##### 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 1934 
|           |  | For the quarterly period ended June 30, 2005                                                
|           |  | OR                                                                                          
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                             

Commission File No. 0-24425


King Pharmaceuticals, Inc.


(Exact name of registrant as specified in its charter)


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

(423) 989-8000


(Registrants telephone number, including area code)


þ o


þ o












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TABLE OF CONTENTS



|                                                                                                                                  |                                                                    |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                                                                                                  
|                                                                                                                                  | Item 1. Financial Statements                                      
|RISK FACTORS                                                                                                                     
|                                                                                                                                  | Item 3. Quantitative and Qualitative Disclosures 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 5. Other Information                                         
|                                                                                                                                  | Item 6. Exhibits                                                  
|SIGNATURES                                                                                                                       
|Ex-10.1  Offer letter to Joseph Squicciarino dated May 6, 2005                                                                   
|Ex-10.2  Offer letter to Eric J. Bruce dated May 19, 2005                                                                        
|Ex-10.3  Retirement and Consulting Agreement, dated April 5, 2005 by and between King Pharmaceuticals, Inc. and James R. Lattanzi
|Ex-10.4  2005 Executive Management Incentive Award                                                                               
|Ex-10.6  Compensation Policy for Non-Employee Directors                                                                          
|Ex-10.7  Salary Amendments to Employment Arrangements with Certain Executive Officers                                            
|Ex-10.8  King Pharmaceuticals, Inc. Executive Deferred Compensation Plan                                                         
|Ex-31.1  Section 302 Certification of the CEO                                                                                    
|Ex-31.2  Section 302 Certification of the CFO                                                                                    
|Ex-32.1  Section 906 Certification of the CEO                                                                                    
|Ex-32.2  Section 906 Certification of the CFO                                                                                    



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##### Table of Contents






PART I  FINANCIAL INFORMATION





Item 1.Financial
Statements


KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                              |                                                                                        |                                            |           |         |              |  |           |         |           | 
|------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------- | ------------ |  | --------- | ------- | --------- | 
|                                                              |                                                                                        | June 30,                                   |           |         |             
|                                                              |                                                                                        | 2005                                       |           |         | December 31, | 
|                                                              |                                                                                        | (unaudited)                                |           |         | 2004         | 
|                                                              |                                                                                        |                                            |           |         |              | 
|ASSETS                                                       
|Current Assets:                                               |                                                                                        |                                            |           |         |              |  |           |        
|                                                              | Cash and cash equivalents                                                              |                                            | $         | 565,566 |              |  | $         | 342,086 |          
|                                                              | Restricted cash                                                                        |                                            |           | 130,400 |              |  |           | 97,730  |          
|                                                              | Marketable securities                                                                  |                                            |           | 7,471   |              |  |           | 16,498  |          
|                                                              | Accounts receivable, net of allowance for doubtful accounts of
    $14,078 and $15,348 |                                            |           | 195,031 |              |  |           | 180,963 |          
|                                                              | Inventories                                                                            |                                            |           | 222,995 |              |  |           | 274,412 |          
|                                                              | Deferred income tax assets                                                             |                                            |           | 122,857 |              |  |           | 153,979 |          
|                                                              | Prepaid expenses and other current assets                                              |                                            |           | 57,140  |              |  |           | 61,395  |          
|                                                              |                                                                                        |                                            |           |         |              | 
|                                                              |                                                                                        | Total current assets                       |           |         | 1,301,460    |  |           |         | 1,127,063 | 
|                                                              |                                                                                        |                                            |           |         |              | 
|Property, plant and equipment, net                            |                                                                                        |                                            | 284,615   |         |              |  | 280,731   |        
|Intangible assets, net                                        |                                                                                        |                                            | 1,092,206 |         |              |  | 1,285,961 |        
|Goodwill                                                      |                                                                                        |                                            | 121,152   |         |              |  | 121,152   |        
|Deferred income tax assets                                    |                                                                                        |                                            | 138,173   |         |              |  | 92,931    |        
|Other assets (includes restricted cash of $13,949 and $2,775) |                                                                                        |                                            | 27,105    |         |              |  | 16,318    |        
|                                                              |                                                                                        |                                            |           |         |              | 
|                                                              |                                                                                        | Total assets                               |           | $       | 2,964,711    |  |           | $       | 2,924,156 | 
|                                                              |                                                                                        |                                            |           |         |              | 
|LIABILITIES AND SHAREHOLDERS EQUITY                         
|Current Liabilities:                                          |                                                                                        |                                            |           |         |              |  |           |        
|                                                              | Accounts payable                                                                       |                                            | $         | 62,190  |              |  | $         | 92,920  |          
|                                                              | Accrued expenses                                                                       |                                            |           | 535,547 |              |  |           | 596,010 |          
|                                                              | Income taxes payable                                                                   |                                            |           | 57,048  |              |  |           |        |          
|                                                              |                                                                                        |                                            |           |         |              | 
|                                                              |                                                                                        | Total current liabilities                  |           |         | 654,785      |  |           |         | 688,930   | 
|                                                              |                                                                                        |                                            |           |         |              | 
|Long-term debt                                                |                                                                                        |                                            | 345,000   |         |              |  | 345,000   |        
|Other liabilities                                             |                                                                                        |                                            | 26,829    |         |              |  | 41,436    |        
|                                                              |                                                                                        |                                            |           |         |              | 
|                                                              |                                                                                        | Total liabilities                          |           |         | 1,026,614    |  |           |         | 1,075,366 | 
|                                                              |                                                                                        |                                            |           |         |              | 
|Commitments and contingencies (Note 9)                        |                                                                                        |                                            |           |         |              |  |           |        
|Shareholders equity                                          |                                                                                        |                                            | 1,938,097 |         |              |  | 1,848,790 |        
|                                                              |                                                                                        |                                            |           |         |              | 
|                                                              |                                                                                        | Total liabilities and shareholders equity |           | $       | 2,964,711    |  |           | $       | 2,924,156 | 
|                                                              |                                                                                        |                                            |           |         |              | 



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##### Table of Contents



KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In thousands, except per share data)


|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |          |          |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ------- | ---------------- | - | ------- | ------- | ------- | - | ---------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                             |                                                                                           | Three Months Ended                                |        |         | Six Months Ended |  
|                                                             |                                                                                           | June 30,                                          |        |         | June 30,         |  
|                                                             |                                                                                           |                                                   |        |         |                  |  
|                                                             |                                                                                           |                                                   |        | 2004*   |                  |   |         |         | 2004*   |  
|                                                             |                                                                                           | 2005                                              |        |         | (restated)       |   |         | 2005    |         |   | (restated) |        
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Revenues:                                                    |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |         
|                                                             | Net sales                                                                                 |                                                   | $      | 443,361 |                  |   | $       | 254,492 |         |   | $          | 793,931 |         |   | $        | 529,186  |         
|                                                             | Royalty revenue                                                                           |                                                   |        | 19,578  |                  |   |         | 21,119  |         |   |            | 37,633  |         |   |          | 37,875   |         
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Total revenues                                    |        |         | 462,939          |   |         |         | 275,611 |   |            |         | 831,564 |   |          |          | 567,061  |  
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Operating costs and expenses:                                |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |         
|                                                             | Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below |                                                   |        | 91,204  |                  |   |         | 85,124  |         |   |            | 163,420 |         |   |          | 168,665  |         
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             | Selling, general and administrative, exclusive of co-promotion
    fees                   |                                                   |        | 101,423 |                  |   |         | 104,125 |         |   |            | 194,273 |         |   |          | 191,727  |         
|                                                             | Medicaid related charge (Note 9)                                                          |                                                   |        |        |                  |   |         | 65,000  |         |   |            |        |         |   |          | 65,000   |         
|                                                             | Mylan transaction costs                                                                   |                                                   |        | 155     |                  |   |         | 3,126   |         |   |            | 3,432   |         |   |          | 3,126    |         
|                                                             | Co-promotion fees                                                                         |                                                   |        | 57,587  |                  |   |         | 19,402  |         |   |            | 92,242  |         |   |          | 42,946   |         
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Total selling, general and administrative expense |        |         | 159,165          |   |         |         | 191,653 |   |            |         | 289,947 |   |          |          | 302,799  |  
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             | Research and development                                                                  |                                                   |        | 17,500  |                  |   |         | 17,478  |         |   |            | 28,972  |         |   |          | 33,501   |         
|                                                             | Depreciation and amortization                                                             |                                                   |        | 39,920  |                  |   |         | 38,466  |         |   |            | 81,346  |         |   |          | 77,784   |         
|                                                             | Intangible asset impairment                                                               |                                                   |        | 126,923 |                  |   |         |        |         |   |            | 126,923 |         |   |          | 34,936   |         
|                                                             | Restructuring charges (Note 13)                                                           |                                                   |        | (17     | )                |   |         | 6,153   |         |   |            | 2,006   |         |   |          | 6,153    |         
|                                                             | Gain on sale of products                                                                  |                                                   |        | (591    | )                |   |         | (3,421  | )       |   |            | (1,438  | )       |   |          | (4,279   | )       
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Total operating costs and expenses                |        |         | 434,104          |   |         |         | 335,453 |   |            |         | 691,176 |   |          |          | 619,559  |  
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             | Operating income (loss)                                                                   |                                                   |        | 28,835  |                  |   |         | (59,842 | )       |   |            | 140,388 |         |   |          | (52,498  | )       
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Other income (expense):                                      |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |         
|                                                             | Interest income                                                                           |                                                   |        | 3,933   |                  |   |         | 1,081   |         |   |            | 6,210   |         |   |          | 2,135    |         
|                                                             | Interest expense                                                                          |                                                   |        | (3,039  | )                |   |         | (3,266  | )       |   |            | (5,740  | )       |   |          | (6,371   | )       
|                                                             | Valuation charge  convertible notes receivable                                           |                                                   |        |        |                  |   |         | (2,438  | )       |   |            |        |         |   |          | (2,887   | )       
|                                                             | Write-down of investment                                                                  |                                                   |        | (369    | )                |   |         |        |         |   |            | (7,222  | )       |   |          |         |         
|                                                             | Other, net                                                                                |                                                   |        | (1,047  | )                |   |         | 1,168   |         |   |            | (1,296  | )       |   |          | 465      |         
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Total other (expense) income                      |        |         | (522             | ) |         |         | (3,455  | ) |            |         | (8,048  | ) |          |          | (6,658   | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Income (loss) from continuing operations before income taxes |                                                                                           |                                                   | 28,313 |         |                  |   | (63,297 | )       |         |   | 132,340    |         |         |   | (59,156  | )       
|Income tax expense                                           |                                                                                           |                                                   | 7,271  |         |                  |   | 986     |         |         |   | 44,193     |         |         |   | 2,825    |         
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Income (loss) from continuing operations                     |                                                                                           |                                                   | 21,042 |         |                  |   | (64,283 | )       |         |   | 88,147     |         |         |   | (61,981  | )       
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Discontinued operations (Note 8):                            |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |         
|                                                             | (Loss) income from discontinued operations, including loss
    on impairment              |                                                   |        | (849    | )                |   |         | 2,148   |         |   |            | 3,833   |         |   |          | (165,314 | )       
|                                                             | Income tax (benefit) expense                                                              |                                                   |        | (304    | )                |   |         | 789     |         |   |            | 1,428   |         |   |          | (60,295  | )       
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | (Loss) income from discontinued operations, net   |        |         | (545             | ) |         |         | 1,359   |   |            |         | 2,405   |   |          |          | (105,019 | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Net income (loss)                                            |                                                                                           | $                                                 | 20,497 |         |                  | $ | (62,924 | )       |         | $ | 90,552     |         |         | $ | (167,000 | )       
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|Income (loss) per common share:                              |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |         
|                                                             | Basic:                                                                                    |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |          |         
|                                                             |                                                                                           | Income (loss) from continuing operations          |        | $       | 0.08             |   |         | $       | (0.27   | ) |            | $       | 0.36    |   |          | $        | (0.26    | )
|                                                             |                                                                                           | Total income (loss) from discontinued operations  |        |         |                 |   |         |         | 0.01    |   |            |         | 0.01    |   |          |          | (0.43    | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Net income (loss)                                 |        | $       | 0.08             |   |         | $       | (0.26   | ) |            | $       | 0.37    |   |          | $        | (0.69    | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             | Diluted:                                                                                  |                                                   |        |         |                  |   |         |         |         |   |            |         |         |   |          |          |         
|                                                             |                                                                                           | Income (loss) from continuing operations          |        | $       | 0.08             |   |         | $       | (0.27   | ) |            | $       | 0.36    |   |          | $        | (0.26    | )
|                                                             |                                                                                           | Total income (loss) from discontinued operations  |        |         |                 |   |         |         | 0.01    |   |            |         | 0.01    |   |          |          | (0.43    | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        
|                                                             |                                                                                           | Net income (loss)                                 |        | $       | 0.08             |   |         | $       | (0.26   | ) |            | $       | 0.37    |   |          | $        | (0.69    | )
|                                                             |                                                                                           |                                                   |        |         |                  |   |         |         |         |   |            |        





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KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |       |        |   |   |           |          |          |  
|-------------------------------------- | ---------------------------------------------------------------- | -------------------------------------- | ----------- | - | -------- | ----------- | --------- | ------------- |  | - | ------- | -------- | - | ----- | ----- | ------ | - | - | --------- | -------- | -------- | -
|                                       |                                                                  |                                        |             |   |          | Accumulated |           |               | 
|                                       |                                                                  | Common Stock                           |             |   |          |             | Other     |               |  |  
|                                       |                                                                  |                                        |             |   | Retained |             |           | Comprehensive |  |   |        
|                                       |                                                                  | Shares                                 |             |   | Amount   |             |           | Earnings      |  |   | Income  |          |   | Total |      
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2003           |                                                                  |                                        | 241,190,852 |   |          | $           | 1,205,970 |               |  | $ | 797,408 |          |   | $     | 1,113 |        |   | $ | 2,004,491 |         
|Comprehensive income:                  |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |       |        |   |   |           |         
|                                       | Net loss, as restated*                                           |                                        |             |  |          |             |           |              |  |   |         | (167,000 | ) |       |       |       |   |   |           | (167,000 | )       
|                                       | Net unrealized loss on marketable securities, net of tax of $28  |                                        |             |  |          |             |           |              |  |   |         |         |   |       |       | (53    | ) |   |           | (53      | )       
|                                       | Foreign currency translation                                     |                                        |             |  |          |             |           |              |  |   |         |         |   |       |       | 48     |   |   |           | 48       |         
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|                                       |                                                                  | Total comprehensive loss, as restated* |             |   |          |             |           |               |  |   |         |          |   |       |       |        |   |   |           |          | (167,005 | )
|Stock option activity                  |                                                                  |                                        | 221,659     |   |          |             | 2,324     |               |  |   |        |          |   |       |      |        |   |   | 2,324     |         
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at June 30, 2004, as restated* |                                                                  |                                        | 241,412,511 |   |          | $           | 1,208,294 |               |  | $ | 630,408 |          |   | $     | 1,108 |        |   | $ | 1,839,810 |         
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2004           |                                                                  |                                        | 241,706,583 |   |          | $           | 1,210,647 |               |  | $ | 637,120 |          |   | $     | 1,023 |        |   | $ | 1,848,790 |         
|Comprehensive income:                  |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |       |        |   |   |           |         
|                                       | Net income                                                       |                                        |             |  |          |             |           |              |  |   |         | 90,552   |   |       |       |       |   |   |           | 90,552   |         
|                                       | Net unrealized loss on marketable securities, net of tax of $702 |                                        |             |  |          |             |           |              |  |   |         |         |   |       |       | (1,249 | ) |   |           | (1,249   | )       
|                                       | Foreign currency translation                                     |                                        |             |  |          |             |           |              |  |   |         |         |   |       |       | (83    | ) |   |           | (83      | )       
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|                                       |                                                                  | Total comprehensive income             |             |   |          |             |           |               |  |   |         |          |   |       |       |        |   |   |           |          | 89,220   |  
|Stock option activity                  |                                                                  |                                        | 28,850      |   |          |             | 87        |               |  |   |        |          |   |       |      |        |   |   | 87        |         
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at June 30, 2005               |                                                                  |                                        | 241,735,433 |   |          | $           | 1,210,734 |               |  | $ | 727,672 |          |   | $     | (309  | )      |   | $ | 1,938,097 |         
|                                       |                                                                  |                                        |             |   |          |             |           |               |  |   |         |          |   |       |      



|  |            
|- | -----------
|* | See Note 2.



