##### 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 March 31, 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












---

TABLE OF CONTENTS



|                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION              
|                                              | Item 1. Financial Statements                                                                 
|                                              | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|RISK FACTORS                                 
|                                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                                              | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                 
|                                              | Item 1. Legal Proceedings                                                                    
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                   
|EX-31.1  SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2  SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1  SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2  SECTION 906 CERTIFICAION OF THE CFO 



---



##### Table of Contents






PART I  FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                                  |                                                                                        |                                            |           |         |              |  |           |         |           | 
|----------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------- | ------------ |  | --------- | ------- | --------- | 
|                                                                  |                                                                                        | March 31,                                  |           |         |             
|                                                                  |                                                                                        | 2005                                       |           |         | December 31, | 
|                                                                  |                                                                                        | (unaudited)                                |           |         | 2004         | 
|                                                                  |                                                                                        |                                            |           |         |              | 
|ASSETS                                                           
|Current Assets:                                                   |                                                                                        |                                            |           |         |              |  |           |        
|                                                                  | Cash and cash equivalents                                                              |                                            | $         | 348,589 |              |  | $         | 342,086 |          
|                                                                  | Restricted cash                                                                        |                                            |           | 65,000  |              |  |           | 97,730  |          
|                                                                  | Marketable securities                                                                  |                                            |           | 8,534   |              |  |           | 16,498  |          
|                                                                  | Accounts receivable, net of allowance for doubtful accounts of
    $15,095 and $15,348 |                                            |           | 206,170 |              |  |           | 180,963 |          
|                                                                  | Inventories                                                                            |                                            |           | 255,408 |              |  |           | 274,412 |          
|                                                                  | Deferred income taxes                                                                  |                                            |           | 122,857 |              |  |           | 153,979 |          
|                                                                  | Prepaid expenses and other current assets                                              |                                            |           | 63,706  |              |  |           | 61,395  |          
|                                                                  |                                                                                        |                                            |           |         |              | 
|                                                                  |                                                                                        | Total current assets                       |           |         | 1,070,264    |  |           |         | 1,127,063 | 
|                                                                  |                                                                                        |                                            |           |         |              | 
|Property, plant and equipment, net                                |                                                                                        |                                            | 281,222   |         |              |  | 280,731   |        
|Goodwill                                                          |                                                                                        |                                            | 121,152   |         |              |  | 121,152   |        
|Intangible assets, net                                            |                                                                                        |                                            | 1,251,697 |         |              |  | 1,285,961 |        
|Other assets (includes restricted cash of $13,882
    and $2,775) |                                                                                        |                                            | 26,689    |         |              |  | 16,318    |        
|Deferred income taxes                                             |                                                                                        |                                            | 99,429    |         |              |  | 92,931    |        
|                                                                  |                                                                                        |                                            |           |         |              | 
|                                                                  |                                                                                        | Total assets                               |           | $       | 2,850,453    |  |           | $       | 2,924,156 | 
|                                                                  |                                                                                        |                                            |           |         |              | 
|LIABILITIES AND SHAREHOLDERS EQUITY                             
|Current Liabilities:                                              |                                                                                        |                                            |           |         |              |  |           |        
|                                                                  | Accounts payable                                                                       |                                            | $         | 44,028  |              |  | $         | 92,920  |          
|                                                                  | Accrued expenses                                                                       |                                            |           | 499,752 |              |  |           | 596,010 |          
|                                                                  | Income taxes payable                                                                   |                                            |           | 14,367  |              |  |           |        |          
|                                                                  |                                                                                        |                                            |           |         |              | 
|                                                                  |                                                                                        | Total current liabilities                  |           |         | 558,147      |  |           |         | 688,930   | 
|                                                                  |                                                                                        |                                            |           |         |              | 
|Long-term debt                                                    |                                                                                        |                                            | 345,000   |         |              |  | 345,000   |        
|Other liabilities                                                 |                                                                                        |                                            | 29,226    |         |              |  | 41,436    |        
|                                                                  |                                                                                        |                                            |           |         |              | 
|                                                                  |                                                                                        | Total liabilities                          |           |         | 932,373      |  |           |         | 1,075,366 | 
|                                                                  |                                                                                        |                                            |           |         |              | 
|Commitments and contingencies (Note 10)                           |                                                                                        |                                            |           |         |              |  |           |        
|Shareholders equity                                              |                                                                                        |                                            | 1,918,080 |         |              |  | 1,848,790 |        
|                                                                  |                                                                                        |                                            |           |         |              | 
|                                                                  |                                                                                        | Total liabilities and shareholders equity |           | $       | 2,850,453    |  |           | $       | 2,924,156 | 
|                                                                  |                                                                                        |                                            |           |         |              | 



2



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In thousands, except per share data)


|                                                      |                                                                                           |                                                  |                                                    |         |            |         |          |          |       |          |  
|----------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------------------------------- | ------- | ---------- | ------- | -------- | -------- | ----- | -------- | -
|                                                      |                                                                                           | Three Months Ended                               |                                                   
|                                                      |                                                                                           | March 31,                                        |                                                   
|                                                      |                                                                                           |                                                  |                                                   
|                                                      |                                                                                           |                                                  |                                                    | 2004*   |           
|                                                      |                                                                                           | 2005                                             |                                                    |         | (restated) |        
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Revenues:                                             |                                                                                           |                                                  |                                                    |         |            |         |          |         
|                                                      | Net sales                                                                                 |                                                  | $                                                  | 350,570 |            |         | $        | 274,693  |      
|                                                      | Royalty revenue                                                                           |                                                  |                                                    | 18,055  |            |         |          | 16,757   |      
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total revenues                                     |         |            | 368,625 |          |          |       | 291,450  |  
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Operating costs and expenses:                         |                                                                                           |                                                  |                                                    |         |            |         |          |         
|                                                      | Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below |                                                  |                                                    | 72,216  |            |         |          | 83,541   |      
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      | Selling, general and administrative, exclusive of co-promotion
    fees                   |                                                  |                                                    | 92,850  |            |         |          | 87,602   |      
|                                                      | Mylan transaction costs                                                                   |                                                  |                                                    | 3,277   |            |         |          |         |      
|                                                      | Co-promotion fees                                                                         |                                                  |                                                    | 34,655  |            |         |          | 23,544   |      
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total selling, general and administrative expenses |         |            | 130,782 |          |          |       | 111,146  |  
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      | Research and development                                                                  |                                                  |                                                    | 11,472  |            |         |          | 16,023   |      
|                                                      | Depreciation and amortization                                                             |                                                  |                                                    | 41,426  |            |         |          | 39,318   |      
|                                                      | Intangible asset impairment                                                               |                                                  |                                                    |        |            |         |          | 34,936   |      
|                                                      | Restructuring charges                                                                     |                                                  |                                                    | 2,023   |            |         |          |         |      
|                                                      | Gain on sale of intangible assets                                                         |                                                  |                                                    | (847    | )          |         |          | (858     | )    
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total other operating costs and expenses           |         |            | 54,074  |          |          |       | 89,419   |  
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total operating costs and expenses                 |         |            | 257,072 |          |          |       | 284,106  |  
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      | Operating income                                                                          |                                                  |                                                    | 111,553 |            |         |          | 7,344    |      
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Other income (expense):                               |                                                                                           |                                                  |                                                    |         |            |         |          |         
|                                                      | Interest income                                                                           |                                                  |                                                    | 2,277   |            |         |          | 1,054    |      
|                                                      | Interest expense                                                                          |                                                  |                                                    | (2,701  | )          |         |          | (3,105   | )    
|                                                      | Valuation charge  convertible notes receivable                                           |                                                  |                                                    |        |            |         |          | (449     | )    
|                                                      | Write-down of investments                                                                 |                                                  |                                                    | (6,853  | )          |         |          |         |      
|                                                      | Other, net expense                                                                        |                                                  |                                                    | (249    | )          |         |          | (703     | )    
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total other expense                                |         |            | (7,526  | )        |          |       | (3,203   | )
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Income from continuing operations before income taxes |                                                                                           |                                                  | 104,027                                            |         |            |         | 4,141    |         
|Income tax expense                                    |                                                                                           |                                                  | 36,922                                             |         |            |         | 1,839    |         
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Income from continuing operations                     |                                                                                           |                                                  | 67,105                                             |         |            |         | 2,302    |         
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Discontinued operations:                              |                                                                                           |                                                  |                                                    |         |            |         |          |         
|                                                      | Income (loss) from discontinued operations, including expected
    loss on disposal       |                                                  |                                                    | 4,682   |            |         |          | (167,462 | )    
|                                                      | Income tax expense (benefit)                                                              |                                                  |                                                    | 1,732   |            |         |          | (61,084  | )    
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           |                                                  | Total income (loss) from discontinued operations   |         |            | 2,950   |          |          |       | (106,378 | )
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Net income (loss)                                     |                                                                                           | $                                                | 70,055                                             |         |            | $       | (104,076 | )       
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|Income (loss) per common share:                       |                                                                                           |                                                  |                                                    |         |            |         |          |         
|                                                      | Basic:                                                                                    |                                                  |                                                    |         |            |         |          |          |      
|                                                      |                                                                                           | Income from continuing operations                |                                                    | $       | 0.28       |         |          | $        | 0.01  |         
|                                                      |                                                                                           | Total income (loss) from discontinued operations |                                                    |         | 0.01       |         |          |          | (0.44 | )       
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           | Net income (loss)                                |                                                    | $       | 0.29       |         |          | $        | (0.43 | )       
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      | Diluted:                                                                                  |                                                  |                                                    |         |            |         |          |          |      
|                                                      |                                                                                           | Income from continuing operations                |                                                    | $       | 0.28       |         |          | $        | 0.01  |         
|                                                      |                                                                                           | Total income (loss) from discontinued operations |                                                    |         | 0.01       |         |          |          | (0.44 | )       
|                                                      |                                                                                           |                                                  |                                                    |         |            |        
|                                                      |                                                                                           | Net income (loss)                                |                                                    | $       | 0.29       |         |          | $        | (0.43 | )       
|                                                      |                                                                                           |                                                  |                                                    |         |            |        