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KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                               |                                                                |                                                                        |         |         |            |   |         |         |         |  
|-------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ------- | ---------- | - | ------- | ------- | ------- | -
|                                                               |                                                                | Six Months Ended                                                       |        
|                                                               |                                                                | June 30,                                                               |        
|                                                               |                                                                |                                                                        |        
|                                                               |                                                                |                                                                        |         | 2004*   |           
|                                                               |                                                                | 2005                                                                   |         |         | (restated) |  
|                                                               |                                                                |                                                                        |         |         |            |  
|Cash flows from operating activities of continuing operations  |                                                                | $                                                                      | 316,768 |         |            | $ | 15,948  |        
|                                                               |                                                                |                                                                        |         |         |            |  
|Cash flows from investing activities of continuing operations: |                                                                |                                                                        |         |         |            |   |         |        
|                                                               | Transfers (to) from restricted cash                            |                                                                        |         | (73,449 | )          |   |         | 806     |        
|                                                               | Purchases of property, plant and equipment                     |                                                                        |         | (19,927 | )          |   |         | (28,462 | )      
|                                                               | Proceeds from sale of assets                                   |                                                                        |         | 1       |            |   |         | 113     |        
|                                                               | Acquisition of primary care business of Elan                   |                                                                        |         |         |            |   |         | (36,000 | )      
|                                                               |                                                                |                                                                        |         |         |            |  
|                                                               |                                                                | Net cash used in investing activities of continuing operations         |         |         | (93,375    | ) |         |         | (63,543 | )
|                                                               |                                                                |                                                                        |         |         |            |  
|Cash flows from financing activities of continuing operations: |                                                                |                                                                        |         |         |            |   |         |        
|                                                               | Proceeds from exercise of stock options, net                   |                                                                        |         | 87      |            |   |         | 2,324   |        
|                                                               | Payments on other long-term debt and capital lease obligations |                                                                        |         |        |            |   |         | (97     | )      
|                                                               |                                                                |                                                                        |         |         |            |  
|                                                               |                                                                | Net cash provided by financing activities of continuing
    operations |         |         | 87         |   |         |         | 2,227   |  
|                                                               |                                                                |                                                                        |         |         |            |  
|Net cash provided by discontinued operations                   |                                                                |                                                                        |        |         |            |   | 6,122   |        
|                                                               |                                                                |                                                                        |         |         |            |  
|Increase (decrease) in cash and cash equivalents               |                                                                |                                                                        | 223,480 |         |            |   | (39,246 | )      
|Cash and cash equivalents, beginning of period                 |                                                                |                                                                        | 342,086 |         |            |   | 146,053 |        
|                                                               |                                                                |                                                                        |         |         |            |  
|Cash and cash equivalents, end of period                       |                                                                | $                                                                      | 565,566 |         |            | $ | 106,807 |        
|                                                               |                                                                |                                                                        |         |         |            |  





5



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2005 and 2004


(Unaudited)


(In thousands)




|   |        
|-- | -------
|1. | General







|   |                                                      
|-- | -----------------------------------------------------
|2. | Restatement of Previously Issued Financial Statements



6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                 
| | ------------------------------------------------
| | Previous Restatement of Income Statement Amounts



|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |        |        |   |         |         |         | 
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | ------- | ------- | ------- | - | ----- | ---------- | ----- | - | ----------- | ------ | ------ | - | ------- | ------- | ------- | 
|                                                             |                                                                                           |                                                   |         | Returns |         |   | Other |            |       |  
|                                                             |                                                                                           | As Originally                                     |         |         | Reserve |   |       | Immaterial |       |   |            
|                                                             |                                                                                           | Reported                                          |         |         | Errors  |   |       | Items      |       |   | As Restated |       
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Revenues:                                                    |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |        |        |   |         |        
|                                                             | Net sales                                                                                 |                                                   | $       | 254,021 |         |   | $     | 7,775      |       |   | $           | (7,304 | )      |   | $       | 254,492 |        
|                                                             | Royalty revenue                                                                           |                                                   |         | 21,119  |         |   |       |           |       |   |             |       |        |   |         | 21,119  |        
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             |                                                                                           | Total revenues                                    |         |         | 275,140 |   |       |            | 7,775 |   |             |        | (7,304 | ) |         |         | 275,611 | 
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Operating costs and expenses:                                |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |        |        |   |         |        
|                                                             | Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below |                                                   |         | 85,411  |         |   |       | (189       | )     |   |             | (98    | )      |   |         | 85,124  |        
|                                                             | Selling, general and administrative, exclusive of co-promotion
    fees                   |                                                   |         | 104,125 |         |   |       |           |       |   |             |       |        |   |         | 104,125 |        
|                                                             | Medicaid related charge                                                                   |                                                   |         | 65,000  |         |   |       |           |       |   |             |       |        |   |         | 65,000  |        
|                                                             | Mylan transaction costs                                                                   |                                                   |         | 3,126   |         |   |       |           |       |   |             |       |        |   |         | 3,126   |        
|                                                             | Co-promotion fees                                                                         |                                                   |         | 20,823  |         |   |       | 361        |       |   |             | (1,782 | )      |   |         | 19,402  |        
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             |                                                                                           | Total selling, general and administrative expense |         |         | 193,074 |   |       |            | 361   |   |             |        | (1,782 | ) |         |         | 191,653 | 
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             | Research and development                                                                  |                                                   |         | 17,478  |         |   |       |           |       |   |             |       |        |   |         | 17,478  |        
|                                                             | Depreciation and amortization                                                             |                                                   |         | 38,466  |         |   |       |           |       |   |             |       |        |   |         | 38,466  |        
|                                                             | Restructuring charges                                                                     |                                                   |         | 6,153   |         |   |       |           |       |   |             |       |        |   |         | 6,153   |        
|                                                             | Gain on sale of assets                                                                    |                                                   |         | (3,421  | )       |   |       |           |       |   |             |       |        |   |         | (3,421  | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             |                                                                                           | Total operating costs and expenses                |         |         | 337,161 |   |       |            | 172   |   |             |        | (1,880 | ) |         |         | 335,453 | 
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             | Operating (loss) income                                                                   |                                                   |         | (62,021 | )       |   |       | 7,603      |       |   |             | (5,424 | )      |   |         | (59,842 | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Total other expense                                          |                                                                                           |                                                   | (3,455  | )       |         |   |      |            |       |   |            |        |        |   | (3,455  | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|(Loss) income from continuing operations before income taxes |                                                                                           |                                                   | (65,476 | )       |         |   | 7,603 |            |       |   | (5,424      | )      |        |   | (63,297 | )      
|Income tax (benefit) expense                                 |                                                                                           |                                                   | 152     |         |         |   | 2,911 |            |       |   | (2,077      | )      |        |   | 986     |        
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|(Loss) income from continuing operations                     |                                                                                           |                                                   | (65,628 | )       |         |   | 4,692 |            |       |   | (3,347      | )      |        |   | (64,283 | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Discontinued operations:                                     |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |        |        |   |         |        
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment              |                                                   |         | 3,332   |         |   |       | (946       | )     |   |             | (238   | )      |   |         | 2,148   |        
|                                                             | Income tax (benefit) expense                                                              |                                                   |         | 1,243   |         |   |       | (363       | )     |   |             | (91    | )      |   |         | 789     |        
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|                                                             |                                                                                           | Income (loss) from discontinued operations, net   |         |         | 2,089   |   |       |            | (583  | ) |             |        | (147   | ) |         |         | 1,359   | 
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Net (loss) income                                            |                                                                                           | $                                                 | (63,539 | )       |         | $ | 4,109 |            |       | $ | (3,494      | )      |        | $ | (62,924 | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Basic (loss) income per common share                         |                                                                                           | $                                                 | (0.26   | )       |         | $ | 0.01  |            |       | $ | (0.01       | )      |        | $ | (0.26   | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       
|Diluted (loss) income per common share                       |                                                                                           | $                                                 | (0.26   | )       |         | $ | 0.01  |            |       | $ | (0.01       | )      |        | $ | (0.26   | )      
|                                                             |                                                                                           |                                                   |         |         |         |   |       |            |       |   |             |       

7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |        |        |   |          |          |          |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------- | -------- | -------- | -------- | - | ------ | ---------- | ------ | - | ----------- | ------ | ------ | - | -------- | -------- | -------- | -
|                                                             |                                                                                          |                                                   |          | Returns  |          |   | Other  |            |        |  
|                                                             |                                                                                          | As Originally                                     |          |          | Reserve  |   |        | Immaterial |        |   |            
|                                                             |                                                                                          | Reported                                          |          |          | Errors   |   |        | Items      |        |   | As Restated |       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Revenues:                                                    |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |        |        |   |          |         
|                                                             | Net sales                                                                                |                                                   | $        | 527,909  |          |   | $      | 8,195      |        |   | $           | (6,918 | )      |   | $        | 529,186  |         
|                                                             | Royalty revenue                                                                          |                                                   |          | 37,875   |          |   |        |           |        |   |             |       |        |   |          | 37,875   |         
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             |                                                                                          | Total revenues                                    |          |          | 565,784  |   |        |            | 8,195  |   |             |        | (6,918 | ) |          |          | 567,061  |  
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Operating costs and expenses:                                |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |        |        |   |          |         
|                                                             | Cost of revenues, exclusive of depreciation, amortization and
    impairment shown below |                                                   |          | 173,125  |          |   |        | (327       | )      |   |             | (4,133 | )      |   |          | 168,665  |         
|                                                             | Selling, general and administrative, exclusive of co-promotion
    fees                  |                                                   |          | 190,727  |          |   |        |           |        |   |             | 1,000  |        |   |          | 191,727  |         
|                                                             | Medicaid related charge                                                                  |                                                   |          | 65,000   |          |   |        |           |        |   |             |       |        |   |          | 65,000   |         
|                                                             | Mylan transaction costs                                                                  |                                                   |          | 3,126    |          |   |        |           |        |   |             |       |        |   |          | 3,126    |         
|                                                             | Co-promotion fees                                                                        |                                                   |          | 48,327   |          |   |        | (2,845     | )      |   |             | (2,536 | )      |   |          | 42,946   |         
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             |                                                                                          | Total selling, general and administrative expense |          |          | 307,180  |   |        |            | (2,845 | ) |             |        | (1,536 | ) |          |          | 302,799  |  
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             | Research and development                                                                 |                                                   |          | 33,501   |          |   |        |           |        |   |             |       |        |   |          | 33,501   |         
|                                                             | Depreciation and amortization                                                            |                                                   |          | 77,784   |          |   |        |           |        |   |             |       |        |   |          | 77,784   |         
|                                                             | Restructuring charges                                                                    |                                                   |          | 6,153    |          |   |        |           |        |   |             |       |        |   |          | 6,153    |         
|                                                             | Intangible asset impairment                                                              |                                                   |          | 34,936   |          |   |        |           |        |   |             |       |        |   |          | 34,936   |         
|                                                             | Gain on sale of assets                                                                   |                                                   |          | (4,279   | )        |   |        |           |        |   |             |       |        |   |          | (4,279   | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             |                                                                                          | Total operating costs and expenses                |          |          | 628,400  |   |        |            | (3,172 | ) |             |        | (5,669 | ) |          |          | 619,559  |  
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             | Operating (loss) income                                                                  |                                                   |          | (62,616  | )        |   |        | 11,367     |        |   |             | (1,249 | )      |   |          | (52,498  | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Total other expense                                          |                                                                                          |                                                   | (6,258   | )        |          |   |       |            |        |   | (400        | )      |        |   | (6,658   | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|(Loss) income from continuing operations before income taxes |                                                                                          |                                                   | (68,874  | )        |          |   | 11,367 |            |        |   | (1,649      | )      |        |   | (59,156  | )       
|Income tax (benefit) expense                                 |                                                                                          |                                                   | (896     | )        |          |   | 4,353  |            |        |   | (632        | )      |        |   | 2,825    |         
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|(Loss) income from continuing operations                     |                                                                                          |                                                   | (67,978  | )        |          |   | 7,014  |            |        |   | (1,017      | )      |        |   | (61,981  | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Discontinued operations:                                     |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |        |        |   |          |         
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment             |                                                   |          | (167,910 | )        |   |        | 3,081      |        |   |             | (485   | )      |   |          | (165,314 | )       
|                                                             | Income tax (benefit) expense                                                             |                                                   |          | (61,289  | )        |   |        | 1,179      |        |   |             | (185   | )      |   |          | (60,295  | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|                                                             |                                                                                          | (Loss) income from discontinued operations, net   |          |          | (106,621 | ) |        |            | 1,902  |   |             |        | (300   | ) |          |          | (105,019 | )
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Net (loss) income                                            |                                                                                          | $                                                 | (174,599 | )        |          | $ | 8,916  |            |        | $ | (1,317      | )      |        | $ | (167,000 | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Basic (loss) income per common share                         |                                                                                          | $                                                 | (0.72    | )        |          | $ | 0.04   |            |        | $ | (0.01       | )      |        | $ | (0.69    | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       
|Diluted (loss) income per common share                       |                                                                                          | $                                                 | (0.72    | )        |          | $ | 0.04   |            |        | $ | (0.01       | )      |        | $ | (0.69    | )       
|                                                             |                                                                                          |                                                   |          |          |          |   |        |            |        |   |             |       