3



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          |          |  
|-------------------------------------- | ----------------------------------------------------------------- | -------------------------- | ----------- | - | -------- | ----------- | --------- | ------------- |  | - | ------- | -------- | - | ----- | ----- | ---- | - | - | --------- | -------- | -------- | -
|                                       |                                                                   |                            |             |   |          | Accumulated |           |               | 
|                                       |                                                                   | Common Stock               |             |   |          |             | Other     |               |  |  
|                                       |                                                                   |                            |             |   | Retained |             |           | Comprehensive |  |   |        
|                                       |                                                                   | Shares                     |             |   | Amount   |             |           | Earnings      |  |   | Income  |          |   | Total |      
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2003           |                                                                   |                            | 241,190,852 |   |          | $           | 1,205,970 |               |  | $ | 797,408 |          |   | $     | 1,113 |      |   | $ | 2,004,491 |         
|Comprehensive income:                  |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |         
|                                       | Net loss                                                          |                            |             |  |          |             |           |              |  |   |         | (104,076 | ) |       |       |     |   |   |           | (104,076 | )       
|                                       | Net unrealized loss on marketable securities, net of tax of $(16) |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | (30  | ) |   |           | (30      | )       
|                                       | Foreign currency translation                                      |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | 99   |   |   |           | 99       |         
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|                                       |                                                                   | Total comprehensive loss   |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          | (104,007 | )
|Stock option activity                  |                                                                   |                            | 177,792     |   |          |             | 946       |               |  |   |        |          |   |       |      |      |   |   | 946       |         
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at March 31, 2004, as restated |                                                                   |                            | 241,368,644 |   |          | $           | 1,206,916 |               |  | $ | 693,332 |          |   | $     | 1,182 |      |   | $ | 1,901,430 |         
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2004           |                                                                   |                            | 241,706,583 |   |          | $           | 1,210,647 |               |  | $ | 637,120 |          |   | $     | 1,023 |      |   | $ | 1,848,790 |         
|Comprehensive income:                  |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |         
|                                       | Net income                                                        |                            |             |  |          |             |           |              |  |   |         | 70,055   |   |       |       |     |   |   |           | 70,055   |         
|                                       | Net unrealized loss on marketable securities, net of tax of $429  |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | (742 | ) |   |           | (742     | )       
|                                       | Foreign currency translation                                      |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | (79  | ) |   |           | (79      | )       
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|                                       |                                                                   | Total comprehensive income |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          | 69,234   |  
|Stock option activity                  |                                                                   |                            | 24,085      |   |          |             | 56        |               |  |   |        |          |   |       |      |      |   |   | 56        |         
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at March 31, 2005              |                                                                   |                            | 241,730,668 |   |          | $           | 1,210,703 |               |  | $ | 707,175 |          |   | $     | 202   |      |   | $ | 1,918,080 |         
|                                       |                                                                   |                            |             |   |          |             |           |               |  |   |         |          |   |       |      



4



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                               |                                                                |                                                                        |         |        |            |   |         |         |         |  
|-------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ------ | ---------- | - | ------- | ------- | ------- | -
|                                                               |                                                                | Three Months Ended                                                     |        
|                                                               |                                                                | March 31,                                                              |        
|                                                               |                                                                |                                                                        |        
|                                                               |                                                                |                                                                        |         | 2004*  |           
|                                                               |                                                                | 2005                                                                   |         |        | (restated) |  
|                                                               |                                                                |                                                                        |         |        |            |  
|Cash flows from operating activities of continuing operations  |                                                                | $                                                                      | 23,503  |        |            | $ | 60,318  |        
|                                                               |                                                                |                                                                        |         |        |            |  
|Cash flows from investing activities of continuing operations: |                                                                |                                                                        |         |        |            |   |         |        
|                                                               | Transfer to restricted cash                                    |                                                                        |         | (7,982 | )          |   |         | (351    | )      
|                                                               | Proceeds from loan receivable                                  |                                                                        |         |       |            |   |         | 248     |        
|                                                               | Purchases of property, plant and equipment                     |                                                                        |         | (9,075 | )          |   |         | (12,585 | )      
|                                                               | Proceeds from sale of property and equipment                   |                                                                        |         | 1      |            |   |         |        |        
|                                                               | Payment of contingent consideration                            |                                                                        |         |       |            |   |         | (36,000 | )      
|                                                               |                                                                |                                                                        |         |        |            |  
|                                                               |                                                                | Net cash used in investing activities of continuing operations         |         |        | (17,056    | ) |         |         | (48,688 | )
|                                                               |                                                                |                                                                        |         |        |            |  
|Cash flows from financing activities of continuing operations: |                                                                |                                                                        |         |        |            |   |         |        
|                                                               | Proceeds from exercise of stock options, net                   |                                                                        |         | 56     |            |   |         | 946     |        
|                                                               | Payments on other long-term debt and capital lease obligations |                                                                        |         |       |            |   |         | (93     | )      
|                                                               |                                                                |                                                                        |         |        |            |  
|                                                               |                                                                | Net cash provided by financing activities of continuing
    operations |         |        | 56         |   |         |         | 853     |  
|                                                               |                                                                |                                                                        |         |        |            |  
|Net cash provided by discontinued operations                   |                                                                |                                                                        |        |        |            |   | 2,790   |        
|                                                               |                                                                |                                                                        |         |        |            |  
|Increase in cash and cash equivalents                          |                                                                |                                                                        | 6,503   |        |            |   | 15,273  |        
|Cash and cash equivalents, beginning of period                 |                                                                |                                                                        | 342,086 |        |            |   | 146,053 |        
|                                                               |                                                                |                                                                        |         |        |            |  
|Cash and cash equivalents, end of period                       |                                                                | $                                                                      | 348,589 |        |            | $ | 161,326 |        
|                                                               |                                                                |                                                                        |         |        |            |  





5



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2005 and 2004


(Unaudited)


(In thousands)




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







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



6



---



##### 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 |        |   | As Previously |       
|                                                             |                                                                                     | Reported                                          |          |          | Errors   |   |       | Items      |        |   | Restated      |       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Revenues:                                                    |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |        |        |   |          |         
|                                                             | Net sales                                                                           |                                                   | $        | 273,887  |          |   | $     | 420        |        |   | $             | 386    |        |   | $        | 274,693  |         
|                                                             | Royalty revenue                                                                     |                                                   |          | 16,757   |          |   |       |           |        |   |               |       |        |   |          | 16,757   |         
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             |                                                                                     | Total revenues                                    |          |          | 290,644  |   |       |            | 420    |   |               |        | 386    |   |          |          | 291,450  |  
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Operating costs and expenses:                                |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |        |        |   |          |         
|                                                             | Cost of revenues, exclusive of depreciation shown below                             |                                                   |          | 87,714   |          |   |       | (138       | )      |   |               | (4,035 | )      |   |          | 83,541   |         
|                                                             | Selling, general and administrative, exclusive of co-promotion
    fees             |                                                   |          | 86,602   |          |   |       |           |        |   |               | 1,000  |        |   |          | 87,602   |         
|                                                             | Co-promotion fees                                                                   |                                                   |          | 27,504   |          |   |       | (3,206     | )      |   |               | (754   | )      |   |          | 23,544   |         
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             |                                                                                     | Total selling, general and administrative expense |          |          | 114,106  |   |       |            | (3,206 | ) |               |        | 246    |   |          |          | 111,146  |  
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             | Research and development                                                            |                                                   |          | 16,023   |          |   |       |           |        |   |               |       |        |   |          | 16,023   |         
|                                                             | Depreciation and amortization                                                       |                                                   |          | 39,318   |          |   |       |           |        |   |               |       |        |   |          | 39,318   |         
|                                                             | Intangible asset impairment                                                         |                                                   |          | 34,936   |          |   |       |           |        |   |               |       |        |   |          | 34,936   |         
|                                                             | Gain on sale of assets                                                              |                                                   |          | (858     | )        |   |       |           |        |   |               |       |        |   |          | (858     | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             |                                                                                     | Total operating costs and expenses                |          |          | 291,239  |   |       |            | (3,344 | ) |               |        | (3,789 | ) |          |          | 284,106  |  
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             | Operating (loss) income                                                             |                                                   |          | (595     | )        |   |       | 3,764      |        |   |               | 4,175  |        |   |          | 7,344    |         
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Total other expense                                          |                                                                                     |                                                   | (2,803   | )        |          |   |      |            |        |   | (400          | )      |        |   | (3,203   | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|(Loss) income from continuing operations before income taxes |                                                                                     |                                                   | (3,398   | )        |          |   | 3,764 |            |        |   | 3,775         |        |        |   | 4,141    |         
|Income tax (benefit) expense                                 |                                                                                     |                                                   | (1,048   | )        |          |   | 1,441 |            |        |   | 1,446         |        |        |   | 1,839    |         
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|(Loss) income from continuing operations                     |                                                                                     |                                                   | (2,350   | )        |          |   | 2,323 |            |        |   | 2,329         |        |        |   | 2,302    |         
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Discontinued operations:                                     |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |        |        |   |          |         
|                                                             | (Loss) income from discontinued operations, including expected
    loss on disposal |                                                   |          | (171,242 | )        |   |       | 4,027      |        |   |               | (247   | )      |   |          | (167,462 | )       
|                                                             | Income tax (benefit) expense                                                        |                                                   |          | (62,532  | )        |   |       | 1,542      |        |   |               | (94    | )      |   |          | (61,084  | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|                                                             |                                                                                     | Total (loss) income from discontinued operations  |          |          | (108,710 | ) |       |            | 2,485  |   |               |        | (153   | ) |          |          | (106,378 | )
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Net (loss) income                                            |                                                                                     | $                                                 | (111,060 | )        |          | $ | 4,808 |            |        | $ | 2,176         |        |        | $ | (104,076 | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Basic (loss) income per common share                         |                                                                                     | $                                                 | (0.46    | )        |          | $ | 0.02  |            |        | $ | 0.01          |        |        | $ | (0.43    | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       
|Diluted (loss) income per common share                       |                                                                                     | $                                                 | (0.46    | )        |          | $ | 0.02  |            |        | $ | 0.01          |        |        | $ | (0.43    | )       
|                                                             |                                                                                     |                                                   |          |          |          |   |       |            |        |   |               |       

7



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|3. | Change in Estimate





|   |                   
|-- | ------------------
|4. | Stock Compensation



|                                 |                                        |                |   |              |                 |  |   |          |  
|-------------------------------- | -------------------------------------- | -------------- | - | ------------ | --------------- |  | - | -------- | -
|                                 |                                        |                |   | Three Months |                
|                                 |                                        | Three Months   |   |              | Ended           | 
|                                 |                                        | Ended          |   |              | March 31, 2004* | 
|                                 |                                        | March 31, 2005 |   |              | (restated)      | 
|                                 |                                        |                |   |              |                 | 
|Net income (loss):               |                                        |                |   |              |                 |  |   |         
|                                 | As reported                            |                | $ | 70,055       |                 |  | $ | (104,076 | )
|                                 | Compensation costs for options granted |                |   | (1,351       | )               |  |   | (1,191   | )
|                                 |                                        |                |   |              |                 | 
|                                 | Pro forma                              |                | $ | 68,704       |                 |  | $ | (105,267 | )
|                                 |                                        |                |   |              |                 | 
|Basic income (loss) per share:   |                                        |                |   |              |                 |  |   |         
|                                 | As reported                            |                | $ | 0.29         |                 |  | $ | (0.43    | )
|                                 |                                        |                |   |              |                 | 
|                                 | Pro forma                              |                | $ | 0.28         |                 |  | $ | (0.44    | )
|                                 |                                        |                |   |              |                 | 
|Diluted income (loss) per share: |                                        |                |   |              |                 |  |   |         
|                                 | As reported                            |                | $ | 0.29         |                 |  | $ | (0.43    | )
|                                 |                                        |                |   |              |                 | 
|                                 | Pro forma                              |                | $ | 0.28         |                 |  | $ | (0.44    | )
|                                 |                                        |                |   |              |                 | 





8



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|5. | Earnings Per Share



|                               |                                |                    |  |         |      |  |  |         | 
|------------------------------ | ------------------------------ | ------------------ |  | ------- | ---- |  |  | ------- | 
|                               |                                | Three Months Ended | 
|                               |                                | March 31,          | 
|                               |                                |                    | 
|                               |                                | 2005               |  |         | 2004 | 
|                               |                                |                    |  |         |      | 
|Basic loss per common share:   |                                |                    |  |         |      |  |  |        
|                               | Weighted average common shares |                    |  | 241,724 |      |  |  | 241,300 | 
|                               |                                |                    |  |         |      | 
|Diluted loss per common share: |                                |                    |  |         |      |  |  |        
|                               | Weighted average common shares |                    |  | 241,724 |      |  |  | 241,300 | 
|                               | Effect of stock options        |                    |  | 79      |      |  |  |        | 
|                               | Convertible debentures         |                    |  |        |      |  |  |        | 
|                               |                                |                    |  |         |      | 
|                               | Weighted average common shares |                    |  | 241,803 |      |  |  | 241,300 | 
|                               |                                |                    |  |         |      | 





|   |            
|-- | -----------
|6. | Inventories



|                                                                                     |  |           |         |   |              |   |         |  
|------------------------------------------------------------------------------------ |  | --------- | ------- | - | ------------ | - | ------- | -
|                                                                                     |  | March 31, |         |   | December 31, |  
|                                                                                     |  | 2005      |         |   | 2004         |  
|                                                                                     |  |           |         |   |              |  
|Raw materials                                                                        |  | $         | 147,238 |   |              | $ | 168,541 |  
|Work-in-process                                                                      |  |           | 19,527  |   |              |   | 20,287  |  
|Finished goods (including $11,712 and $11,350 of sample
    inventory, respectively) |  |           | 127,419 |   |              |   | 133,527 |  
|                                                                                     |  |           |         |   |              |  
|                                                                                     |  |           | 294,184 |   |              |   | 322,355 |  
|Inventory valuation allowance                                                        |  |           | (38,776 | ) |              |   | (47,943 | )
|                                                                                     |  |           |         |   |              |  
|                                                                                     |  | $         | 255,408 |   |              | $ | 274,412 |  
|                                                                                     |  |           |         |   |              |  



|   |                              
|-- | -----------------------------
|7. | Property, Plant and Equipment



9



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                               
|-- | ------------------------------
|8. | Intangible Assets and Goodwill



|                              |                         |          |           |           |              |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | --------- | ------------ | - | ------- | ------- | 
|                              |                         | Gross    |           |           |             
|                              |                         | Carrying |           |           | Accumulated  |  
|                              |                         | Amount   |           |           | Amortization |  
|                              |                         |          |           |           |              |  
|Trademarks and product rights |                         | $        | 1,370,711 |           |              | $ | 241,455 |        
|Patents                       |                         |          | 267,049   |           |              |   | 145,565 |        
|Other intangibles             |                         |          | 9,459     |           |              |   | 8,502   |        
|                              |                         |          |           |           |              |  
|                              | Total intangible assets |          | $         | 1,647,219 |              |   | $       | 395,522 | 
|                              |                         |          |           |           |              |  



|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount |        
|                               |  |        |        
|2005                           |  | $      | 116,906 | 
|2006                           |  |        | 99,588  | 
|2007                           |  |        | 97,962  | 
|2008                           |  |        | 91,933  | 
|2009                           |  |        | 80,417  | 









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



|   |                        
|-- | -----------------------
|9. | Discontinued Operations



10



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                             |  |                    |       |           |            |   |          |  
|------------------------------------------------------------ |  | ------------------ | ----- | --------- | ---------- | - | -------- | -
|                                                             |  | Three Months Ended |      
|                                                             |  |                    |      
|                                                             |  |                    |       | March 31, |           
|                                                             |  | March 31,          |       |           | 2004*      |  
|                                                             |  | 2005               |       |           | (restated) |  
|                                                             |  |                    |       |           |            |  
|Total revenues                                               |  | $                  | 4,682 |           |            | $ | 10,896   |  
|Operating income (loss), including expected loss on disposal |  |                    | 4,682 |           |            |   | (167,462 | )
|Net income (loss)                                            |  |                    | 2,950 |           |            |   | (106,378 | )





|    |              
|--- | -------------
|10. | Contingencies



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







11



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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