8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|3. | Stock Compensation



|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |        |   |  |   |          |  
|--------------------------------------- | ----------------------------------------------------- | ------------------ | - | ------ | ---------------- |  | - | ------- | ----- |  | ---------- | ------ | - |  | - | -------- | -
|                                        |                                                       | Three Months Ended |   |        | Six Months Ended | 
|                                        |                                                       | June 30,           |   |        | June 30,         | 
|                                        |                                                       |                    |   |        |                  | 
|                                        |                                                       |                    |   | 2004*  |                  |  |   |         | 2004* | 
|                                        |                                                       | 2005               |   |        | (restated)       |  |   | 2005    |       |  | (restated) |       
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|Net income (loss):                      |                                                       |                    |   |        |                  |  |   |         |       |  |            |        |   |  |   |         
|                                        | As reported                                           |                    | $ | 20,497 |                  |  | $ | (62,924 | )     |  | $          | 90,552 |   |  | $ | (167,000 | )
|                                        | Less pro forma compensation costs for options granted |                    |   | (1,516 | )                |  |   | (2,377  | )     |  |            | (2,867 | ) |  |   | (3,568   | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|                                        | Pro forma                                             |                    | $ | 18,981 |                  |  | $ | (65,301 | )     |  | $          | 87,685 |   |  | $ | (170,568 | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|Basic income (loss) per share:          |                                                       |                    |   |        |                  |  |   |         |       |  |            |        |   |  |   |         
|                                        | As reported                                           |                    | $ | 0.08   |                  |  | $ | (0.26   | )     |  | $          | 0.37   |   |  | $ | (0.69    | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|                                        | Pro forma                                             |                    | $ | 0.08   |                  |  | $ | (0.27   | )     |  | $          | 0.36   |   |  | $ | (0.71    | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|Diluted income (loss) per common share: |                                                       |                    |   |        |                  |  |   |         |       |  |            |        |   |  |   |         
|                                        | As reported                                           |                    | $ | 0.08   |                  |  | $ | (0.26   | )     |  | $          | 0.37   |   |  | $ | (0.69    | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       
|                                        | Pro forma                                             |                    | $ | 0.08   |                  |  | $ | (0.27   | )     |  | $          | 0.36   |   |  | $ | (0.71    | )
|                                        |                                                       |                    |   |        |                  |  |   |         |       |  |            |       







|   |                   
|-- | ------------------
|4. | Earnings Per Share



|                                        |                                |                    |  |         |                  |  |  |         |  |  |      |         |  |  |  |         | 
|--------------------------------------- | ------------------------------ | ------------------ |  | ------- | ---------------- |  |  | ------- |  |  | ---- | ------- |  |  |  | ------- | 
|                                        |                                | Three Months Ended |  |         | Six Months Ended | 
|                                        |                                | June 30,           |  |         | June 30,         | 
|                                        |                                |                    |  |         |                  | 
|                                        |                                | 2005               |  |         | 2004             |  |  | 2005    |  |  | 2004 |        
|                                        |                                |                    |  |         |                  |  |  |         |  |  |      |        
|Basic income (loss) per common share:   |                                |                    |  |         |                  |  |  |         |  |  |      |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,732 |                  |  |  | 241,383 |  |  |      | 241,728 |  |  |  | 241,341 | 
|                                        |                                |                    |  |         |                  |  |  |         |  |  |      |        
|Diluted income (loss) per common share: |                                |                    |  |         |                  |  |  |         |  |  |      |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,732 |                  |  |  | 241,383 |  |  |      | 241,728 |  |  |  | 241,341 | 
|                                        | Effect of stock options        |                    |  | 51      |                  |  |  |        |  |  |      | 65      |  |  |  |        | 
|                                        |                                |                    |  |         |                  |  |  |         |  |  |      |        
|                                        | Weighted average common shares |                    |  | 241,783 |                  |  |  | 241,383 |  |  |      | 241,793 |  |  |  | 241,341 | 
|                                        |                                |                    |  |         |                  |  |  |         |  |  |      |        

9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |            
|-- | -----------
|5. | Inventories



|                                                                                     |  |          |         |   |              |   |         |  
|------------------------------------------------------------------------------------ |  | -------- | ------- | - | ------------ | - | ------- | -
|                                                                                     |  | June 30, |         |   | December 31, |  
|                                                                                     |  | 2005     |         |   | 2004         |  
|                                                                                     |  |          |         |   |              |  
|Raw materials                                                                        |  | $        | 131,848 |   |              | $ | 168,541 |  
|Work-in-process                                                                      |  |          | 19,929  |   |              |   | 20,287  |  
|Finished goods (including $11,891 and $11,350 of sample
    inventory, respectively) |  |          | 109,214 |   |              |   | 133,527 |  
|                                                                                     |  |          |         |   |              |  
|                                                                                     |  |          | 260,991 |   |              |   | 322,355 |  
|Inventory valuation allowance                                                        |  |          | (37,996 | ) |              |   | (47,943 | )
|                                                                                     |  |          |         |   |              |  
|                                                                                     |  | $        | 222,995 |   |              | $ | 274,412 |  
|                                                                                     |  |          |         |   |              |  



|   |                              
|-- | -----------------------------
|6. | Property, Plant and Equipment





|   |                               
|-- | ------------------------------
|7. | Intangible Assets and Goodwill



|                              |                         |          |           |           |              |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | --------- | ------------ | - | ------- | ------- | 
|                              |                         | Gross    |           |           |             
|                              |                         | Carrying |           |           | Accumulated  |  
|                              |                         | Amount   |           |           | Amortization |  
|                              |                         |          |           |           |              |  
|Trademarks and product rights |                         | $        | 1,243,788 |           |              | $ | 260,319 |        
|Patents                       |                         |          | 267,049   |           |              |   | 159,146 |        
|Other intangibles             |                         |          | 9,459     |           |              |   | 8,625   |        
|                              |                         |          |           |           |              |  
|                              | Total intangible assets |          | $         | 1,520,296 |              |   | $       | 428,090 | 
|                              |                         |          |           |           |              |  

10



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














|         |  |         |        |  |          |   |         |       |  |   |         | 
|-------- |  | ------- | ------ |  | -------- | - | ------- | ----- |  | - | ------- | 
|         |  | Branded |        |  | Meridian |   |         |      
|         |  | Segment |        |  | Segment  |   |         | Total | 
|         |  |         |        |  |          |   |         |       | 
|Goodwill |  | $       | 12,742 |  |          | $ | 108,410 |       |  | $ | 121,152 | 
|         |  |         |        |  |          |   |         |       | 



|   |                        
|-- | -----------------------
|8. | Discontinued Operations





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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                             |  |                    |      |       |                  |   |       |      |       |   |            |  |  |   |          |  
|------------------------------------------------------------ |  | ------------------ | ---- | ----- | ---------------- | - | ----- | ---- | ----- | - | ---------- |  |  | - | -------- | -
|                                                             |  | Three Months Ended |      |       | Six Months Ended |  
|                                                             |  | June 30,           |      |       | June 30,         |  
|                                                             |  |                    |      |       |                  |  
|                                                             |  |                    |      | 2004* |                  |   |       |      | 2004* |  
|                                                             |  | 2005               |      |       | (restated)       |   |       | 2005 |       |   | (restated) | 
|                                                             |  |                    |      |       |                  |   |       |      |       |   |            | 
|Total revenues                                               |  | $                  | (849 | )     |                  | $ | 3,042 |      |       | $ | 3,834      |  |  | $ | 13,939   |  
|Operating (loss) income, including expected loss on disposal |  |                    | (849 | )     |                  |   | 2,148 |      |       |   | 3,833      |  |  |   | (165,314 | )
|Net (loss) income                                            |  |                    | (545 | )     |                  |   | 1,359 |      |       |   | 2,405      |  |  |   | (105,019 | )



9.     Contingencies




| |                    
| | -------------------
| | Fen/Phen Litigation







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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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









| |                            
| | ---------------------------
| | Hormone Replacement Therapy





| |                                     
| | ------------------------------------
| | Average Wholesale Pricing Litigation



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                                                    
| | -------------------------------------------------------------------
| | Governmental Investigations and Securities and ERISA
    Litigation









| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has previously accrued $130,400 in respect of its
    estimated underpayments to Medicaid and other government pricing
    programs and estimated settlement costs with all relevant
    governmental parties. This amount includes $65,400 accrued for
    estimated underpayments to Medicaid and other governmental
    pricing programs, and an additional $65,000 for estimated

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | settlement costs to cover interest, costs, fines, penalties and
    all other additional amounts. The Companys current
    expectation is that the aggregate cost to settle with the
    governmental authorities should not materially exceed the
    amounts already accrued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | With respect to the matters being investigated by or discussed
    with the staff of the SEC, the Company currently anticipates
    that it would settle, without admitting or denying, one or more
    charges that the Company had failed to maintain adequate books
    and records and internal controls. The Company anticipates that
    the action to be settled could also include one or more charges
    that its public filings contained material misstatements or
    omissions relating to its financial results for some or all of
    the periods for which results have been restated. The Company
    does not anticipate being required to restate any results for
    periods prior to 2002.                                            
|
| |  | The Company expects that it will be required to enter into a
    Corporate Integrity Agreement with the Department of Health and
    Human Services, which would require the Company to submit to
    audits relating to its Medicaid rebate calculations over a
    five-year period. The Company does not expect that the
    resolution of the pending investigations will result in any
    prohibitions on the Companys sales to Medicaid or any
    related state or Federal program, nor does the Company expect
    any other material restriction on its ability to conduct its
    business, although the Company will be required to incur
    consultant fees and other expenses in order to comply with the
    Corporate Integrity Agreement.
|
| |  | The Company does not expect that any criminal charges will be
    asserted against it or against any present or former director,
    officer or employee in connection with the matters being
    investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             









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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














16



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                        
| | -----------------------
| | Other Legal Proceedings



Approved Drug Products With
Therapeutic Equivalence Evaluations




17



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












18



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|    |                        
|--- | -----------------------
|10. | Accounting Developments





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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|11. | Income Taxes





|    |                    
|--- | -------------------
|12. | Segment Information





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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |          |         |  |   |          |         |  
|--------------- | --------------------------------- | --------------------------------------------------- | - | -------- | ------------------------- |  | - | -------- | ------- | - | ---------- | -------- | ------- |  | - | -------- | ------- | -
|                |                                   | Three Months Ended                                  |   |          |                          
|                |                                   | June 30,                                            |   |          | Six Months Ended June 30, | 
|                |                                   |                                                     |   |          |                           | 
|                |                                   |                                                     |   | 2004*    |                           |  |   |          | 2004*   |  
|                |                                   | 2005                                                |   |          | (restated)                |  |   | 2005     |         |   | (restated) |         
|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |         
|Total revenues: |                                   |                                                     |   |          |                           |  |   |          |         |   |            |          |         |  |   |         
|                | Branded pharmaceuticals           |                                                     | $ | 400,310  |                           |  | $ | 220,059  |         |   | $          | 722,079  |         |  | $ | 454,073  |        
|                | Meridian Medical Technologies     |                                                     |   | 35,418   |                           |  |   | 27,681   |         |   |            | 58,632   |         |  |   | 62,182   |        
|                | Royalties                         |                                                     |   | 19,578   |                           |  |   | 21,118   |         |   |            | 37,633   |         |  |   | 37,875   |        
|                | Contract manufacturing and other  |                                                     |   | 129,847  |                           |  |   | 152,539  |         |   |            | 249,212  |         |  |   | 285,431  |        
|                | Eliminations                      |                                                     |   | (122,214 | )                         |  |   | (145,786 | )       |   |            | (235,992 | )       |  |   | (272,500 | )      
|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |         
|                |                                   | Consolidated total net revenues                     |   | $        | 462,939                   |  |   | $        | 275,611 |   |            | $        | 831,564 |  |   | $        | 567,061 |  
|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |         
|Segment profit: |                                   |                                                     |   |          |                           |  |   |          |         |   |            |          |         |  |   |         
|                | Branded pharmaceuticals           |                                                     | $ | 335,682  |                           |  | $ | 161,607  |         |   | $          | 607,794  |         |  | $ | 337,617  |        
|                | Meridian Medical Technologies     |                                                     |   | 18,164   |                           |  |   | 14,000   |         |   |            | 30,477   |         |  |   | 33,454   |        
|                | Royalties                         |                                                     |   | 17,140   |                           |  |   | 17,978   |         |   |            | 32,946   |         |  |   | 32,155   |        
|                | Contract manufacturing and other  |                                                     |   | 749      |                           |  |   | (3,098   | )       |   |            | (3,073   | )       |  |   | (4,830   | )      
|                | Other operating costs and expense |                                                     |   | (342,900 | )                         |  |   | (250,329 | )       |   |            | (527,756 | )       |  |   | (450,894 | )      
|                | Other expense                     |                                                     |   | (522     | )                         |  |   | (3,455   | )       |   |            | (8,048   | )       |  |   | (6,658   | )      
|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |         
|                |                                   | Income (loss) from continuing operations before tax |   | $        | 28,313                    |  |   | $        | (63,297 | ) |            | $        | 132,340 |  |   | $        | (59,156 | )
|                |                                   |                                                     |   |          |                           |  |   |          |         |   |            |         



|              |                                  |                           |   |           |              |  |   |           |           | 
|------------- | -------------------------------- | ------------------------- | - | --------- | ------------ |  | - | --------- | --------- | 
|              |                                  | As of                     |   |           | As of        | 
|              |                                  | June 30,                  |   |           | December 31, | 
|              |                                  | 2005                      |   |           | 2004         | 
|              |                                  |                           |   |           |              | 
|Total assets: |                                  |                           |   |           |              |  |   |          
|              | Branded pharmaceuticals          |                           | $ | 2,578,841 |              |  | $ | 2,530,725 |          
|              | Meridian Medical Technologies    |                           |   | 258,198   |              |  |   | 275,850   |          
|              | Royalties                        |                           |   | 21,210    |              |  |   | 22,430    |          
|              | Contract manufacturing and other |                           |   | 106,462   |              |  |   | 95,151    |          
|              |                                  |                           |   |           |              | 
|              |                                  | Consolidated total assets |   | $         | 2,964,711    |  |   | $         | 2,924,156 | 
|              |                                  |                           |   |           |              | 

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |                |                                              |   |         |                  |  |   |        |         |  |            |         |         |  |   |         |         | 
|--------------- | -------------- | -------------------------------------------- | - | ------- | ---------------- |  | - | ------ | ------- |  | ---------- | ------- | ------- |  | - | ------- | ------- | 
|                |                | Three Months Ended                           |   |         | Six Months Ended | 
|                |                | June 30,                                     |   |         | June 30,         | 
|                |                |                                              |   |         |                  | 
|                |                |                                              |   | 2004*   |                  |  |   |        | 2004*   | 
|                |                | 2005                                         |   |         | (restated)       |  |   | 2005   |         |  | (restated) |        
|                |                |                                              |   |         |                  |  |   |        |         |  |            |        
|Total revenues: |                |                                              |   |         |                  |  |   |        |         |  |            |         |         |  |   |        
|                | Cardiovascular |                                              | $ | 149,388 |                  |  | $ | 70,148 |         |  | $          | 238,261 |         |  | $ | 140,655 |        
|                | Anti-infective |                                              |   | 21,072  |                  |  |   | 7,914  |         |  |            | 42,294  |         |  |   | 21,504  |        
|                | Critical care  |                                              |   | 54,506  |                  |  |   | 39,045 |         |  |            | 118,526 |         |  |   | 79,348  |        
|                | Endocrinology  |                                              |   | 52,915  |                  |  |   | 37,735 |         |  |            | 99,135  |         |  |   | 69,388  |        
|                | Respiratory    |                                              |   | 4,212   |                  |  |   | 1,654  |         |  |            | 8,577   |         |  |   | 10,095  |        
|                | Neuroscience   |                                              |   | 106,111 |                  |  |   | 58,623 |         |  |            | 197,506 |         |  |   | 120,748 |        
|                | Other branded  |                                              |   | 12,106  |                  |  |   | 4,940  |         |  |            | 17,780  |         |  |   | 12,335  |        
|                |                |                                              |   |         |                  |  |   |        |         |  |            |        
|                |                | Consolidated branded pharmaceutical revenues |   | $       | 400,310          |  |   | $      | 220,059 |  |            | $       | 722,079 |  |   | $       | 454,073 | 
|                |                |                                              |   |         |                  |  |   |        |         |  |            |        





|    |                         
|--- | ------------------------
|13. | Restructuring Activities



|                          |  |              |     |  |           |   |       |          |         |            |       |  |           |        |     |         |          |            |      |      |  |   |      |   |  |   |     | 
|------------------------- |  | ------------ | --- |  | --------- | - | ----- | -------- | ------- | ---------- | ----- |  | --------- | ------ | --- | ------- | -------- | ---------- | ---- | ---- |  | - | ---- | - |  | - | --- | 
|                          |  | Accrued      |     |  |           |   |       |          | Accrued |            |       |  |           |        |     | Accrued |         
|                          |  | Balance at   |     |  | Income    |   |       |          |         | Balance at |       |  | Income    |        |     |         |          | Balance at |     
|                          |  | December 31, |     |  | Statement |   |       |          |         | March 31,  |       |  | Statement |        |     |         |          | June 30,   |     
|                          |  | 2004         |     |  | Impact    |   |       | Payments |         |            | 2005  |  |           | Impact |     |         | Payments |            |      | 2005 | 
|                          |  |              |     |  |           |   |       |          |         |            |       |  |           |        |     |         |          |            |      |      | 
|Employee relocation       |  | $            |    |  |           | $ | 159   |          |         | $          | 159   |  |           | $      |    |         |          | $          | 163  |      |  | $ | 163  |   |  | $ |    | 
|Facility demolition costs |  |              | 924 |  |           |   |      |          |         |            |      |  |           |        | 924 |         |          |            |     |      |  |   |     |   |  |   | 924 | 
|Termination of lease      |  |              |    |  |           |   | 1,733 |          |         |            | 1,733 |  |           |        |    |         |          |            |     |      |  |   |     |   |  |   |    | 
|Other                     |  |              |    |  |           |   | 131   |          |         |            | 131   |  |           |        |    |         |          |            | (180 | )    |  |   | (180 | ) |  |   |    | 
|                          |  |              |     |  |           |   |       |          |         |            |       |  |           |        |     |         |          |            |      |      | 
|                          |  | $            | 924 |  |           | $ | 2,023 |          |         | $          | 2,023 |  |           | $      | 924 |         |          | $          | (17  | )    |  | $ | (17  | ) |  | $ | 924 | 
|                          |  |              |     |  |           |   |       |          |         |            |       |  |           |        |     |         |          |            |      |      | 





|    |                      
|--- | ---------------------
|14. | Marketable Securities