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



12



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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









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





13



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has 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 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 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             





14



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















15



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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



Approved Drug Products With
Therapeutic Equivalence Evaluations


16



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














17



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                        
|--- | -----------------------
|11. | Accounting Developments







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



18



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                       |                                    |                                              |   |          |            |  |   |          |         | 
|---------------------- | ---------------------------------- | -------------------------------------------- | - | -------- | ---------- |  | - | -------- | ------- | 
|                       |                                    | Three Months Ended                           |  
|                       |                                    | March 31,                                    |  
|                       |                                    |                                              |  
|                       |                                    |                                              |   | 2004*    |           
|                       |                                    | 2005                                         |   |          | (restated) | 
|                       |                                    |                                              |   |          |            | 
|Total revenues:        |                                    |                                              |   |          |            |  |   |         
|                       | Branded pharmaceuticals            |                                              | $ | 321,769  |            |  | $ | 234,014  |        
|                       | Meridian Medical Technologies      |                                              |   | 23,214   |            |  |   | 34,501   |        
|                       | Royalties                          |                                              |   | 18,055   |            |  |   | 16,757   |        
|                       | Contract manufacturing             |                                              |   | 119,365  |            |  |   | 132,892  |        
|                       | Eliminations                       |                                              |   | (113,778 | )          |  |   | (126,714 | )      
|                       |                                    |                                              |   |          |            | 
|                       |                                    | Consolidated total net revenues              |   | $        | 368,625    |  |   | $        | 291,450 | 
|                       |                                    |                                              |   |          |            | 
|Segment profit (loss): |                                    |                                              |   |          |            |  |   |         
|                       | Branded pharmaceuticals            |                                              | $ | 272,112  |            |  | $ | 176,010  |        
|                       | Meridian Medical Technologies      |                                              |   | 12,313   |            |  |   | 19,454   |        
|                       | Royalties                          |                                              |   | 15,806   |            |  |   | 14,177   |        
|                       | Contract manufacturing             |                                              |   | (3,822   | )          |  |   | (1,732   | )      
|                       | Other operating costs and expenses |                                              |   | (184,856 | )          |  |   | (200,565 | )      
|                       | Other expenses                     |                                              |   | (7,526   | )          |  |   | (3,203   | )      
|                       |                                    |                                              |   |          |            | 
|                       |                                    | Income from continuing operations before tax |   | $        | 104,027    |  |   | $        | 4,141   | 
|                       |                                    |                                              |   |          |            | 



|              |                               |                           |   |           |              |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | --------- | ------------ |  | - | --------- | --------- | 
|              |                               | As of                     |   |           | As of        | 
|              |                               | March 31,                 |   |           | December 31, | 
|              |                               | 2005                      |   |           | 2004         | 
|              |                               |                           |   |           |              | 
|Total assets: |                               |                           |   |           |              |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,815,917 |              |  | $ | 2,865,803 |          
|              | Meridian Medical Technologies |                           |   | 251,122   |              |  |   | 275,850   |          
|              | Royalties                     |                           |   | 19,610    |              |  |   | 22,430    |          
|              | Contract manufacturing        |                           |   | 98,882    |              |  |   | 95,151    |          
|              | All other                     |                           |   |          |              |  |   |          |          
|              | Eliminations                  |                           |   | (335,078  | )            |  |   | (335,078  | )        
|              |                               |                           |   |           |              | 
|              |                               | Consolidated total assets |   | $         | 2,850,453    |  |   | $         | 2,924,156 | 
|              |                               |                           |   |           |              | 

19



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |                |                                              |   |        |            |  |   |        |         | 
|--------------- | -------------- | -------------------------------------------- | - | ------ | ---------- |  | - | ------ | ------- | 
|                |                | Three Months Ended                           |  
|                |                | March 31,                                    |  
|                |                |                                              |  
|                |                |                                              |   | 2004*  |           
|                |                | 2005                                         |   |        | (restated) | 
|                |                |                                              |   |        |            | 
|Total revenues: |                |                                              |   |        |            |  |   |       
|                | Cardiovascular |                                              | $ | 88,873 |            |  | $ | 70,507 |        
|                | Anti-infective |                                              |   | 21,222 |            |  |   | 13,590 |        
|                | Critical care  |                                              |   | 64,020 |            |  |   | 40,303 |        
|                | Endocrinology  |                                              |   | 46,220 |            |  |   | 31,653 |        
|                | Respiratory    |                                              |   | 4,365  |            |  |   | 8,441  |        
|                | Neuroscience   |                                              |   | 91,395 |            |  |   | 62,125 |        
|                | Other branded  |                                              |   | 5,674  |            |  |   | 7,395  |        
|                |                |                                              |   |        |            | 
|                |                | Consolidated branded pharmaceutical revenues |   | $      | 321,769    |  |   | $      | 234,014 | 
|                |                |                                              |   |        |            | 





|    |                                                   
|--- | --------------------------------------------------
|13. | Restructuring Activities and Executive Retirements



|                          |  |              |     |  |           |   |       |          |  |   |          |            |      |   |   |  |  |   |     | 
|------------------------- |  | ------------ | --- |  | --------- | - | ----- | -------- |  | - | -------- | ---------- | ---- | - | - |  |  | - | --- | 
|                          |  | Accrued      |     |  |           |   |       |          |  |   | Accrued  |           
|                          |  | Balance at   |     |  | Income    |   |       |          |  |   |          | Balance at |     
|                          |  | December 31, |     |  | Statement |   |       |          |  |   |          | March 31,  |     
|                          |  | 2004         |     |  | Impact    |   |       | Payments |  |   | Non-Cash |            | 2005 |  
|                          |  |              |     |  |           |   |       |          |  |   |          |            |      |  
|Employee relocation       |  | $            |    |  |           | $ | 159   |          |  | $ | 159      |            |      | $ |  |  |  | $ |    | 
|Facility demolition costs |  |              | 924 |  |           |   |      |          |  |   |         |            |      |   |  |  |  |   | 924 | 
|Termination of lease      |  |              |    |  |           |   | 1,733 |          |  |   | 1,733    |            |      |   |  |  |  |   |    | 
|Other                     |  |              |    |  |           |   | 131   |          |  |   | 131      |            |      |   |  |  |  |   |    | 
|                          |  |              |     |  |           |   |       |          |  |   |          |            |      |   |  
|                          |  | $            | 924 |  |           | $ | 2,023 |          |  | $ | 2,023    |            |      | $ |  |  |  | $ | 924 | 
|                          |  |              |     |  |           |   |       |          |  |   |          |            |      |   |  





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





|    |                               
|--- | ------------------------------
|15. | Guarantor Financial Statements

3 4


20



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING BALANCE SHEETS


(In thousands, except share data)


|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |         |           | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | --------- | --------- | ----------------- |  | --------- | ------------ | --------- | ----------- | ------- | ----- | ------ | ------------ | ---------- | - | ---------- | --------- | --------- | ------------ | --------- |  | ------------ | ----------- | --------- | ------- | --------- | ------- | ------------ | - | ------ | ----- | ------ |  | ---------- | - | ---------- | - | --------- | ------- | --------- | 
|                                     |                                           | March 31, 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                 |                                            | $         | 344,282   |                   |  | $         | 2,295        |           |             | $       | 2,012 |        |              | $          |  |            |           | $         | 348,589      |           |  | $            | 313,881     |           |         | $         | 27,035  |              |   | $      | 1,170 |        |  | $          |  |            |   | $         | 342,086 |          
|                                     | Marketable securities                     |                                            |           | 8,534     |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 8,534        |           |  |              | 16,498      |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           | 16,498  |          
|                                     | Restricted cash                           |                                            |           | 65,000    |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 65,000       |           |  |              | 66,543      |           |         |           | 31,187  |              |   |        |      |        |  |            |  |            |   |           | 97,730  |          
|                                     | Accounts receivable, net                  |                                            |           | 2,788     |                   |  |           | 201,358      |           |             |         | 2,024 |        |              |            |  |            |           |           | 206,170      |           |  |              | 3,344       |           |         |           | 174,797 |              |   |        | 2,822 |        |  |            |  |            |   |           | 180,963 |          
|                                     | Inventories                               |                                            |           | 213,562   |                   |  |           | 41,671       |           |             |         | 175   |        |              |            |  |            |           |           | 255,408      |           |  |              | 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 |                                            |           | 19,898    |                   |  |           | 43,808       |           |             |         |      |        |              |            |  |            |           |           | 63,706       |           |  |              | 22,846      |           |         |           | 38,481  |              |   |        | 68    |        |  |            |  |            |   |           | 61,395  |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current assets                       |           |           | 681,062           |  |           |              | 384,991   |             |         |       | 4,211  |              |            |   |           |           |           |              | 1,070,264 |  |              |             | 693,369   |         |           |         | 429,413      |   |        |       | 4,281  |  |            |   |           |   |           |         | 1,127,063 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Property, plant and equipment, net   |                                           |                                            | 109,831   |           |                   |  | 171,389   |              |           |             | 2       |       |        |              |           |   |            |           | 281,222   |              |           |  | 112,416      |             |           |         | 168,313   |         |              |   | 2      |       |        |  |           |   |            |   | 280,731   |        
|Goodwill                             |                                           |                                            |          |           |                   |  | 121,152   |              |           |             |        |       |        |              |           |   |            |           | 121,152   |              |           |  |             |             |           |         | 121,152   |         |              |   |       |       |        |  |           |   |            |   | 121,152   |        
|Intangible assets, net               |                                           |                                            | 153       |           |                   |  | 1,241,417 |              |           |             | 10,127  |       |        |              |           |   |            |           | 1,251,697 |              |           |  | 194          |             |           |         | 1,275,474 |         |              |   | 10,293 |       |        |  |           |   |            |   | 1,285,961 |        
|Other assets                         |                                           |                                            | 26,449    |           |                   |  | 240       |              |           |             |        |       |        |              |           |   |            |           | 26,689    |              |           |  | 16,078       |             |           |         | 240       |         |              |   |       |       |        |  |           |   |            |   | 16,318    |        
|Deferred income tax assets           |                                           |                                            | 19,963    |           |                   |  | 79,466    |              |           |             |        |       |        |              |           |   |            |           | 99,429    |              |           |  | 14,197       |             |           |         | 78,734    |         |              |   |       |       |        |  |           |   |            |   | 92,931    |        
|Investments in subsidiaries          |                                           |                                            | 2,265,812 |           |                   |  |          |              |           |             |        |       |        |              | (2,265,812 | ) |            |           |          |              |           |  | 2,186,234    |             |           |         |          |         |              |   |       |       |        |  | (2,186,234 | ) |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total assets                               |           | $         | 3,103,270         |  |           | $            | 1,998,655 |             |         | $     | 14,340 |              |            | $ | (2,265,812 | )         |           | $            | 2,850,453 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|Current liabilities:                 |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|                                     | Accounts payable                          |                                            | $         | 21,396    |                   |  | $         | 22,581       |           |             | $       | 51    |        |              | $          |  |            |           | $         | 44,028       |           |  | $            | 61,427      |           |         | $         | 31,339  |              |   | $      | 154   |        |  | $          |  |            |   | $         | 92,920  |          
|                                     | Accrued expenses                          |                                            |           | 119,359   |                   |  |           | 380,382      |           |             |         | 11    |        |              |            |  |            |           |           | 499,752      |           |  |              | 125,095     |           |         |           | 470,899 |              |   |        | 16    |        |  |            |  |            |   |           | 596,010 |          
|                                     | Income taxes payable                      |                                            |           | 10,104    |                   |  |           | 4,440        |           |             |         | (177  | )      |              |            |  |            |           |           | 14,367       |           |  |              |            |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           |        |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current liabilities                  |           |           | 150,859           |  |           |              | 407,403   |             |         |       | (115   | )            |            |   |           |           |           |              | 558,147   |  |              |             | 186,522   |         |           |         | 502,238      |   |        |       | 170    |  |            |   |           |   |           |         | 688,930   | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Long-term debt                       |                                           |                                            | 345,000   |           |                   |  |          |              |           |             |        |       |        |              |           |   |            |           | 345,000   |              |           |  | 345,000      |             |           |         |          |         |              |   |       |       |        |  |           |   |            |   | 345,000   |        
|Other long-term liabilities          |                                           |                                            | 26,812    |           |                   |  | 2,414     |              |           |             |        |       |        |              |           |   |            |           | 29,226    |              |           |  | 29,417       |             |           |         | 12,019    |         |              |   |       |       |        |  |           |   |            |   | 41,436    |        
|Intercompany payable (receivable)    |                                           |                                            | 662,519   |           |                   |  | (670,541  | )            |           |             | 8,022   |       |        |              |           |   |            |           |          |              |           |  | 612,759      |             |           |         | (620,511  | )       |              |   | 7,752  |       |        |  |           |   |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities                          |           |           | 1,185,190         |  |           |              | (260,724  | )           |         |       | 7,907  |              |            |   |           |           |           |              | 932,373   |  |              |             | 1,173,698 |         |           |         | (106,254     | ) |        |       | 7,922  |  |            |   |           |   |           |         | 1,075,366 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Shareholders equity                 |                                           |                                            | 1,918,080 |           |                   |  | 2,259,379 |              |           |             | 6,433   |       |        |              | (2,265,812 | ) |            |           | 1,918,080 |              |           |  | 1,848,790    |             |           |         | 2,179,580 |         |              |   | 6,654  |       |        |  | (2,186,234 | ) |            |   | 1,848,790 |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities and shareholders equity |           | $         | 3,103,270         |  |           | $            | 1,998,655 |             |         | $     | 14,340 |              |            | $ | (2,265,812 | )         |           | $            | 2,850,453 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  

21



---



##### Table of Contents



GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


(Unaudited)


(In thousands, except per share data)