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|15. | Change in Estimate





|    |                               
|--- | ------------------------------
|16. | Guarantor Financial Statements

3 4


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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING BALANCE SHEETS


(In thousands)


|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |         |           | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | --------- | --------- | ----------------- |  | --------- | ------------ | --------- | ----------- | ------- | ----- | ------ | ------------ | ---------- | - | ---------- | --------- | --------- | ------------ | --------- |  | ------------ | ----------- | --------- | ------- | --------- | ------- | ------------ | - | ------ | ----- | ------ |  | ---------- | - | ---------- | - | --------- | ------- | --------- | 
|                                     |                                           | June 30, 2005                              |           |           |                  
|                                     |                                           | (unaudited)                                |           |           | December 31, 2004 | 
|                                     |                                           |                                            |           |           |                   | 
|                                     |                                           |                                            |           | Non       |                   |  |           |              |           |             | Non     |       |        |             
|                                     |                                           |                                            |           | Guarantor |                   |  | Guarantor |              |           | Eliminating |         |       | King   |              |            |   |            | Guarantor |           |              | Guarantor |  |              | Eliminating |           |         | King      |        
|                                     |                                           | King                                       |           |           | Subsidiaries      |  |           | Subsidiaries |           |             | Entries |       |        | Consolidated |            |   | King       |           |           | Subsidiaries |           |  | Subsidiaries |             |           | Entries |           |         | Consolidated |  
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|ASSETS                               |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|Current assets:                      |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|                                     | Cash and cash equivalents                 |                                            |           | 558,571   |                   |  | $         | 4,839        |           |             | $       | 2,156 |        |              | $          |  |            |           | $         | 565,566      |           |  | $            | 313,881     |           |         | $         | 27,035  |              |   | $      | 1,170 |        |  | $          |  |            |   | $         | 342,086 |          
|                                     | Marketable securities                     |                                            |           | 7,471     |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 7,471        |           |  |              | 16,498      |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           | 16,498  |          
|                                     | Restricted cash                           |                                            |           | 130,400   |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 130,400      |           |  |              | 66,543      |           |         |           | 31,187  |              |   |        |      |        |  |            |  |            |   |           | 97,730  |          
|                                     | Accounts receivable, net                  |                                            |           | 467       |                   |  |           | 192,981      |           |             |         | 1,583 |        |              |            |  |            |           |           | 195,031      |           |  |              | 3,344       |           |         |           | 174,797 |              |   |        | 2,822 |        |  |            |  |            |   |           | 180,963 |          
|                                     | Inventories                               |                                            |           | 183,530   |                   |  |           | 39,370       |           |             |         | 95    |        |              |            |  |            |           |           | 222,995      |           |  |              | 237,448     |           |         |           | 36,743  |              |   |        | 221   |        |  |            |  |            |   |           | 274,412 |          
|                                     | Deferred income tax assets                |                                            |           | 26,998    |                   |  |           | 95,859       |           |             |         |      |        |              |            |  |            |           |           | 122,857      |           |  |              | 32,809      |           |         |           | 121,170 |              |   |        |      |        |  |            |  |            |   |           | 153,979 |          
|                                     | Prepaid expenses and other current assets |                                            |           | 14,737    |                   |  |           | 42,403       |           |             |         |      |        |              |            |  |            |           |           | 57,140       |           |  |              | 22,846      |           |         |           | 38,481  |              |   |        | 68    |        |  |            |  |            |   |           | 61,395  |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current assets                       |           |           | 922,174           |  |           |              | 375,452   |             |         |       | 3,834  |              |            |   |           |           |           |              | 1,301,460 |  |              |             | 693,369   |         |           |         | 429,413      |   |        |       | 4,281  |  |            |   |           |   |           |         | 1,127,063 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Property, plant and equipment, net   |                                           |                                            | 106,726   |           |                   |  | 177,889   |              |           |             |        |       |        |              |           |   |            |           | 284,615   |              |           |  | 112,416      |             |           |         | 168,313   |         |              |   | 2      |       |        |  |           |   |            |   | 280,731   |        
|Goodwill                             |                                           |                                            |          |           |                   |  | 121,152   |              |           |             |        |       |        |              |           |   |            |           | 121,152   |              |           |  |             |             |           |         | 121,152   |         |              |   |       |       |        |  |           |   |            |   | 121,152   |        
|Intangible assets, net               |                                           |                                            | 113       |           |                   |  | 1,082,132 |              |           |             | 9,961   |       |        |              |           |   |            |           | 1,092,206 |              |           |  | 194          |             |           |         | 1,275,474 |         |              |   | 10,293 |       |        |  |           |   |            |   | 1,285,961 |        
|Other assets                         |                                           |                                            | 26,865    |           |                   |  | 240       |              |           |             |        |       |        |              |           |   |            |           | 27,105    |              |           |  | 16,078       |             |           |         | 240       |         |              |   |       |       |        |  |           |   |            |   | 16,318    |        
|Deferred income tax assets           |                                           |                                            | 14,285    |           |                   |  | 123,888   |              |           |             |        |       |        |              |           |   |            |           | 138,173   |              |           |  | 14,197       |             |           |         | 78,734    |         |              |   |       |       |        |  |           |   |            |   | 92,931    |        
|Investments in subsidiaries          |                                           |                                            | 2,289,238 |           |                   |  |          |              |           |             |        |       |        |              | (2,289,238 | ) |            |           |          |              |           |  | 2,186,234    |             |           |         |          |         |              |   |       |       |        |  | (2,186,234 | ) |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total assets                               |           |           | 3,359,401         |  |           | $            | 1,880,753 |             |         | $     | 13,795 |              |            | $ | (2,289,238 | )         |           | $            | 2,964,711 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|Current liabilities:                 |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|                                     | Accounts payable                          |                                            |           | 24,462    |                   |  | $         | 37,692       |           |             | $       | 36    |        |              | $          |  |            |           | $         | 62,190       |           |  | $            | 61,427      |           |         | $         | 31,339  |              |   | $      | 154   |        |  | $          |  |            |   | $         | 92,920  |          
|                                     | Accrued expenses                          |                                            |           | 116,024   |                   |  |           | 419,532      |           |             |         | (9    | )      |              |            |  |            |           |           | 535,547      |           |  |              | 125,095     |           |         |           | 470,899 |              |   |        | 16    |        |  |            |  |            |   |           | 596,010 |          
|                                     | Income taxes payable                      |                                            |           | 3,142     |                   |  |           | 54,383       |           |             |         | (477  | )      |              |            |  |            |           |           | 57,048       |           |  |              |            |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           |        |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current liabilities                  |           |           | 143,628           |  |           |              | 511,607   |             |         |       | (450   | )            |            |   |           |           |           |              | 654,785   |  |              |             | 186,522   |         |           |         | 502,238      |   |        |       | 170    |  |            |   |           |   |           |         | 688,930   | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Long-term debt                       |                                           |                                            | 345,000   |           |                   |  |          |              |           |             |        |       |        |              |           |   |            |           | 345,000   |              |           |  | 345,000      |             |           |         |          |         |              |   |       |       |        |  |           |   |            |   | 345,000   |        
|Other long-term liabilities          |                                           |                                            | 24,596    |           |                   |  | 2,233     |              |           |             |        |       |        |              |           |   |            |           | 26,829    |              |           |  | 29,417       |             |           |         | 12,019    |         |              |   |       |       |        |  |           |   |            |   | 41,436    |        
|Intercompany payable (receivable)    |                                           |                                            | 908,080   |           |                   |  | (916,225  | )            |           |             | 8,145   |       |        |              |           |   |            |           |          |              |           |  | 612,759      |             |           |         | (620,511  | )       |              |   | 7,752  |       |        |  |           |   |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities                          |           |           | 1,421,304         |  |           |              | (402,385  | )           |         |       | 7,695  |              |            |   |           |           |           |              | 1,026,614 |  |              |             | 1,173,698 |         |           |         | (106,254     | ) |        |       | 7,922  |  |            |   |           |   |           |         | 1,075,366 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Shareholders equity                 |                                           |                                            | 1,938,097 |           |                   |  | 2,283,138 |              |           |             | 6,100   |       |        |              | (2,289,238 | ) |            |           | 1,938,097 |              |           |  | 1,848,790    |             |           |         | 2,179,580 |         |              |   | 6,654  |       |        |  | (2,186,234 | ) |            |   | 1,848,790 |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities and shareholders equity |           |           | 3,359,401         |  |           | $            | 1,880,753 |             |         | $     | 13,795 |              |            | $ | (2,289,238 | )         |           | $            | 2,964,711 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  

24



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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


(Unaudited)


(In thousands)


|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |         |         |         |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ---------------------------------- | ------ | --------- | -------------------------------------------- |  | --------- | ------------ | ------- |  | ------------ | ---- | ---- | ------------ | ------- | -------- | --------- | - | ------ | ------------ | ------- | - | ------------ | ------- | ------- | ------------ | ------- | ------- | ------------ |  | --- | --- | --- | - | ------ | -------- | -------- | - | ------- | ------- | ------- | -
|                                                             |                                                                              | Three Months Ended June 30, 2005   |        |           | Three Months Ended June 30, 2004 (restated)* | 
|                                                             |                                                                              |                                    |        |           |                                              | 
|                                                             |                                                                              |                                    |        | Non       |                                              |  |           |              |         |  | Non          |      |      |             
|                                                             |                                                                              |                                    |        | Guarantor |                                              |  | Guarantor |              |         |  |              | King |      |              |         |          | Guarantor |   |        | Guarantor    |         |   |              |         | King    |             
|                                                             |                                                                              | King                               |        |           | Subsidiaries                                 |  |           | Subsidiaries |         |  | Eliminations |      |      | Consolidated |         |          | King      |   |        | Subsidiaries |         |   | Subsidiaries |         |         | Eliminations |         |         | Consolidated | 
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Revenues:                                                    |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |         |        
|                                                             | Net sales                                                                    |                                    | $      | 102,090   |                                              |  | $         | 442,992      |         |  | $            | 144  |      |              | $       | (101,865 | )         |   | $      | 443,361      |         |   | $            | 121,767 |         |              | $       | 254,034 |              |  | $   | 465 |     |   | $      | (121,774 | )        |   | $       | 254,492 |        
|                                                             | Royalty revenue                                                              |                                    |        |          |                                              |  |           | 19,578       |         |  |              |     |      |              |         |         |           |   |        | 19,578       |         |   |              |        |         |              |         | 21,119  |              |  |     |    |     |   |        |         |          |   |         | 21,119  |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|                                                             |                                                                              | Total revenues                     |        |           | 102,090                                      |  |           |              | 462,570 |  |              |      | 144  |              |         |          | (101,865  | ) |        |              | 462,939 |   |              |         | 121,767 |              |         |         | 275,153      |  |     |     | 465 |   |        |          | (121,774 | ) |         |         | 275,611 |  
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Operating costs and expenses:                                |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |         |        
|                                                             | Cost of revenues                                                             |                                    |        | 32,855    |                                              |  |           | 160,128      |         |  |              | 86   |      |              |         | (101,865 | )         |   |        | 91,204       |         |   |              | 35,167  |         |              |         | 171,594 |              |  |     | 137 |     |   |        | (121,774 | )        |   |         | 85,124  |        
|                                                             | Selling, general and administrative                                          |                                    |        | 52,859    |                                              |  |           | 106,120      |         |  |              | 31   |      |              |         |         |           |   |        | 159,010      |         |   |              | 48,693  |         |              |         | 74,743  |              |  |     | 91  |     |   |        |         |          |   |         | 123,527 |        
|                                                             | Medicaid related charges                                                     |                                    |        |          |                                              |  |           |             |         |  |              |     |      |              |         |         |           |   |        |             |         |   |              | 65,000  |         |              |         |        |              |  |     |    |     |   |        |         |          |   |         | 65,000  |        
|                                                             | Transaction costs                                                            |                                    |        | 155       |                                              |  |           |             |         |  |              |     |      |              |         |         |           |   |        | 155          |         |   |              | 3,126   |         |              |         |        |              |  |     |    |     |   |        |         |          |   |         | 3,126   |        
|                                                             | Depreciation and amortization                                                |                                    |        | 3,922     |                                              |  |           | 35,832       |         |  |              | 166  |      |              |         |         |           |   |        | 39,920       |         |   |              | 4,312   |         |              |         | 34,048  |              |  |     | 106 |     |   |        |         |          |   |         | 38,466  |        
|                                                             | Research and development                                                     |                                    |        | 131       |                                              |  |           | 17,369       |         |  |              |     |      |              |         |         |           |   |        | 17,500       |         |   |              | 146     |         |              |         | 17,332  |              |  |     |    |     |   |        |         |          |   |         | 17,478  |        
|                                                             | Intangible asset impairment                                                  |                                    |        |          |                                              |  |           | 126,923      |         |  |              |     |      |              |         |         |           |   |        | 126,923      |         |   |              |        |         |              |         |        |              |  |     |    |     |   |        |         |          |   |         |        |        
|                                                             | Gain on sale of intangible assets                                            |                                    |        |          |                                              |  |           | (591         | )       |  |              |     |      |              |         |         |           |   |        | (591         | )       |   |              |        |         |              |         | (3,421  | )            |  |     |    |     |   |        |         |          |   |         | (3,421  | )      
|                                                             | Restructuring charges                                                        |                                    |        | 163       |                                              |  |           | (180         | )       |  |              |     |      |              |         |         |           |   |        | (17          | )       |   |              | 6,247   |         |              |         | (94     | )            |  |     |    |     |   |        |         |          |   |         | 6,153   |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|                                                             |                                                                              | Total operating costs and expenses |        |           | 90,085                                       |  |           |              | 445,601 |  |              |      | 283  |              |         |          | (101,865  | ) |        |              | 434,104 |   |              |         | 162,691 |              |         |         | 294,202      |  |     |     | 334 |   |        |          | (121,774 | ) |         |         | 335,453 |  
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Operating income (loss)                                      |                                                                              |                                    | 12,005 |           |                                              |  | 16,969    |              |         |  | (139         | )    |      |              |        |          |           |   | 28,835 |              |         |   | (40,924      | )       |         |              | (19,049 | )       |              |  | 131 |     |     |   |       |          |          |   | (59,842 | )      
|Other income (expense):                                      |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |       |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |        |        
|                                                             | Interest income                                                              |                                    |        | 3,680     |                                              |  |           | 253          |         |  |              |     |      |              |         |         |           |   |        | 3,933        |         |   |              | 917     |         |              |         | 164     |              |  |     |    |     |   |        |         |          |   |         | 1,081   |        
|                                                             | Interest expense                                                             |                                    |        | (3,036    | )                                            |  |           | (3           | )       |  |              |     |      |              |         |         |           |   |        | (3,039       | )       |   |              | (3,266  | )       |              |         |        |              |  |     |    |     |   |        |         |          |   |         | (3,266  | )      
|                                                             | Valuation charge  convertible notes receivable                              |                                    |        |          |                                              |  |           |             |         |  |              |     |      |              |         |         |           |   |        |             |         |   |              | (2,438  | )       |              |         |        |              |  |     |    |     |   |        |         |          |   |         | (2,438  | )      
|                                                             | Write-down of investment                                                     |                                    |        | (369      | )                                            |  |           |             |         |  |              |     |      |              |         |         |           |   |        | (369         | )       |   |              |        |         |              |         |        |              |  |     |    |     |   |        |         |          |   |         |        |        
|                                                             | Other (expense) income, net                                                  |                                    |        | (105      | )                                            |  |           | (721         | )       |  |              | (221 | )    |              |         |         |           |   |        | (1,047       | )       |   |              | (162    | )       |              |         | 1,374   |              |  |     | (44 | )   |   |        |         |          |   |         | 1,168   |        
|                                                             | Equity in earnings (loss) of subsidiaries                                    |                                    |        | 23,432    |                                              |  |           |             |         |  |              |     |      |              |         | (23,432  | )         |   |        |             |         |   |              | 2,534   |         |              |         |        |              |  |     |    |     |   |        | (2,534   | )        |   |         |        |        
|                                                             | Intercompany interest (expense) income                                       |                                    |        | (16,797   | )                                            |  |           | 16,948       |         |  |              | (151 | )    |              |         |         |           |   |        |             |         |   |              | (8,164  | )       |              |         | 8,164   |              |  |     |    |     |   |        |         |          |   |         |        |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|                                                             |                                                                              | Total other income (expense)       |        |           | 6,805                                        |  |           |              | 16,477  |  |              |      | (372 | )            |         |          | (23,432   | ) |        |              | (522    | ) |              |         | (10,579 | )            |         |         | 9,702        |  |     |     | (44 | ) |        |          | (2,534   | ) |         |         | (3,455  | )
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Income (loss) from continuing operations before income taxes |                                                                              |                                    | 18,810 |           |                                              |  | 33,446    |              |         |  | (511         | )    |      |              | (23,432 | )        |           |   | 28,313 |              |         |   | (51,503      | )       |         |              | (9,347  | )       |              |  | 87  |     |     |   | (2,534 | )        |          |   | (63,297 | )      
|Income tax (benefit) expense                                 |                                                                              |                                    | (1,687 | )         |                                              |  | 9,137     |              |         |  | (179         | )    |      |              |        |          |           |   | 7,271  |              |         |   | 11,421       |         |         |              | (10,465 | )       |              |  | 30  |     |     |   |       |          |          |   | 986     |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Income (loss) from continuing operations                     |                                                                              |                                    | 20,497 |           |                                              |  | 24,309    |              |         |  | (332         | )    |      |              | (23,432 | )        |           |   | 21,042 |              |         |   | (62,924      | )       |         |              | 1,118   |         |              |  | 57  |     |     |   | (2,534 | )        |          |   | (64,283 | )      
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|Discontinued operations:                                     |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |         |        
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment |                                    |        |          |                                              |  |           | (849         | )       |  |              |     |      |              |         |         |           |   |        | (849         | )       |   |              |        |         |              |         | 2,148   |              |  |     |    |     |   |        |         |          |   |         | 2,148   |        
|                                                             | Income tax (benefit) expense                                                 |                                    |        |          |                                              |  |           | (304         | )       |  |              |     |      |              |         |         |           |   |        | (304         | )       |   |              |        |         |              |         | 789     |              |  |     |    |     |   |        |         |          |   |         | 789     |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|                                                             | (Loss) income from discontinued operations, net                              |                                    |        |          |                                              |  |           | (545         | )       |  |              |     |      |              |         |         |           |   |        | (545         | )       |   |              |        |         |              |         | 1,359   |              |  |     |    |     |   |        |         |          |   |         | 1,359   |        
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|                                                             |                                                                              | Net income (loss)                  |        | $         | 20,497                                       |  |           | $            | 23,764  |  |              | $    | (332 | )            |         | $        | (23,432   | ) |        | $            | 20,497  |   |              | $       | (62,924 | )            |         | $       | 2,477        |  |     | $   | 57  |   |        | $        | (2,534   | ) |         | $       | (62,924 | )
|                                                             |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              | 
|* See Note 2                                                 |                                                                              |                                    |        |           |                                              |  |           |              |         |  |              |      |      |              |         |          |           |   |        |              |         |   |              |         |         |              |         |         |              |  |     |     |     |   |        |          |          |   |         |        