|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |          |      |     |       |      |         |          |          |         |       |         |          |          |  
|------------------------------------------------------------ | ----------------------------------------------- | ------------------------------------------------ | ----------------- | --------- | --------------------------------------------- | ------ | --------- | ------------ | ------- | ------ | ------------ | ---- | ---- | ------------ | ------- | ------- | --------- | ------- | ------- | ------------ | ------- | ------ | ------------ | -------- | -------- | ------------ | ------- | ------- | ------------ | -------- | ---- | --- | ----- | ---- | ------- | -------- | -------- | ------- | ----- | ------- | -------- | -------- | -
|                                                             |                                                 | Three Months Ended March 31, 2005                |                   |           | Three Months Ended March 31, 2004 (restated)* |       
|                                                             |                                                 |                                                  |                   |           |                                               |       
|                                                             |                                                 |                                                  |                   | Non       |                                               |        |           |              |         |        | Non          |      |      |             
|                                                             |                                                 |                                                  |                   | Guarantor |                                               |        | Guarantor |              |         |        |              | King |      |              |         |         | Guarantor |         |         | Guarantor    |         |        |              |          | King     |             
|                                                             |                                                 | King                                             |                   |           | Subsidiaries                                  |        |           | Subsidiaries |         |        | Eliminations |      |      | Consolidated |         |         | King      |         |         | Subsidiaries |         |        | Subsidiaries |          |          | Eliminations |         |         | Consolidated |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Revenues:                                                    |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |          |      |     |       |      |         |          |          |         |       |        
|                                                             | Net sales                                       |                                                  | $                 | 94,318    |                                               |        | $         | 349,259      |         |        | $            | 440  |      |              | $       | (93,447 | )         |         | $       | 350,570      |         |        | $            | 106,502  |          |              | $       | 274,153 |              |          | $    | 418 |       |      | $       | (106,380 | )        |         | $     | 274,693 |         
|                                                             | Royalty revenue                                 |                                                  |                   |          |                                               |        |           | 18,055       |         |        |              |     |      |              |         |        |           |         |         | 18,055       |         |        |              |         |          |              |         | 16,757  |              |          |      |    |       |      |         |         |          |         |       | 16,757  |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|                                                             |                                                 | Total revenues                                   |                   |           | 94,318                                        |        |           |              | 367,314 |        |              |      | 440  |              |         |         | (93,447   | )       |         |              | 368,625 |        |              |          | 106,502  |              |         |         | 290,910      |          |      |     | 418   |      |         |          | (106,380 | )       |       |         | 291,450  |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Operating costs and expenses:                                |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |          |      |     |       |      |         |          |          |         |       |        
|                                                             | Cost of revenues                                |                                                  |                   | 39,170    |                                               |        |           | 126,263      |         |        |              | 230  |      |              |         | (93,447 | )         |         |         | 72,216       |         |        |              | 31,997   |          |              |         | 157,807 |              |          |      | 117 |       |      |         | (106,380 | )        |         |       | 83,541  |         
|                                                             | Selling, general and administrative             |                                                  |                   | 39,079    |                                               |        |           | 88,330       |         |        |              | 96   |      |              |         |        |           |         |         | 127,505      |         |        |              | 36,694   |          |              |         | 73,601  |              |          |      | 851 |       |      |         |         |          |         |       | 111,146 |         
|                                                             | Transaction costs                               |                                                  |                   | 3,277     |                                               |        |           |             |         |        |              |     |      |              |         |        |           |         |         | 3,277        |         |        |              |         |          |              |         |        |              |          |      |    |       |      |         |         |          |         |       |        |         
|                                                             | Depreciation and amortization                   |                                                  |                   | 3,887     |                                               |        |           | 37,373       |         |        |              | 166  |      |              |         |        |           |         |         | 41,426       |         |        |              | 4,340    |          |              |         | 34,872  |              |          |      | 106 |       |      |         |         |          |         |       | 39,318  |         
|                                                             | Research and development                        |                                                  |                   | 161       |                                               |        |           | 11,311       |         |        |              |     |      |              |         |        |           |         |         | 11,472       |         |        |              | 110      |          |              |         | 15,913  |              |          |      |    |       |      |         |         |          |         |       | 16,023  |         
|                                                             | Intangible asset impairment                     |                                                  |                   |          |                                               |        |           |             |         |        |              |     |      |              |         |        |           |         |         |             |         |        |              |         |          |              |         | 34,936  |              |          |      |    |       |      |         |         |          |         |       | 34,936  |         
|                                                             | Gain on sale of intangible assets               |                                                  |                   |          |                                               |        |           | (847         | )       |        |              |     |      |              |         |        |           |         |         | (847         | )       |        |              |         |          |              |         | (858    | )            |          |      |    |       |      |         |         |          |         |       | (858    | )       
|                                                             | Restructuring charges                           |                                                  |                   | 159       |                                               |        |           | 1,864        |         |        |              |     |      |              |         |        |           |         |         | 2,023        |         |        |              |         |          |              |         |        |              |          |      |    |       |      |         |         |          |         |       |        |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|                                                             |                                                 | Total operating costs and expenses               |                   |           | 85,733                                        |        |           |              | 264,294 |        |              |      | 492  |              |         |         | (93,447   | )       |         |              | 257,072 |        |              |          | 73,141   |              |         |         | 316,271      |          |      |     | 1,074 |      |         |          | (106,380 | )       |       |         | 284,106  |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Operating income (loss)                                      |                                                 |                                                  | 8,585             |           |                                               |        | 103,020   |              |         |        | (52          | )    |      |              |        |         |           |         | 111,553 |              |         |        | 33,361       |          |          |              | (25,361 | )       |              |          | (656 | )   |       |      |        |          |          |         | 7,344 |        
|Other income (expense):                                      |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |          |      |     |       |      |         |          |          |         |       |        
|                                                             | Interest income                                 |                                                  |                   | 2,042     |                                               |        |           | 235          |         |        |              |     |      |              |         |        |           |         |         | 2,277        |         |        |              | 893      |          |              |         | 161     |              |          |      |    |       |      |         |         |          |         |       | 1,054   |         
|                                                             | Interest expense                                |                                                  |                   | (2,686    | )                                             |        |           | (15          | )       |        |              |     |      |              |         |        |           |         |         | (2,701       | )       |        |              | (3,100   | )        |              |         | (5      | )            |          |      |    |       |      |         |         |          |         |       | (3,105  | )       
|                                                             | Valuation change  convertible notes receivable |                                                  |                   |          |                                               |        |           |             |         |        |              |     |      |              |         |        |           |         |         |             |         |        |              | (449     | )        |              |         |        |              |          |      |    |       |      |         |         |          |         |       | (449    | )       
|                                                             | Write-down of investment                        |                                                  |                   | (6,853    | )                                             |        |           |             |         |        |              |     |      |              |         |        |           |         |         | (6,853       | )       |        |              |         |          |              |         |        |              |          |      |    |       |      |         |         |          |         |       |        |         
|                                                             | Other, net                                      |                                                  |                   | (77       | )                                             |        |           | (32          | )       |        |              | (140 | )    |              |         |        |           |         |         | (249         | )       |        |              | (325     | )        |              |         | (331    | )            |          |      | (47 | )     |      |         |         |          |         |       | (703    | )       
|                                                             | Equity in earnings (loss) of subsidiaries       |                                                  |                   | 79,657    |                                               |        |           |             |         |        |              |     |      |              |         | (79,657 | )         |         |         |             |         |        |              | (117,756 | )        |              |         |        |              |          |      |    |       |      |         | 117,756  |          |         |       |        |         
|                                                             | Intercompany interest (expense) income          |                                                  |                   | (12,193   | )                                             |        |           | 12,342       |         |        |              | (149 | )    |              |         |        |           |         |         |             |         |        |              | (7,166   | )        |              |         | 7,166   |              |          |      |    |       |      |         |         |          |         |       |        |         
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|                                                             |                                                 | Total other income (expense)                     |                   |           | 59,890                                        |        |           |              | 12,530  |        |              |      | (289 | )            |         |         | (79,657   | )       |         |              | (7,526  | )      |              |          | (127,903 | )            |         |         | 6,991        |          |      |     | (47   | )    |         |          | 117,756  |         |       |         | (3,203   | )       
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Income (loss) from continuing operations before income taxes |                                                 |                                                  | 68,475            |           |                                               |        | 115,550   |              |         |        | (341         | )    |      |              | (79,657 | )       |           |         | 104,027 |              |         |        | (94,542      | )        |          |              | (18,370 | )       |              |          | (703 | )   |       |      | 117,756 |          |          |         | 4,141 |        
|Income tax (benefit) expense                                 |                                                 |                                                  | (1,580            | )         |                                               |        | 38,621    |              |         |        | (119         | )    |      |              |        |         |           |         | 36,922  |              |         |        | 9,534        |          |          |              | (7,449  | )       |              |          | (246 | )   |       |      |        |          |          |         | 1,839 |        
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Income (loss) from continuing operations                     |                                                 |                                                  | 70,055            |           |                                               |        | 76,929    |              |         |        | (222         | )    |      |              | (79,657 | )       |           |         | 67,105  |              |         |        | (104,076     | )        |          |              | (10,921 | )       |              |          | (457 | )   |       |      | 117,756 |          |          |         | 2,302 |        
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|Discontinued operations:                                     |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |          |      |     |       |      |         |          |          |         |       |        
|                                                             |                                                 | Income (loss) from discontinued operations       |                   |           |                                              |        |           |              | 4,682   |        |              |      |     |              |         |         |          |         |         |              | 4,682   |        |              |          |         |              |         |         | (167,462     | )        |      |     |      |      |         |          |         |         |       |         | (167,462 | )       
|                                                             |                                                 | Income tax expense (benefit)                     |                   |           |                                              |        |           |              | 1,732   |        |              |      |     |              |         |         |          |         |         |              | 1,732   |        |              |          |         |              |         |         | (61,084      | )        |      |     |      |      |         |          |         |         |       |         | (61,084  | )       
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|                                                             |                                                 | Total income (loss) from discontinued operations |                   |           |                                              |        |           |              | 2,950   |        |              |      |     |              |         |         |          |         |         |              | 2,950   |        |              |          |         |              |         |         | (106,378     | )        |      |     |      |      |         |          |         |         |       |         | (106,378 | )       
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         
|                                                             |                                                 |                                                  | Net income (loss) |           | $                                             | 70,055 |           |              | $       | 79,879 |              |      | $    | (222         | )       |         | $         | (79,657 | )       |              | $       | 70,055 |              |          | $        | (104,076     | )       |         | $            | (117,299 | )    |     | $     | (457 | )       |          | $        | 117,756 |       |         | $        | (104,076 | )
|                                                             |                                                 |                                                  |                   |           |                                               |        |           |              |         |        |              |      |      |              |         |         |           |         |         |              |         |        |              |          |          |              |         |         |              |         



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

22



---



##### Table of Contents



GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |          |   |   |       |     |  |   |         |         |  
|--------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------- | --------- | --------------------------------------------- | - | --------- | ------------ | - | ---- | ------------ | --- |  | ---- | --------- | ------ | ------------ | --------- | ------- | ------------ | ---- | - | ------------ | -------- | - | - | ----- | --- |  | - | ------- | ------- | -
|                                                    |                                              | Three Months Ended March 31, 2005 |         |           | Three Months Ended March 31, 2004 (restated)* |  
|                                                    |                                              |                                   |         |           |                                               |  
|                                                    |                                              |                                   |         | Non       |                                               |   |           |              |   |      | Non          |     |  |     
|                                                    |                                              |                                   |         | Guarantor |                                               |   | Guarantor |              |   | King |              |     |  |      | Guarantor |        |              | Guarantor |         |              | King |  
|                                                    |                                              | King                              |         |           | Subsidiaries                                  |   |           | Subsidiaries |   |      | Consolidated |     |  | King |           |        | Subsidiaries |           |         | Subsidiaries |      |   | Consolidated |         
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Cash flows from operating activities                |                                              | $                                 | (7,771  | )         |                                               | $ | 30,702    |              |   | $    | 572          |     |  | $    | 23,503    |        |              | $         | (91,452 | )            |      | $ | 151,661      |          |   | $ | 109   |     |  | $ | 60,318  |        
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Cash flows from investing activities:               |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |          |   |   |       |     |  |   |         |        
|                                                    | Transfer to restricted cash                  |                                   |         | (9,564    | )                                             |   |           | 1,582        |   |      |              |    |  |      |           | (7,982 | )            |           |         |             |      |   |              | (351     | ) |   |       |    |  |   |         | (351    | )
|                                                    | Proceeds from loans receivable               |                                   |         |          |                                               |   |           |             |   |      |              |    |  |      |           |       |              |           |         |             |      |   |              | 248      |   |   |       |    |  |   |         | 248     |  
|                                                    | Purchases of property, plant and equipment   |                                   |         | (2,081    | )                                             |   |           | (6,994       | ) |      |              |    |  |      |           | (9,075 | )            |           |         | (3,477       | )    |   |              | (9,108   | ) |   |       |    |  |   |         | (12,585 | )
|                                                    | Proceeds from sale of property and equipment |                                   |         | 1         |                                               |   |           |             |   |      |              |    |  |      |           | 1      |              |           |         |             |      |   |              |         |   |   |       |    |  |   |         |        |  
|                                                    | Acquisition of Primary Care from Elan        |                                   |         |          |                                               |   |           |             |   |      |              |    |  |      |           |       |              |           |         |             |      |   |              | (36,000  | ) |   |       |    |  |   |         | (36,000 | )
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Net cash used in investing activities               |                                              |                                   | (11,644 | )         |                                               |   | (5,412    | )            |   |      |             |     |  |      | (17,056   | )      |              |           | (3,477  | )            |      |   | (45,211      | )        |   |   |      |     |  |   | (48,688 | )      
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Cash flows from financing activities:               |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |          |   |   |       |     |  |   |         |        
|                                                    | Proceeds from exercise of stock options, net |                                   |         | 56        |                                               |   |           |             |   |      |              |    |  |      |           | 56     |              |           |         | 946          |      |   |              |         |   |   |       |    |  |   |         | 946     |  
|                                                    | Payments on other long-term debt             |                                   |         |          |                                               |   |           |             |   |      |              |    |  |      |           |       |              |           |         | (93          | )    |   |              |         |   |   |       |    |  |   |         | (93     | )
|                                                    | Intercompany                                 |                                   |         | 49,760    |                                               |   |           | (50,030      | ) |      |              | 270 |  |      |           |       |              |           |         | 104,892      |      |   |              | (105,027 | ) |   |       | 135 |  |   |         |        |  
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Net cash provided by (used in) financing activities |                                              |                                   | 49,816  |           |                                               |   | (50,030   | )            |   |      | 270          |     |  |      | 56        |        |              |           | 105,745 |              |      |   | (105,027     | )        |   |   | 135   |     |  |   | 853     |        
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Net cash provided by discontinued operations        |                                              |                                   |        |           |                                               |   |          |              |   |      |             |     |  |      |          |        |              |           |        |              |      |   | 2,790        |          |   |   |      |     |  |   | 2,790   |        
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         
|Increase (decrease) in cash and cash equivalents    |                                              |                                   | 30,401  |           |                                               |   | (24,740   | )            |   |      | 842          |     |  |      | 6,503     |        |              |           | 10,816  |              |      |   | 4,213        |          |   |   | 244   |     |  |   | 15,273  |        
|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            |                                              | $                                 | 344,282 |           |                                               | $ | 2,295     |              |   | $    | 2,012        |     |  | $    | 348,589   |        |              | $         | 151,433 |              |      | $ | 7,854        |          |   | $ | 2,039 |     |  | $ | 161,326 |        
|                                                    |                                              |                                   |         |           |                                               |   |           |              |   |      |              |     |  |      |           |        |              |           |         |              |      |   |              |         



23



---



##### Table of Contents








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

The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk
Factors set out below and 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




Updates and Developments




| |                               
| | ------------------------------
| | Wholesale Inventory Reductions







General Review of Financial Results




|                              |       |                      |         |         |            |   |         |         | 
|----------------------------- | ----- | -------------------- | ------- | ------- | ---------- | - | ------- | ------- | 
|                              |       | For the Three Months |        
|                              |       | Ended March 31,      |        
|                              |       |                      |        
|                              |       |                      |         | 2004    |           
|                              |       | 2005                 |         |         | (restated) |  
|                              |       |                      |         |         |            |  
|Branded pharmaceuticals       |       | $                    | 321,769 |         |            | $ | 234,014 |        
|Meridian Medical Technologies |       |                      | 23,214  |         |            |   | 34,501  |        
|Royalties                     |       |                      | 18,055  |         |            |   | 16,757  |        
|Contract manufacturing        |       |                      | 5,587   |         |            |   | 6,178   |        
|                              |       |                      |         |         |            |  
|                              | Total |                      | $       | 368,625 |            |   | $       | 291,450 | 
|                              |       |                      |         |         |            |  

24



---



##### Table of Contents





|    |                      
|--- | ---------------------
|II. | RESULTS OF OPERATIONS





| |                                           
| | ------------------------------------------
| | Three Months Ended March 31, 2005 and 2004



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













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







25



---



##### Table of Contents

























| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Restructuring charges 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.                                                                                                                                                                                                              
|
| |  | Income of $0.8 million and $0.9 million in 2005 and
    2004, respectively, primarily due to gains on the sale of some
    of our assets.                                                                                                                                                                                                                                                                                             
|
| |  | An intangible asset impairment charge totaling
    $34.9 million in 2004 which is primarily related to a
    greater than expected decline in prescriptions for
    Florinef® and Tapazole® due to availability of
    generics for these products. This special item was recorded in
    order to adjust the carrying value of the intangible assets on
    our balance sheet associated with these products so as to
    reflect the

26



---



##### Table of Contents



| |  |                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimated fair value of such assets. We determined the fair
    value of the intangible assets associated with Florinef®
    and Tapazole® based on our estimated discounted cash flows
    for these products.



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





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









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



Income from Continuing
Operations






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







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



Liquidity and Capital Resources




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



27



---



##### Table of Contents















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





28



---



##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have 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 the Company or against any present or former director,
    officer or employee in connection with the matters being
    investigated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               







29



---



##### Table of Contents















30



---



##### Table of Contents









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









31



---



##### Table of Contents







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

Approved Drug Products with Therapeutic
Equivalence Evaluations




| |                                  
| | ---------------------------------
| | Three Months Ended March 31, 2005









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



3 4


32



---



##### Table of Contents









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





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







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







33



---



##### Table of Contents











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

34



---



##### Table of Contents





|                              |                                    |                |               |             |              |           |          |         |        |         |         |           |         |         | 
|----------------------------- | ---------------------------------- | -------------- | ------------- | ----------- | ------------ | --------- | -------- | ------- | ------ | ------- | ------- | --------- | ------- | ------- | 
|                              |                                    |                |               | Accumulated |              |           | Net Book |        
|                              |                                    | Cost           |               |             | Amortization |           |          | Value   |       
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | (in thousands) |              
|Branded                       |                                    |                |               |             |              |           |          |         |        |         |         |          
|                              | Altace                             |                | $             | 276,150     |              |           | $        | 60,086  |        |         | $       | 216,064   |        
|                              | Other Cardiovascular               |                |               | 94,045      |              |           |          | 17,840  |        |         |         | 76,205    |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Cardiovascular |               |             | 370,195      |           |          |         | 77,926 |         |         |           | 292,269 |        
|                              |                                    | Anti-infective |               |             | 221,593      |           |          |         | 53,957 |         |         |           | 167,636 |        
|                              |                                    | Critical care  |               |             | 17,643       |           |          |         | 7,418  |         |         |           | 10,225  |        
|                              |                                    | Endocrinology  |               |             | 28,841       |           |          |         | 13,368 |         |         |           | 15,473  |        
|                              | Skelaxin                           |                |               | 203,015     |              |           |          | 20,970  |        |         |         | 182,045   |        
|                              | Sonata                             |                |               | 181,121     |              |           |          | 17,021  |        |         |         | 164,100   |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Neuroscience   |               |             | 384,136      |           |          |         | 37,991 |         |         |           | 346,145 |        
|                              | Intal                              |                |               | 106,192     |              |           |          | 10,178  |        |         |         | 96,014    |        
|                              | Other Respiratory                  |                |               | 12,397      |              |           |          | 3,179   |        |         |         | 9,218     |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Respiratory    |               |             | 118,589      |           |          |         | 13,357 |         |         |           | 105,232 |        
|                              |                                    | Other          |               |             | 81,027       |           |          |         | 22,060 |         |         |           | 58,967  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    |                | Total Branded |             |              | 1,222,024 |          |         |        | 226,077 |         |           |         | 995,947 | 
|Meridian Medical Technologies |                                    |                | 146,217       |             |              |           | 13,327   |         |        |         | 132,890 |          
|Royalties                     |                                    |                | 2,470         |             |              |           | 2,051    |         |        |         | 419     |          
|Contract manufacturing        |                                    |                |              |             |              |           |         |         |        |         |        |          
|All other                     |                                    |                |              |             |              |           |         |         |        |         |        |          
|                              |                                    |                |               |             |              |           |          |         |       
|                              | Total trademark and product rights |                | $             | 1,370,711   |              |           | $        | 241,455 |        |         | $       | 1,129,256 |        
|                              |                                    |                |               |             |              |           |          |         |       