25



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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


(Unaudited)


(In thousands)


|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |         |      |     |      |       |         |          |          |          |         |          |          |         | 
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------ | ---------------------------------- | --------- | ------------------------------------------- | ------- | --------- | ------------ | ------- | ------- | ------------ | ---- | ---- | ------------ | -------- | -------- | --------- | -------- | ------- | ------------ | ------- | ------- | ------------ | -------- | -------- | ------------ | ------- | -------- | ------------ | ------- | ---- | --- | ---- | ----- | ------- | -------- | -------- | -------- | ------- | -------- | -------- | ------- | 
|                                                             |                                                                              | Six Months Ended June 30, 2005 |                                    |           | Six Months Ended June 30, 2004 (restated) * |        
|                                                             |                                                                              |                                |                                    |           |                                             |        
|                                                             |                                                                              |                                |                                    | Non       |                                             |         |           |              |         |         | Non          |      |      |             
|                                                             |                                                                              |                                |                                    | Guarantor |                                             |         | Guarantor |              |         |         |              | King |      |              |          |          | Guarantor |          |         | Guarantor    |         |         |              |          | King     |             
|                                                             |                                                                              | King                           |                                    |           | Subsidiaries                                |         |           | Subsidiaries |         |         | Eliminations |      |      | Consolidated |          |          | King      |          |         | Subsidiaries |         |         | Subsidiaries |          |          | Eliminations |         |          | Consolidated |        
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Revenues:                                                    |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |         |      |     |      |       |         |          |          |          |         |         
|                                                             | Net sales                                                                    |                                | $                                  | 196,408   |                                             |         | $         | 792,251      |         |         | $            | 584  |      |              | $        | (195,312 | )         |          | $       | 793,931      |         |         | $            | 228,269  |          |              | $       | 528,188  |              |         | $    | 883 |      |       | $       | (228,154 | )        |          | $       | 529,186  |         
|                                                             | Royalty revenue                                                              |                                |                                    |          |                                             |         |           | 37,633       |         |         |              |     |      |              |          |         |           |          |         | 37,633       |         |         |              |         |          |              |         | 37,875   |              |         |      |    |      |       |         |         |          |          |         | 37,875   |         
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|                                                             |                                                                              | Total revenues                 |                                    |           | 196,408                                     |         |           |              | 829,884 |         |              |      | 584  |              |          |          | (195,312  | )        |         |              | 831,564 |         |              |          | 228,269  |              |         |          | 566,063      |         |      |     | 883  |       |         |          | (228,154 | )        |         |          | 567,061  |        
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Operating costs and expenses:                                |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |         |      |     |      |       |         |          |          |          |         |         
|                                                             | Cost of revenues                                                             |                                |                                    | 72,025    |                                             |         |           | 286,391      |         |         |              | 316  |      |              |          | (195,312 | )         |          |         | 163,420      |         |         |              | 67,164   |          |              |         | 329,401  |              |         |      | 254 |      |       |         | (228,154 | )        |          |         | 168,665  |         
|                                                             | Selling, general and administrative                                          |                                |                                    | 91,938    |                                             |         |           | 194,450      |         |         |              | 127  |      |              |          |         |           |          |         | 286,515      |         |         |              | 85,387   |          |              |         | 148,344  |              |         |      | 942 |      |       |         |         |          |          |         | 234,673  |         
|                                                             | Medicaid related charges                                                     |                                |                                    |          |                                             |         |           |             |         |         |              |     |      |              |          |         |           |          |         |             |         |         |              | 65,000   |          |              |         |         |              |         |      |    |      |       |         |         |          |          |         | 65,000   |         
|                                                             | Transaction costs                                                            |                                |                                    | 3,432     |                                             |         |           |             |         |         |              |     |      |              |          |         |           |          |         | 3,432        |         |         |              | 3,126    |          |              |         |         |              |         |      |    |      |       |         |         |          |          |         | 3,126    |         
|                                                             | Depreciation and amortization                                                |                                |                                    | 7,809     |                                             |         |           | 73,205       |         |         |              | 332  |      |              |          |         |           |          |         | 81,346       |         |         |              | 8,652    |          |              |         | 68,920   |              |         |      | 212 |      |       |         |         |          |          |         | 77,784   |         
|                                                             | Research and development                                                     |                                |                                    | 292       |                                             |         |           | 28,680       |         |         |              |     |      |              |          |         |           |          |         | 28,972       |         |         |              | 256      |          |              |         | 33,245   |              |         |      |    |      |       |         |         |          |          |         | 33,501   |         
|                                                             | Intangible asset impairment                                                  |                                |                                    |          |                                             |         |           | 126,923      |         |         |              |     |      |              |          |         |           |          |         | 126,923      |         |         |              |         |          |              |         | 34,936   |              |         |      |    |      |       |         |         |          |          |         | 34,936   |         
|                                                             | Gain on sale of intangible assets                                            |                                |                                    |          |                                             |         |           | (1,438       | )       |         |              |     |      |              |          |         |           |          |         | (1,438       | )       |         |              |         |          |              |         | (4,279   | )            |         |      |    |      |       |         |         |          |          |         | (4,279   | )       
|                                                             | Restructuring charges                                                        |                                |                                    | 322       |                                             |         |           | 1,684        |         |         |              |     |      |              |          |         |           |          |         | 2,006        |         |         |              | 6,247    |          |              |         | (94      | )            |         |      |    |      |       |         |         |          |          |         | 6,153    |         
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|                                                             |                                                                              |                                | Total operating costs and expenses |           |                                             | 175,818 |           |              |         | 709,895 |              |      |      | 775          |          |          |           | (195,312 | )       |              |         | 691,176 |              |          |          | 235,832      |         |          |              | 610,473 |      |     |      | 1,408 |         |          |          | (228,154 | )       |          |          | 619,559 | 
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Operating income (loss)                                      |                                                                              |                                | 20,590                             |           |                                             |         | 119,989   |              |         |         | (191         | )    |      |              |         |          |           |          | 140,388 |              |         |         | (7,563       | )        |          |              | (44,410 | )        |              |         | (525 | )   |      |       |        |          |          |          | (52,498 | )       
|Other income (expense):                                      |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |         |      |     |      |       |         |          |          |          |         |         
|                                                             | Interest income                                                              |                                |                                    | 5,722     |                                             |         |           | 488          |         |         |              |     |      |              |          |         |           |          |         | 6,210        |         |         |              | 1,810    |          |              |         | 325      |              |         |      |    |      |       |         |         |          |          |         | 2,135    |         
|                                                             | Interest expense                                                             |                                |                                    | (5,722    | )                                           |         |           | (18          | )       |         |              |     |      |              |          |         |           |          |         | (5,740       | )       |         |              | (6,366   | )        |              |         | (5       | )            |         |      |    |      |       |         |         |          |          |         | (6,371   | )       
|                                                             | Valuation charge  convertible notes receivable                              |                                |                                    |          |                                             |         |           |             |         |         |              |     |      |              |          |         |           |          |         |             |         |         |              | (2,887   | )        |              |         |         |              |         |      |    |      |       |         |         |          |          |         | (2,887   | )       
|                                                             | Write-down of investment                                                     |                                |                                    | (7,222    | )                                           |         |           |             |         |         |              |     |      |              |          |         |           |          |         | (7,222       | )       |         |              |         |          |              |         |         |              |         |      |    |      |       |         |         |          |          |         |         |         
|                                                             | Other (expense) income, net                                                  |                                |                                    | (182      | )                                           |         |           | (753         | )       |         |              | (361 | )    |              |          |         |           |          |         | (1,296       | )       |         |              | (487     | )        |              |         | 1,043    |              |         |      | (91 | )    |       |         |         |          |          |         | 465      |         
|                                                             | Equity in earnings (loss) of subsidiaries                                    |                                |                                    | 103,089   |                                             |         |           |             |         |         |              |     |      |              |          | (103,089 | )         |          |         |             |         |         |              | (115,222 | )        |              |         |         |              |         |      |    |      |       |         | 115,222  |          |          |         |         |         
|                                                             | Intercompany interest (expense) income                                       |                                |                                    | (28,990   | )                                           |         |           | 29,290       |         |         |              | (300 | )    |              |          |         |           |          |         |             |         |         |              | (15,330  | )        |              |         | 15,330   |              |         |      |    |      |       |         |         |          |          |         |         |         
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|                                                             |                                                                              | Total other income (expense)   |                                    |           | 66,695                                      |         |           |              | 29,007  |         |              |      | (661 | )            |          |          | (103,089  | )        |         |              | (8,048  | )       |              |          | (138,482 | )            |         |          | 16,693       |         |      |     | (91  | )     |         |          | 115,222  |          |         |          | (6,658   | )      
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Income (loss) from continuing operations before income taxes |                                                                              |                                | 87,285                             |           |                                             |         | 148,996   |              |         |         | (852         | )    |      |              | (103,089 | )        |           |          | 132,340 |              |         |         | (146,045     | )        |          |              | (27,717 | )        |              |         | (616 | )   |      |       | 115,222 |          |          |          | (59,156 | )       
|Income tax (benefit) expense                                 |                                                                              |                                | (3,267                             | )         |                                             |         | 47,758    |              |         |         | (298         | )    |      |              |         |          |           |          | 44,193  |              |         |         | 20,955       |          |          |              | (17,914 | )        |              |         | (216 | )   |      |       |        |          |          |          | 2,825   |         
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Income (loss) from continuing operations                     |                                                                              |                                | 90,552                             |           |                                             |         | 101,238   |              |         |         | (554         | )    |      |              | (103,089 | )        |           |          | 88,147  |              |         |         | (167,000     | )        |          |              | (9,803  | )        |              |         | (400 | )   |      |       | 115,222 |          |          |          | (61,981 | )       
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|Discontinued operations:                                     |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |         |      |     |      |       |         |          |          |          |         |         
|                                                             | Income (loss) from discontinued operations, including loss on
    impairment |                                |                                    |          |                                             |         |           | 3,833        |         |         |              |     |      |              |          |         |           |          |         | 3,833        |         |         |              |         |          |              |         | (165,314 | )            |         |      |    |      |       |         |         |          |          |         | (165,314 | )       
|                                                             | Income tax expense (benefit)                                                 |                                |                                    |          |                                             |         |           | 1,428        |         |         |              |     |      |              |          |         |           |          |         | 1,428        |         |         |              |         |          |              |         | (60,295  | )            |         |      |    |      |       |         |         |          |          |         | (60,295  | )       
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|                                                             | Income (loss) from discontinued operations, net                              |                                |                                    |          |                                             |         |           | 2,405        |         |         |              |     |      |              |          |         |           |          |         | 2,405        |         |         |              |         |          |              |         | (105,019 | )            |         |      |    |      |       |         |         |          |          |         | (105,019 | )       
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        
|                                                             |                                                                              | Net income (loss)              |                                    | $         | 90,552                                      |         |           | $            | 103,643 |         |              | $    | (554 | )            |          | $        | (103,089  | )        |         | $            | 90,552  |         |              | $        | (167,000 | )            |         | $        | (114,822     | )       |      | $   | (400 | )     |         | $        | 115,222  |          |         | $        | (167,000 | )      
|                                                             |                                                                              |                                |                                    |           |                                             |         |           |              |         |         |              |      |      |              |          |          |           |          |         |              |         |         |              |          |          |              |         |          |              |        



26



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |         |   |   |       |    |   |   |         |         |  
|--------------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | --------- | ------------------------------------------ |  | --------- | ------------ | - | ---- | ------------ | --- |  | ---- | --------- | ------- | ------------ | --------- | ------- | ------------ | ---- | - | ------------ | ------- | - | - | ----- | -- | - | - | ------- | ------- | -
|                                                    |                                              | Six Months Ended June 30, 2005 |         |           | Six Months Ended June 30, 2004 (restated)* | 
|                                                    |                                              |                                |         |           |                                            | 
|                                                    |                                              |                                |         | Non       |                                            |  |           |              |   |      | Non          |     |  |     
|                                                    |                                              |                                |         | Guarantor |                                            |  | Guarantor |              |   | King |              |     |  |      | Guarantor |         |              | Guarantor |         |              | King |  
|                                                    |                                              | King                           |         |           | Subsidiaries                               |  |           | Subsidiaries |   |      | Consolidated |     |  | King |           |         | Subsidiaries |           |         | Subsidiaries |      |   | Consolidated |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Cash flows from operating activities                |                                              |                                | 27,223  |           |                                            |  | 288,952   |              |   |      | 593          |     |  |      | 316,768   |         |              | $         | (44,664 | )            |      | $ | 60,694       |         |   | $ | (82   | )  |   | $ | 15,948  |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Cash flows from investing activities:               |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |         |   |   |       |    |   |   |         |        
|                                                    | Transfers (to) from restricted cash          |                                |         | (75,031   | )                                          |  |           | 1,582        |   |      |              |    |  |      |           | (73,449 | )            |           |         | 1,351        |      |   |              | (545    | ) |   |       |   |   |   |         | 806     |  
|                                                    | Purchases of marketable securities           |                                |         |          |                                            |  |           |             |   |      |              |    |  |      |           |        |              |           |         |              |      |   |              |        |   |   |       |   |   |   |         |        |  
|                                                    | Purchases of property, plant and equipment   |                                |         | (2,911    | )                                          |  |           | (17,016      | ) |      |              |    |  |      |           | (19,927 | )            |           |         | (6,891       | )    |   |              | (21,569 | ) |   |       | (2 | ) |   |         | (28,462 | )
|                                                    | Proceeds from sale of assets                 |                                |         | 1         |                                            |  |           |             |   |      |              |    |  |      |           | 1       |              |           |         | 113          |      |   |              |        |   |   |       |   |   |   |         | 113     |  
|                                                    | Acquisition of Primary Care from Elan        |                                |         |          |                                            |  |           |             |   |      |              |    |  |      |           |        |              |           |         |             |      |   |              | (36,000 | ) |   |       |   |   |   |         | (36,000 | )
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Net cash used in investing activities               |                                              |                                | (77,941 | )         |                                            |  | (15,434   | )            |   |      |             |     |  |      | (93,375   | )       |              |           | (5,427  | )            |      |   | (58,114      | )       |   |   | (2    | )  |   |   | (63,543 | )      
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Cash flows from financing activities:               |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |         |   |   |       |    |   |   |         |        
|                                                    | Proceeds from exercise of stock options, net |                                |         | 87        |                                            |  |           |             |   |      |              |    |  |      |           | 87      |              |           |         | 2,324        |      |   |              |        |   |   |       |   |   |   |         | 2,324   |  
|                                                    | Payments on other long-term debt             |                                |         |          |                                            |  |           |             |   |      |              |    |  |      |           |        |              |           |         | (97          | )    |   |              |        |   |   |       |   |   |   |         | (97     | )
|                                                    | Intercompany                                 |                                |         | 295,321   |                                            |  |           | (295,714     | ) |      |              | 393 |  |      |           |        |              |           |         | 6,106        |      |   |              | (6,193  | ) |   |       | 87 |   |   |         |        |  
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Net cash provided by (used in) financing activities |                                              |                                | 295,408 |           |                                            |  | (295,714  | )            |   |      | 393          |     |  |      | 87        |         |              |           | 8,333   |              |      |   | (6,193       | )       |   |   | 87    |    |   |   | 2,227   |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Net cash provided by discontinued operations        |                                              |                                |        |           |                                            |  |          |              |   |      |             |     |  |      |          |         |              |           |        |              |      |   | 6,122        |         |   |   |      |    |   |   | 6,122   |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Increase (decrease) in cash and cash equivalents    |                                              |                                | 244,690 |           |                                            |  | (22,196   | )            |   |      | 986          |     |  |      | 223,480   |         |              |           | (41,758 | )            |      |   | 2,509        |         |   |   | 3     |    |   |   | (39,246 | )      
|Cash and cash equivalents, beginning of period      |                                              |                                | 313,881 |           |                                            |  | 27,035    |              |   |      | 1,170        |     |  |      | 342,086   |         |              |           | 140,617 |              |      |   | 3,641        |         |   |   | 1,795 |    |   |   | 146,053 |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        
|Cash and cash equivalents, end of period            |                                              |                                | 558,571 |           |                                            |  | 4,839     |              |   |      | 2,156        |     |  |      | 565,566   |         |              | $         | 98,859  |              |      | $ | 6,150        |         |   | $ | 1,798 |    |   | $ | 106,807 |        
|                                                    |                                              |                                |         |           |                                            |  |           |              |   |      |              |     |  |      |           |         |              |           |         |              |      |   |              |        



27



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##### Table of Contents



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


The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk Factors set
out below and in our Annual Report on Form 10-K for the
year ended December 31, 2004, 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, 2004; and
(c) our unaudited consolidated financial statements and
related notes which are included in this report on
Form 10-Q. Please see the sections entitled Risk
Factors and A Warning About Forward-Looking
Statements for a discussion of the uncertainties, risks
and assumptions associated with these statements.


I.     OVERVIEW


Introduction




General Review of Financial Results




|                                 |       |                      |         |         |                    |   |         |         |      |   |            |         |  |   |         |         | 
|-------------------------------- | ----- | -------------------- | ------- | ------- | ------------------ | - | ------- | ------- | ---- | - | ---------- | ------- |  | - | ------- | ------- | 
|                                 |       | For the Three Months |         |         | For the Six Months |  
|                                 |       | Ended June 30,       |         |         | Ended June 30,     |  
|                                 |       |                      |         |         |                    |  
|                                 |       |                      |         | 2004    |                    |   |         |         | 2004 |  
|                                 |       | 2005                 |         |         | (restated)         |   |         | 2005    |      |   | (restated) |        
|                                 |       |                      |         |         |                    |   |         |         |      |   |            |        
|Branded pharmaceuticals          |       | $                    | 400,310 |         |                    | $ | 220,059 |         |      | $ | 722,079    |         |  | $ | 454,073 |        
|Meridian Medical Technologies    |       |                      | 35,418  |         |                    |   | 27,681  |         |      |   | 58,632     |         |  |   | 62,182  |        
|Royalties                        |       |                      | 19,578  |         |                    |   | 21,118  |         |      |   | 37,633     |         |  |   | 37,875  |        
|Contract manufacturing and other |       |                      | 7,633   |         |                    |   | 6,753   |         |      |   | 13,220     |         |  |   | 12,931  |        
|                                 |       |                      |         |         |                    |   |         |         |      |   |            |        
|                                 | Total |                      | $       | 462,939 |                    |   | $       | 275,611 |      |   | $          | 831,564 |  |   | $       | 567,061 | 
|                                 |       |                      |         |         |                    |   |         |         |      |   |            |        

II.     RESULTS OF OPERATIONS






| |                                          
| | -----------------------------------------
| | Three Months Ended June 30, 2005 and 2004



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





28



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











29



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $5.2 million charge in 2005 and a $5.0 million
    charge in 2004 primarily due to professional fees related to the
    ongoing investigations of our company by the Office of Inspector
    General of the Department of Health and Human Services, which we
    refer to as the OIG, and the U.S. Securities and
    Exchange Commission, which we refer to as the SEC.
    For additional information, please see Governmental
    Investigations and Securities Litigation in
    Liquidity and Capital Resources.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Special charges of $0.2 million in 2005 and
    $3.1 million in 2004 for professional fees and expenses
    related to our terminated merger agreement with Mylan
    Laboratories Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | As part of our ongoing discussions with the OIG, the SEC, and
    other state and federal agencies, we accrued $65.0 million
    for estimated settlement costs as an operating expense during
    the second quarter of 2004 to cover interest, costs, fines,
    penalties and all other amounts in addition to the
    $65.4 million that we previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    Although we have not entered into any agreements or
    understandings with respect to a possible settlement, these
    accruals represent our current best estimate of the aggregate
    payment we would have to make pursuant to a comprehensive
    settlement with the OIG, the SEC and other federal and state
    agencies. For additional information, please see
    Governmental Investigations and Securities
    Litigation in Liquidity and Capital Resources.











| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge of $126.9 million in
    2005 related to Sonata®. As previously disclosed, a new
    competitor to Sonata® entered the market in April 2005. In
    the second quarter of 2005, the prescriptions for Sonata®
    did not meet our expectations. As a result, we lowered our
    future sales forecast which decreased the estimated undiscounted
    future cash flows associated with these assets to a level below
    the carrying value. This special item was recorded in order to
    adjust the carrying value of the Sonata® intangible assets
    on our balance sheet so as to reflect the

30



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| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | estimated fair value of such assets. We determined the fair
    value of the intangible assets associated with Sonata®
    based on the estimated discounted future cash flows for this
    product.                                                  
|
| |  | Income in the amount of $0.6 million and $3.4 million
    in 2005 and 2004, respectively, due to gains on the sale of some
    of our assets.                                                                                                         
|
| |  | A restructuring charge in the amount of $6.2 million during
    2004 primarily due to separation agreements with several
    executives and the relocation of our sales and marketing
    operations from Bristol, Tennessee to Princeton, New Jersey.



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





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









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





| |                                         
| | ----------------------------------------
| | Income (loss) from Continuing Operations





| |                        
| | -----------------------
| | Discontinued Operations





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





| |                                        
| | ---------------------------------------
| | Six Months Ended June 30, 2005 and 2004



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













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







32



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| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Income of $1.6 million in 2005 and a charge of
    $0.2 million in 2004 related to changes in estimates
    regarding the effect of some excess purchase commitments.
|
| |  | A $4.6 million charge in 2004 primarily related to the
    voluntary recall of some lots of Levoxyl®.                                                                













| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $8.9 million and $10.7 million during 2005
    and 2004, respectively, primarily due to professional fees that
    were related to the ongoing investigations of our company by the
    OIG and the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Charges in the amount of $3.4 million and $3.1 million in
    2005 and 2004, respectively, for professional fees and expenses
    related to the terminated merger agreement with Mylan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | As discussed above, we accrued $65.0 million for a Medicaid
    related charge in the first half of 2004 to cover estimated
    interest, costs, fines, penalties and all other settlement costs
    in addition to the $65.4 million that we previously accrued
    for estimated underpayments to Medicaid and other government
    pricing programs. Although we have not entered into any
    agreements or understandings with respect to a possible
    settlement, these accruals represent our current best estimate
    of the aggregate payment we would have to make pursuant to a
    comprehensive settlement with the OIG, the SEC and other federal
    and state agencies. For additional information, please see
    Governmental Investigations and Securities
    Litigation in Liquidity and Capital Resources.







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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge of $126.9 million in 2005
    related to Sonata®. As previously disclosed, a new
    competitor to Sonata® entered the market in April 2005. In
    the second quarter of 2005, the prescriptions for Sonata®
    did not meet our expectations. As a result, we lowered our
    future sales forecast which decreased the estimated undiscounted
    future cash flows associated with these assets to a level below
    the carrying value. This special item was recorded in order to
    adjust the carrying value of the Sonata® intangible assets
    on our balance sheet so as to reflect the estimated fair value
    of such assets. We also had an intangible asset impairment
    charge totaling $34.9 million in 2004 that was primarily
    related to a greater than expected decline in prescriptions for
    Florinef® and Tapazole® due to the availability of
    generics for these products. This special item was recorded to
    adjust the carrying value of the intangible assets on our
    balance sheet associated with these products so as to reflect
    the estimated fair value of such assets. We determined the fair
    value of the intangible assets associated with Sonata®,
    Florinef® and Tapazole® based on our estimated
    discounted future cash flows for these products.
|
| |  | Income in the amount of $1.4 million and $4.3 million
    in 2005 and 2004, respectively, due to gains on the sale of some
    of our assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | A restructuring charge in the amount of $2.0 million in
    2005 primarily due to our decision to discontinue some
    relatively insignificant products associated with our Meridian
    Medical Technologies business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We also incurred a restructuring charge in the amount of
    $6.2 million during 2004 primarily due to separation
    agreements with several executives and the relocation of our
    sales and marketing operations from Bristol, Tennessee to
    Princeton, New Jersey.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



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





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









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





| |                                         
| | ----------------------------------------
| | Income (loss) from Continuing Operations



34



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| |                        
| | -----------------------
| | Discontinued Operations





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



Liquidity and Capital Resources




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











35



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| |                                                          
| | ---------------------------------------------------------
| | Governmental Investigations and Securities
    Litigation









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We previously accrued $130.4 million in respect of our
    estimated underpayments to Medicaid and other government pricing
    programs, and estimated settlement costs with all relevant
    governmental parties. This amount includes $65.4 million
    accrued for estimated underpayments to Medicaid and other
    government pricing programs, and an additional
    $65.0 million for estimated settlement costs to cover
    interest, costs, fines, penalties and all other additional
    amounts. Our current expectation is that the aggregate cost to
    settle with the governmental authorities should not materially
    exceed the amounts already accrued.             
|
| |  | With respect to the matters being investigated by or discussed
    with the staff of the SEC, we currently anticipate that we would
    settle, without admitting or denying, one or more charges that
    we failed to maintain adequate books and records and internal
    controls. We anticipate that the action to be settled could also
    include one or more charges that our public filings contained
    material misstatements or omissions relating to our financial
    results for some or all of the periods for which results have
    been restated. We do not anticipate being required to restate
    any results for periods prior to 2002.                            
|
| |  | We expect that we will be required to enter into a Corporate
    Integrity Agreement with the Department of Health and Human
    Services, which would require us to submit to audits relating to
    our Medicaid rebate calculations over a five-year period. We do
    not expect that the resolution of the pending investigations
    will result in any prohibitions on our sales to Medicaid or any
    related state or Federal program, nor do we expect any other
    material restriction on our ability to conduct our business,
    although we will be required to incur consultant fees and other
    expenses in order to comply with the Corporate Integrity
    Agreement.
|
| |  | We do not expect that any criminal charges will be asserted
    against us or against any present or former director, officer or
    employee in connection with the matters being investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

36



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37



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| |                           
| | --------------------------
| | Skelaxin® Patent Challenge

Approved Drug
Products with Therapeutic Equivalence Evaluations


38



---



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| |                         
| | ------------------------
| | Altace® Patent Challenge



39



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| |                               
| | ------------------------------
| | Six Months Ended June 30, 2005





40



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

3 4








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





| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards



41



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| |                             
| | ----------------------------
| | Critical Accounting Policies













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

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| |  |                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | patent is eliminated. As the pattern of economic benefit cannot
    be reliably determined, we use the straight-line method of
    amortization for our intangibles.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We review our property, plant and equipment and intangible
    assets for possible impairment whenever events or circumstances
    indicate that the carrying amount of an asset may not be
    recoverable. We review our goodwill for possible impairment
    annually, or whenever events or circumstances indicate that the
    carrying amount may not be recoverable. In any event, we
    evaluate the remaining useful lives of our intangible assets
    each reporting period to determine whether events and
    circumstances warrant a revision to the remaining period of
    amortization. This evaluation is performed through our quarterly
    evaluation of intangibles for impairment. In evaluating goodwill
    for impairment, we estimate the fair value of our individual
    business reporting units on a discounted cash flow basis.
    Assumptions and estimates used in the evaluation of impairment
    may affect the carrying value of long-lived assets, which could
    result in impairment charges in future periods. Such assumptions
    include projections of future cash flows and, in some cases, the
    current fair value of the asset. In addition, our depreciation
    and amortization policies reflect judgments on the estimated
    useful lives of assets.
|
| | We may incur impairment charges in the future if prescriptions
    for, or sales of, our products are less than current
    expectations and result in a reduction of our estimated
    undiscounted future cash flows. This may be caused by many
    factors, including competition from generic substitutes,
    significant delays in the manufacture of supply of materials,
    the publication of negative results of studies or clinical
    trials, or new legislation or regulatory proposals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



|                              |                                    |                |               |             |              |           |          |         |        |         |         |         |         |         | 
|----------------------------- | ---------------------------------- | -------------- | ------------- | ----------- | ------------ | --------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | 
|                              |                                    |                |               | Accumulated |              |           | Net Book |        
|                              |                                    | Cost           |               |             | Amortization |           |          | Value   |       
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | (in thousands) |              
|Branded                       |                                    |                |               |             |              |           |          |         |        |         |         |        
|                              | Altace                             |                | $             | 276,150     |              |           | $        | 63,311  |        |         | $       | 212,839 |        
|                              | Other Cardiovascular               |                |               | 94,045      |              |           |          | 19,507  |        |         |         | 74,538  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Cardiovascular |               |             | 370,195      |           |          |         | 82,818 |         |         |         | 287,377 |        
|                              |                                    | Anti-infective |               |             | 221,593      |           |          |         | 56,590 |         |         |         | 165,003 |        
|                              |                                    | Critical care  |               |             | 17,644       |           |          |         | 7,682  |         |         |         | 9,962   |        
|                              |                                    | Endocrinology  |               |             | 28,841       |           |          |         | 13,606 |         |         |         | 15,235  |        
|                              | Skelaxin                           |                |               | 203,015     |              |           |          | 24,857  |        |         |         | 178,158 |        
|                              | Sonata                             |                |               | 54,199      |              |           |          | 20,015  |        |         |         | 34,184  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Neuroscience   |               |             | 257,214      |           |          |         | 44,872 |         |         |         | 212,342 |        
|                              | Intal                              |                |               | 106,192     |              |           |          | 11,570  |        |         |         | 94,622  |        
|                              | Other Respiratory                  |                |               | 12,396      |              |           |          | 3,311   |        |         |         | 9,085   |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Respiratory    |               |             | 118,588      |           |          |         | 14,881 |         |         |         | 103,707 |        
|                              |                                    | Other          |               |             | 81,027       |           |          |         | 23,191 |         |         |         | 57,836  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    |                | Total Branded |             |              | 1,095,102 |          |         |        | 243,640 |         |         |         | 851,462 | 
|Meridian Medical Technologies |                                    |                | 146,217       |             |              |           | 14,618   |         |        |         | 131,599 |        
|Royalties                     |                                    |                | 2,469         |             |              |           | 2,061    |         |        |         | 408     |        
|Contract manufacturing        |                                    |                |              |             |              |           |         |         |        |         |        |        
|All other                     |                                    |                |              |             |              |           |         |         |        |         |        |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              | Total trademark and product rights |                | $             | 1,243,788   |              |           | $        | 260,319 |        |         | $       | 983,469 |        
|                              |                                    |                |               |             |              |           |          |         |       

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|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |   |   |   |   |       |        |       |        | 
|----------------------------- | ---------------------------------- | ------------------ | ------------- | ------------ | ------- | ------- | ------------------ | ------- | ----- | ------ | ----------- | ------------ | ------- |  | - | - | - | - | ----- | ------ | ----- | ------ | 
|                              |                                    | Three Months Ended |               |              |         |         | Three Months Ended |        
|                              |                                    | June 30, 2005      |               |              |         |         | June 30, 2004      |        
|                              |                                    |                    |               |              |         |         |                    |        
|                              |                                    |                    |               | Amortization |         |         | Life               |         |       |        |             | Amortization |        
|                              |                                    | Impairments        |               |              | Expense |         |                    | (Years) |       |        | Impairments |              | Expense | 
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         | 
|                              |                                    | (in thousands)     |               |              |         |         | (in thousands)     |        
|Branded                       |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |   |   |   |   |       |       
|                              | Altace                             |                    | $             |             |         |         |                    | 3,225   |       |        |             | 23           |         |  | $ |  |   |   | $     | 2,303  |      
|                              | Other Cardiovascular               |                    |               |             |         |         |                    | 1,667   |       |        |             |              |         |  |   |  |   |   |       | 1,178  |      
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  
|                              |                                    | Cardiovascular     |               |              |        |         |                    |         | 4,892 |        |             |              |         |  |   |   |  |   |       |        | 3,481 |       
|                              |                                    | Anti-infective     |               |              |        |         |                    |         | 2,633 |        |             |              |         |  |   |   |  |   |       |        | 2,632 |       
|                              |                                    | Critical care      |               |              |        |         |                    |         | 264   |        |             |              |         |  |   |   |  |   |       |        | 165   |       
|                              |                                    | Endocrinology      |               |              |        |         |                    |         | 238   |        |             |              |         |  |   |   |  |   |       |        | 287   |       
|                              | Skelaxin                           |                    |               |             |         |         |                    | 3,887   |       |        |             | 13.5         |         |  |   |  |   |   |       | 2,550  |      
|                              | Sonata                             |                    |               | 126,923      |         |         |                    | 2,993   |       |        |             | 7.5          |         |  |   |  |   |   |       | 3,375  |      
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  
|                              |                                    | Neuroscience       |               |              | 126,923 |         |                    |         | 6,880 |        |             |              |         |  |   |   |  |   |       |        | 5,925 |       
|                              | Intal                              |                    |               |             |         |         |                    | 1,392   |       |        |             | 20           |         |  |   |  |   |   |       | 1,065  |      
|                              | Other respiratory                  |                    |               |             |         |         |                    | 133     |       |        |             |              |         |  |   |  |   |   |       | 143    |      
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  
|                              |                                    | Respiratory        |               |              |        |         |                    |         | 1,525 |        |             |              |         |  |   |   |  |   |       |        | 1,208 |       
|                              |                                    | Other              |               |              |        |         |                    |         | 1,130 |        |             |              |         |  |   |   |  |   |       |        | 1,044 |       
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  
|                              |                                    |                    | Total Branded |              |         | 126,923 |                    |         |       | 17,562 |             |              |         |  |   |   |   |  |       |        |       | 14,742 | 
|Meridian Medical Technologies |                                    |                    |              |              |         |         | 1,291              |         |       |        |             |              |         |  |  |   |   |   | 1,531 |       
|Royalties                     |                                    |                    |              |              |         |         | 11                 |         |       |        |             |              |         |  |  |   |   |   | 10    |       
|Contract manufacturing        |                                    |                    |              |              |         |         |                   |         |       |        |             |              |         |  |  |   |   |   |      |       
|All other                     |                                    |                    |              |              |         |         |                   |         |       |        |             |              |         |  |  |   |   |   |      |       
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  
|                              | Total trademark and product rights |                    | $             | 126,923      |         |         | $                  | 18,864  |       |        |             |              |         |  |   |  |   |   | $     | 16,283 |      
|                              |                                    |                    |               |              |         |         |                    |         |       |        |             |              |         |  |  

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|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |   |        |        |        |       |        |        |        | 
|----------------------------- | ---------------------------------- | ---------------- | ------------- | ------------ | ------- | ------- | ---------------- | ------- | ------ | ------ | ----------- | ------------ |  | ------- | - | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                              |                                    | Six Months Ended |               |              |         |         | Six Months Ended |        
|                              |                                    | June 30, 2005    |               |              |         |         | June 30, 2004    |        
|                              |                                    |                  |               |              |         |         |                  |        
|                              |                                    |                  |               | Amortization |         |         | Life             |         |        |        |             | Amortization | 
|                              |                                    | Impairments      |               |              | Expense |         |                  | (Years) |        |        | Impairments |              |  | Expense |  
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              |                                    | (in thousands)   |               |              |         |         | (in thousands)   |        
|Branded                       |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |   |        |        |        |       |       
|                              | Altace                             |                  | $             |             |         |         | $                | 6,450   |        |        |             | 23           |  |         | $ |       |        |        | $     | 4,606  |       
|                              | Other Cardiovascular               |                  |               |             |         |         |                  | 3,305   |        |        |             |              |  |         |   |       |        |        |       | 2,356  |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              |                                    | Cardiovascular   |               |              |        |         |                  |         | 9,755  |        |             |              |  |         |   |        |       |        |       |        | 6,962  |       
|                              |                                    | Anti-infective   |               |              |        |         |                  |         | 5,267  |        |             |              |  |         |   |        |       |        |       |        | 5,263  |       
|                              |                                    | Critical care    |               |              |        |         |                  |         | 527    |        |             |              |  |         |   |        |       |        |       |        | 331    |       
|                              |                                    | Endocrinology    |               |              |        |         |                  |         | 476    |        |             |              |  |         |   |        | 14,362 |        |       |        | 942    |       
|                              | Skelaxin                           |                  |               |             |         |         |                  | 7,774   |        |        |             | 13.5         |  |         |   |       |        |        |       | 5,100  |       
|                              | Sonata                             |                  |               | 126,923      |         |         |                  | 5,986   |        |        |             | 7.5          |  |         |   |       |        |        |       | 6,750  |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              |                                    | Neuroscience     |               |              | 126,923 |         |                  |         | 13,760 |        |             |              |  |         |   |        |       |        |       |        | 11,850 |       
|                              | Intal                              |                  |               |             |         |         |                  | 2,753   |        |        |             | 20           |  |         |   |       |        |        |       | 2,129  |       
|                              | Other respiratory                  |                  |               |             |         |         |                  | 267     |        |        |             |              |  |         |   |       |        |        |       | 287    |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              |                                    | Respiratory      |               |              |        |         |                  |         | 3,020  |        |             |              |  |         |   |        |       |        |       |        | 2,416  |       
|                              |                                    | Other            |               |              |        |         |                  |         | 2,319  |        |             |              |  |         |   |        | 20,240 |        |       |        | 2,660  |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              |                                    |                  | Total Branded |              |         | 126,923 |                  |         |        | 35,124 |             |              |  |         |   |        |        | 34,602 |       |        |        | 30,424 | 
|Meridian Medical Technologies |                                    |                  |              |              |         |         | 2,582            |         |        |        |             |              |  |         |  |        |        |        | 3,062 |       
|Royalties                     |                                    |                  |              |              |         |         | 21               |         |        |        |             |              |  |         |  |        |        |        | 21    |       
|Contract manufacturing        |                                    |                  |              |              |         |         |                 |         |        |        |             |              |  |         |  |        |        |        |      |       
|All other                     |                                    |                  |              |              |         |         |                 |         |        |        |             |              |  |         |  |        |        |        |      |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  
|                              | Total trademark and product rights |                  | $             | 126,923      |         |         | $                | 37,727  |        |        |             |              |  |         | $ | 34,602 |        |        | $     | 33,507 |       
|                              |                                    |                  |               |              |         |         |                  |         |        |        |             |              |  |         |  



|         |  |                                 |                   |             |                |  |                   | 
|-------- |  | ------------------------------- | ----------------- | ----------- | -------------- |  | ----------------- | 
|         |  | Remaining Life at June 30, 2005 |                  
|         |  |                                 |                  
|         |  |                                 |                   | Trademark & |               
|         |  | Patent                          |                   |             | Product Rights | 
|         |  |                                 |                   |             |                | 
|Altace   |  |                                 | 3 years 10 months |             |                |  | 16 years 6 months | 
|Skelaxin |  |                                 |                  |             |                |  | 11 years 6 months | 
|Sonata   |  |                                 | 3 years           |             |                |  | 5 years 6 months  | 
|Intal    |  |                                 |                  |             |                |  | 17 years 5 months | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories.Our inventories are valued at the lower of
    cost or market value. We evaluate all of our inventory for short
    dated or slow moving product and inventory commitments under
    supply agreements based on projections of future demand and
    market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we
    provide a provision to reflect the lower value of that
    inventory. This methodology recognizes projected inventory
    losses at the time such losses are evident rather than at the
    time goods are actually sold. We maintain supply agreements with
    some of our vendors which contain minimum purchase requirements.
    We estimate future inventory requirements based on current facts
    and trends. Should our minimum purchase requirements under
    supply agreements or our estimated

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | future inventory requirements exceed actual inventory quantities
    which we will be able to sell to our customers, we record a
    charge in costs of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Accruals for rebates, returns, and chargebacks.We
    establish accruals for returns, chargebacks and commercial and
    Medicaid rebates in the same period we recognize the related
    sales. The accruals reduce revenues and are included in accrued
    expenses. At the time a rebate or chargeback payment is made or
    a product return is received, which occurs with a delay after
    the related sale, we record a reduction to accrued expenses and,
    at the end of each quarter, adjust accrued expenses for
    differences between estimated and actual payments. Due to
    estimates and assumptions inherent in determining the amount of
    returns, chargebacks and rebates, the actual amount of product
    returns and claims for chargebacks and rebates may be different
    from our estimates.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our product returns accrual is primarily based on estimates of
    future product returns over the period during which customers
    have a right of return which is in turn based in part on
    estimates of the remaining shelf life of our products when sold
    to customers. Future product returns are estimated primarily
    based on historical sales and return rates. We estimate our
    Medicaid rebate and commercial contractual rebate accruals based
    on estimates of usage by rebate-eligible customers, estimates of
    the level of inventory of our products in the distribution
    channel that remain potentially subject to those rebates, and
    the terms of our contractual and regulatory rebate obligations.
    We estimate our chargeback accrual based on our estimates of the
    level of inventory of our products in the distribution channel
    that remain subject to chargebacks, and specific contractual and
    historical chargeback rates.
|
| | Our accruals for returns, chargebacks and rebates are adjusted
    as appropriate for specific known developments that may result
    in a change in our product returns or our rebate and chargeback
    obligations. In the case of product returns, we monitor demand
    levels for our products and the effects of the introduction of
    competing products and other factors on this demand. When we
    identify decreases in demand for products or experience higher
    than historical rates of returns caused by unexpected discrete
    events, we further analyze these products for potential
    additional supplemental reserves. We also monitor wholesale
    inventory levels and adjust the reserve as appropriate.                                                                                                                                                                                                                                                     



| |                                    
| | -----------------------------------
| | Accrual for Rebates (in thousands):

|                                                          |  |      |         |      |            |   |         |  
|--------------------------------------------------------- |  | ---- | ------- | ---- | ---------- | - | ------- | -
|                                                          |  |      |         | 2004 |           
|                                                          |  | 2005 |         |      | (restated) |  
|                                                          |  |      |         |      |            |  
|Balance at January 1, net of prepaid amounts              |  | $    | 172,161 |      |            | $ | 213,893 |  
|Current provision related to sales made in current period |  |      | 55,456  |      |            |   | 72,717  |  
|Current provision related to sales made in prior periods  |  |      | (9,202  | )    |            |   | (1,397  | )
|Actual rebates                                            |  |      | (77,083 | )    |            |   | (74,701 | )
|                                                          |  |      |         |      |            |  
|Balance at March 31, net of prepaid amounts               |  | $    | 141,332 |      |            | $ | 210,512 |  
|                                                          |  |      |         |      |            |  
|Current provision related to sales made in current period |  |      | 81,154  |      |            |   | 75,754  |  
|Current provision related to sales made in prior periods  |  |      | 1,087   |      |            |   | 9,173   |  
|Actual rebates                                            |  |      | (75,617 | )    |            |   | (82,826 | )
|                                                          |  |      |         |      |            |  
|Balance at June 30, net of prepaid amounts                |  | $    | 147,956 |      |            | $ | 212,613 |  
|                                                          |  |      |         |      |            |  

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| |                                    
| | -----------------------------------
| | Accrual for Returns (in thousands):

|                       |  |      |         |      |            |   |         |  
|---------------------- |  | ---- | ------- | ---- | ---------- | - | ------- | -
|                       |  |      |         | 2004 |           
|                       |  | 2005 |         |      | (restated) |  
|                       |  |      |         |      |            |  
|Balance at January 1   |  | $    | 122,863 |      |            | $ | 82,477  |  
|Current provision      |  |      | (5,867  | )    |            |   | 36,797  |  
|Supplemental provision |  |      | 1,429   |      |            |   |        |  
|Actual returns         |  |      | (45,394 | )    |            |   | (30,636 | )
|                       |  |      |         |      |            |  
|Balance at March 31    |  | $    | 73,031  |      |            | $ | 88,638  |  
|                       |  |      |         |      |            |  
|Current provision      |  |      | 8,209   |      |            |   | 49,164  |  
|Supplemental provision |  |      | 1,958   |      |            |   |        |  
|Actual returns         |  |      | (15,009 | )    |            |   | (37,955 | )
|                       |  |      |         |      |            |  
|Balance at June 30     |  | $    | 68,189  |      |            | $ | 99,847  |  
|                       |  |      |         |      |            |  



| |                                        
| | ---------------------------------------
| | Accrual for Chargebacks (in thousands):

|                    |  |      |         |      |            |   |         |  
|------------------- |  | ---- | ------- | ---- | ---------- | - | ------- | -
|                    |  |      |         | 2004 |           
|                    |  | 2005 |         |      | (restated) |  
|                    |  |      |         |      |            |  
|Balance January 1   |  | $    | 27,953  |      |            | $ | 25,349  |  
|Current provision   |  |      | 33,298  |      |            |   | 27,606  |  
|Actual chargebacks  |  |      | (36,788 | )    |            |   | (29,169 | )
|                    |  |      |         |      |            |  
|Balance at March 31 |  | $    | 24,463  |      |            | $ | 23,786  |  
|                    |  |      |         |      |            |  
|Current provision   |  |      | 21,179  |      |            |   | 44,155  |  
|Actual chargebacks  |  |      | (31,741 | )    |            |   | (35,319 | )
|                    |  |      |         |      |            |  
|Balance at June 30  |  | $    | 13,901  |      |            | $ | 32,622  |  
|                    |  |      |         |      |            |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based on data received from our inventory management agreements
    with our three key wholesale customers, during the first quarter
    of 2005, there was a significant reduction of wholesale
    inventory levels of our products. While our calculation for
    returns reserves is based on historical sales and return rates
    over the period which customers have a right of return, it gives
    consideration to the amount of wholesale inventory levels. The
    significant reduction in wholesale inventories of our products
    during the first quarter of 2005 resulted in a decrease of
    approximately $25 million in our reserve for returns and a
    corresponding increase in net sales from branded
    pharmaceuticals. In the second quarter of 2005, an additional
    reduction in wholesale inventories resulted in a decrease of
    approximately $5 million in our reserve for returns and a
    corresponding increase in net sales from branded
    pharmaceuticals. The 2005 current provision amounts
    in the table Accrual for Returns, above, has
    therefore been reduced by these amounts.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition.Revenue is recognized when title and
    risk of loss are transferred to customers, collection of sales
    is reasonably assured, and we have no further performance
    obligations. This is generally at the time products are received
    by the customer. Accruals for estimated returns, rebates and
    chargebacks, determined based on historical experience, reduce
    revenues at the time of sale and are included in accrued
    expenses. Medicaid and certain other governmental pricing
    programs involve particularly difficult interpretations of
    relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. Royalty revenue is recognized based on a percentage of
    sales (namely, contractually agreed-upon royalty rates) reported
    by third parties.

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RISK FACTORS


You should carefully consider the risks described below and
the other information contained in this report, including our
unaudited consolidated financial statements and related notes.
You should also consider the information contained in our annual
report on Form 10-K for the year ended December 31,
2004, including our audited consolidated financial statements
and related notes. The risks described below are not the only
ones facing our company. Additional risks not presently known to
us or that we currently deem immaterial may also impair our
business operations. If any of the adverse events described in
this Risk Factors section or other sections of this
report or our annual report on Form 10-K for the year ended
December 31, 2004 actually occurs, our business, results of
operations and financial condition could be materially adversely
affected, the trading price, if any, of our securities could
decline and you might lose all or part of your investment.


Risks Related to our Business




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









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| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot successfully enforce our rights under the
    patents relating to three of our largest products, Altace®,
    Skelaxin®, Sonata®, and the patent relating to
    Adenoscan®, or if we are unable to secure or enforce our
    rights under other patents, trademarks, trade secrets or other
    intellectual property, our results of operations could be
    materially adversely affected.





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| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to the risk of additional litigation and
    regulatory proceedings or actions in connection with the
    restatement of prior period financial statements.



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management concluded that we did not have a sufficient
    number of finance and accounting resources performing
    supervisory review and monitoring activities as of year-end 2004
    and, accordingly, that we did not maintain effective controls
    over that period-end financial reporting process. We cannot
    assure you that we will be able to remediate this material
    weakness and conclude that our internal control over financial
    reporting is effective as of the end of 2005 or that the
    material weakness will not result in material misstatements of
    our financial statements.









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





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



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





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







| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of binodenoson, a myocardial
    pharmacologic stress imaging agent;                                                       
|
| |  | engaged in the development of PT-141, an investigational new
    drug for the treatment of erectile dysfunction and female sexual
    dysfunction;    
|
| |  | engaged in the development of T-62, an investigational drug for
    the treatment of neuropathic pain;                                                
|
| |  | engaged in the development of MRE0094, an investigational drug
    for the topical treatment of chronic diabetic foot ulcers;                         
|
| |  | engaged in the development of a new inhaler for Intal®
    using the alternative propellant HFA for which the FDA has
    issued an approvable letter;
|
| |  | engaged in the development of an Altace®/diuretic
    combination product; and                                                                        
|
| |  | engaged in the development of a diazepam-filled auto-injector.                                                                                        





| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | 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 already in development in a cost
    effective manner; or                                         
|
| |  | obtain any FDA approvals necessary to successfully implement the
    strategies described above.                                  



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| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 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,





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





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



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| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot sell our products in amounts greater than our
    minimum purchase requirements under some of our supply
    agreements or sell our products in accordance with our
    forecasts, our results of operations and cash flows may be
    adversely affected.







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







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





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





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



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





| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The insolvency of any of our principal customers,
    wholesale pharmaceutical distributors, could have a material
    adverse effect on our business, financial condition, results of
    operations and cash flows.





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



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









| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | On November 15, 2006, we may be required to
    repurchase our
    23/4%
    Convertible Debentures due November 15, 2021.

3 4


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





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







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









| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Co-Promotion Agreement for Altace® with Wyeth
    could be terminated, could be assigned to another company by
    Wyeth, or Wyeth could market a competing product.







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



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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | If the operations of our centralized distribution facility
    were interrupted, our business could be harmed.





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





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





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





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





| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our results of operations;                                                                                               
|
| |  | perceived risks and uncertainties concerning our business;                                                                             
|
| |  | announcements of earnings;                                                                                                             
|
| |  | developments in the governmental investigations or securities
    litigation;                                                          
|
| |  | failure to meet or exceed our own projections for revenue,
    product sales and earnings per share;                                   
|
| |  | failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
|
| |  | failure to meet or exceed security analysts financial
    projections for our company;                                                

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| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | comments or recommendations made by securities analysts;                                                               
|
| |  | general market conditions;                                                                                             
|
| |  | perceptions about market conditions in the pharmaceutical
    industry;                                                
|
| |  | announcements of technological innovations or the results of
    clinical trials or studies;                           
|
| |  | changes in marketing, product pricing and sales strategies or
    development of new products by us or our competitors;
|
| |  | changes in domestic or foreign governmental regulations or
    regulatory approval processes; and                      
|
| |  | announcements concerning regulatory compliance and government
    agency reviews.                                      



Risks Related to Our Industry




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









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





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









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



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





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



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The Medicare Prescription Drug, Improvement and Modernization
Act of 2003




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





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



Competition for Acquisitions.




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

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Product Competition.














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





A Warning About Forward-Looking Statements










| |   |                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated net sales and
    prescription trends for our branded pharmaceutical products,
    particularly Altace®, Skelaxin®, Thrombin-JMI®,
    Sonata® and Levoxyl®;                                                                                                   
|
| |  | expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to Altace®, Skelaxin®, Sonata® and
    Adenoscan®;                                                                                                                    
|
| |  | expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;                                                                                                                                                                                
|
| |  | the adequacy of our liquidity and capital resources;                                                                                                                                                                                                                                                          
|
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                             
|
| |  | the development and approval of binodenoson, our next generation
    cardiac pharmacologic stress-imaging agent; PT-141, an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;

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| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; pre-clinical programs; and product
    life-cycle development projects;                                                                                                                                                                
|
| |  | the development and approval of a diazepam-filled auto-injector,
    new inhaler for Intal® and Tilade® using the
    alternative propellant HFA, and an Altace®/diuretic
    combination product;                                                                                                                                     
|
| |  | our successful execution of our growth strategies;                                                                                                                                                                                                                                                                                     
|
| |  | anticipated developments and expansions of our business;                                                                                                                                                                                                                                                                               
|
| |  | our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for Thrombin-JMI®;                                                                                                                                                                
|
| |  | anticipated increases in sales of acquired products or royalty
    revenues;                                                                                                                                                                                                                                                           
|
| |  | the success of our Co-Promotion Agreement with Wyeth;                                                                                                                                                                                                                                                                                  
|
| |  | the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;                                                                                                                                                                                                     
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                                            
|
| |  | the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal® inhaler formulation utilizing HFA, and other
    regulatory agencies worldwide;                                                    
|
| |  | the products which we expect to offer;                                                                                                                                                                                                                                                                                                 
|
| |  | the intent, belief or current expectations, primarily with
    respect to our future operating performance;                                                                                                                                                                                                                            
|
| |  | expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;                                                                                                                                                                                                  
|
| |  | expectations regarding the outcome of various pending legal
    proceedings including the Altace® and Skelaxin® patent
    challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report; and
|
| |  | expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.                                                                                                                                                                                                                            








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









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



| |                                          
| | -----------------------------------------
| | Internal Control Over Financial Reporting



Internal Control 
Integrated Framework,






| |                                 
| | --------------------------------
| | Remediation of Material Weakness





| |                                                     
| | ----------------------------------------------------
| | Changes in Internal Control Over Financial Reporting





| |                                                 
| | ------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures



70



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##### Table of Contents






PART II  OTHER INFORMATION







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








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





|                                 |                          |     |  |             |                    |  |  |           | 
|-------------------------------- | ------------------------ | --- |  | ----------- | ------------------ |  |  | --------- | 
|                                 |                          | For |  |             | Withhold Authority | 
|                                 |                          |     |  |             |                    | 
|Class III: (terms expiring 2007) |                          |     |  |             |                    |  |  |          
|                                 | Gregory D. Jordan, Ph.D. |     |  | 210,462,821 |                    |  |  | 8,841,721 | 
|                                 | Brian A. Markison        |     |  | 215,468,119 |                    |  |  | 3,836,423 | 
|Class I: (terms expiring 2008)   |                          |     |  |             |                    |  |  |          
|                                 | R. Charles Moyer, Ph.D.  |     |  | 210,515,123 |                    |  |  | 8,789,419 | 
|                                 | D. Gregory Rooker        |     |  | 209,679,574 |                    |  |  | 9,624,968 | 
|                                 | Ted G. Wood              |     |  | 210,796,552 |                    |  |  | 8,507,990 | 



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Directors continuing in service include: Earnest W. Deavenport,
    Jr., Elizabeth M. Greetham and Philip M. Pfeffer.



|           |  |  |             | 
|---------- |  |  | ----------- | 
|For        |  |  | 144,920,198 | 
|          
|Against    |  |  | 28,875,955  | 
|          
|Abstention |  |  | 1,409,855   | 






|        |                  
|------- | -----------------
|Item 5. | Other Information



| |                                                      
| | -----------------------------------------------------
| | Approval of 2005 Executive Management Incentive Award







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##### Table of Contents



Exhibit 10.4




| |                           
| | --------------------------
| | Approval of Incentive Plan







| |                                                       
| | ------------------------------------------------------
| | Amendment of Non-Employee Director Compensation Policy





| |                                
| | -------------------------------
| | 2005 Increases to Base Salaries







| |                                                 
| | ------------------------------------------------
| | Adoption of Executive Deferred Compensation Plan



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|        |         
|------- | --------
|Item 6. | Exhibits



| |    |     |  |   |  |                                                                                                                                                                                                                                                         
| | -- | --- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .1  |  |  |  | Offer letter to Joseph Squicciarino dated May 25, 2005.                                                                                                                                                                                                 
| | 10 | .2  |  |  |  | Offer letter to Eric J. Bruce dated May 19, 2005.                                                                                                                                                                                                       
| | 10 | .3* |  |  |  | Retirement and Consulting Agreement, dated as of April 1,
    2005, and Waiver, Release and Non-Solicitation, Noncompete and
    Nondisclosure Agreement, dated as of May 12, 2005, by and
    between King Pharmaceuticals, Inc. and James R. Lattanzi.
| | 10 | .4  |  |  |  | 2005 Executive Management Incentive Award.                                                                                                                                                                                                              
| | 10 | .5  |  |  |  | King Pharmaceuticals, Inc. Incentive Plan (incorporated by
    reference to the definitive proxy statement, filed
    April 28, 2005, related to the 2005 annual meeting of
    shareholders).                                                          
| | 10 | .6  |  |  |  | Compensation Policy for Non-Employee Directors.                                                                                                                                                                                                         
| | 10 | .7  |  |  |  | Salary Amendments For Certain Executive Officers.                                                                                                                                                                                                       
| | 10 | .8  |  |  |  | King Pharmaceuticals, Inc. Executive Deferred Compensation Plan.                                                                                                                                                                                        
| | 31 | .1  |  |  |  | Certification of Brian A. Markison, President and Chief
    Executive Officer of King Pharmaceuticals, Inc., pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                             
| | 31 | .2  |  |  |  | Certification of Joseph Squicciarino, Chief Financial Officer of
    King Pharmaceuticals, Inc., pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                         
| | 32 | .1  |  |  |  | Certification of Brian A. Markison, President and Chief
    Executive Officer of King Pharmaceuticals, Inc., pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                             
| | 32 | .2  |  |  |  | Certification of Joseph Squicciarino, Chief Financial Officer of
    King Pharmaceuticals, Inc., pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                         






|  |                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential treatment requested as to certain portions, which
    portions have been filed separately with the Securities and
    Exchange Commission.

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SIGNATURES






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



| |     |                      
| | --- | ---------------------
| | By: | /s/ Brian A. Markison

| |                                      
| | -------------------------------------
| |                                      
| | Brian A. Markison                    
| | President and Chief Executive Officer





| |     |                        
| | --- | -----------------------
| | By: | /s/ Joseph Squicciarino

| |                        
| | -----------------------
| |                        
| | Joseph Squicciarino    
| | Chief Financial Officer



75