35



---



##### Table of Contents





| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The amounts for impairments and amortization expense and the
    amortization period used for the three months ended
    March 31, 2004 and 2005 are as follows:

|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |   |        |        |        |       |        |       |        | 
|----------------------------- | ---------------------------------- | ------------------ | ------------- | ------------ | - | - | ------------------ | ------ | ----- | ----------- |  | ------------ | ------- |  | - | ------ | ------ | ------ | ----- | ------ | ----- | ------ | 
|                              |                                    | Three months ended |               |              |   |   | Three months ended |       
|                              |                                    | March 31, 2005     |               |              |   |   | March 31, 2004     |       
|                              |                                    |                    |               |              |   |   |                    |       
|                              |                                    |                    |               | Amortization |   |   | Life               |        |       |             |  | Amortization |        
|                              |                                    | Impairments        |               | Expense      |   |   | (Years)            |        |       | Impairments |  |              | Expense | 
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         | 
|                              |                                    | (in thousands)     |               |              |   |   | (in thousands)     |       
|Branded                       |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |   |        |        |        |       |       
|                              | Altace                             |                    | $             |             |   |   | $                  | 3,225  |       |             |  | 23           |         |  | $ |       |        |        | $     | 2,304  |      
|                              | Other Cardiovascular               |                    |               |             |   |   |                    | 1,638  |       |             |  |              |         |  |   |       |        |        |       | 1,178  |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  
|                              |                                    | Cardiovascular     |               |              |  |   |                    |        | 4,863 |             |  |              |         |  |   |        |       |        |       |        | 3,482 |       
|                              |                                    | Anti-infective     |               |              |  |   |                    |        | 2,633 |             |  |              |         |  |   |        |       |        |       |        | 2,632 |       
|                              |                                    | Critical care      |               |              |  |   |                    |        | 264   |             |  |              |         |  |   |        |       |        |       |        | 166   |       
|                              |                                    | Endocrinology      |               |              |  |   |                    |        | 238   |             |  |              |         |  |   |        | 14,362 |        |       |        | 655   |       
|                              | Skelaxin                           |                    |               |             |   |   |                    | 3,887  |       |             |  | 13.5         |         |  |   |       |        |        |       | 2,550  |      
|                              | Sonata                             |                    |               |             |   |   |                    | 2,993  |       |             |  | 15.5         |         |  |   |       |        |        |       | 3,375  |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  
|                              |                                    | Neuroscience       |               |              |  |   |                    |        | 6,880 |             |  |              |         |  |   |        |       |        |       |        | 5,925 |       
|                              | Intal                              |                    |               |             |   |   |                    | 1,361  |       |             |  | 20           |         |  |   |       |        |        |       | 1,065  |      
|                              | Other respiratory                  |                    |               |             |   |   |                    | 134    |       |             |  |              |         |  |   |       |        |        |       | 143    |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  
|                              |                                    | Respiratory        |               |              |  |   |                    |        | 1,495 |             |  |              |         |  |   |        |       |        |       |        | 1,208 |       
|                              |                                    | Other              |               |              |  |   |                    |        | 1,188 |             |  |              |         |  |   |        | 20,240 |        |       |        | 1,614 |       
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  
|                              |                                    |                    | Total Branded |              |   |  |                    |        |       | 17,561      |  |              |         |  |   |        |        | 34,602 |       |        |       | 15,682 | 
|Meridian Medical Technologies |                                    |                    |              |              |   |   | 1,291              |        |       |             |  |              |         |  |  |        |        |        | 1,531 |       
|Royalties                     |                                    |                    |              |              |   |   | 11                 |        |       |             |  |              |         |  |  |        |        |        | 11    |       
|Contract manufacturing        |                                    |                    |              |              |   |   |                   |        |       |             |  |              |         |  |  |        |        |        |      |       
|All other                     |                                    |                    |              |              |   |   |                   |        |       |             |  |              |         |  |  |        |        |        |      |       
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  
|                              | Total trademark and product rights |                    | $             |             |   |   | $                  | 18,863 |       |             |  |              |         |  | $ | 34,602 |        |        | $     | 17,224 |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |  

36



---



##### Table of Contents





|                              |                                    |                |               |              |                |         |       |             |              |        |         |         |        |         |       |        |        |        | 
|----------------------------- | ---------------------------------- | -------------- | ------------- | ------------ | -------------- | ------- | ----- | ----------- | ------------ | ------ | ------- | ------- | ------ | ------- | ----- | ------ | ------ | ------ | 
|                              |                                    | 2003           |               |              | 2004           |        
|                              |                                    |                |               |              |                |        
|                              |                                    |                |               | Amortization |                |         |       |             | Amortization |       
|                              |                                    | Impairments    |               |              | Expense        |         |       | Impairments |              |        | Expense |        
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    | (in thousands) |               |              | (in thousands) |        
|Branded                       |                                    |                |               |              |                |         |       |             |              |        |         |         |        |         |       |       
|                              | Altace                             |                | $             |             |                |         | $     | 9,254       |              |        | $       |        |        |         | $     | 10,135 |       
|                              | Other Cardiovascular               |                |               |             |                |         |       | 3,863       |              |        |         | 3,618   |        |         |       | 5,117  |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    | Cardiovascular |               |              |               |         |       |             | 13,117       |        |         |         | 3,618  |         |       |        | 15,252 |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    | Anti-infective |               |              |               |         |       |             | 10,019       |        |         |         | 11,042 |         |       |        | 10,420 |       
|                              |                                    | Critical care  |               |              | 1,206          |         |       |             | 832          |        |         |         | 3,274  |         |       |        | 760    |       
|                              |                                    | Endocrinology  |               |              |               |         |       |             | 1,640        |        |         |         | 16,169 |         |       |        | 1,467  |       
|                              | Skelaxin                           |                |               |             |                |         |       | 5,525       |              |        |         |        |        |         |       | 11,558 |       
|                              | Sonata                             |                |               |             |                |         |       | 7,313       |              |        |         | 88,000  |        |         |       | 12,635 |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    | Neuroscience   |               |              |               |         |       |             | 12,838       |        |         |         | 88,000 |         |       |        | 24,193 |       
|                              | Intal                              |                |               |             |                |         |       | 4,259       |              |        |         |        |        |         |       | 4,558  |       
|                              | Other Respiratory                  |                |               | 5,015        |                |         |       | 705         |              |        |         | 149     |        |         |       | 564    |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    | Respiratory    |               |              | 5,015          |         |       |             | 4,964        |        |         |         | 149    |         |       |        | 5,122  |       
|                              |                                    | Other          |               |              | 110,970        |         |       |             | 5,068        |        |         |         | 38,529 |         |       |        | 4,790  |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              |                                    |                | Total Branded |              |                | 117,191 |       |             |              | 48,478 |         |         |        | 160,781 |       |        |        | 62,004 | 
|Meridian Medical Technologies |                                    |                |              |              |                |         | 6,125 |             |              |        | 3,120   |         |        |         | 5,885 |       
|Royalties                     |                                    |                |              |              |                |         | 42    |             |              |        |        |         |        |         | 42    |       
|Contract manufacturing        |                                    |                |              |              |                |         |      |             |              |        |        |         |        |         |      |       
|All other                     |                                    |                |              |              |                |         |      |             |              |        |        |         |        |         |      |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        
|                              | Total trademark and product rights |                | $             | 117,191      |                |         | $     | 54,645      |              |        | $       | 163,901 |        |         | $     | 67,931 |       
|                              |                                    |                |               |              |                |         |       |             |              |        |         |        



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The remaining patent life compared to the life of the trademarks
    and product rights for significant products is as follows:

|          |  |                                  |                  |                     |        |  |                   | 
|--------- |  | -------------------------------- | ---------------- | ------------------- | ------ |  | ----------------- | 
|          |  | Remaining Life at March 31, 2005 |                 
|          |  |                                  |                 
|          |  |                                  |                  | Trademark & Product |       
|          |  | Patent                           |                  |                     | Rights | 
|          |  |                                  |                  |                     |        | 
|Altace    |  |                                  | 4 years 1 month  |                     |        |  | 16 years 9 months | 
|Skelaxin* |  |                                  | 3 months         |                     |        |  | 11 years 9 months | 
|Sonata    |  |                                  | 3 years 3 months |                     |        |  | 13 years 9 months | 
|Intal     |  |                                  |                 |                     |        |  | 17 years 8 months | 



|  |                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | When we acquired the Skelaxin patent, it was under challenge by
    third parties. These challenges continue. Considering the
    existence of these challenges we chose to amortize the patent
    rights over a shorter period. If we are successful in defending
    the patent, the remaining legal life may extend well beyond
    three 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

37



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | trends. Should our minimum purchase requirements under supply
    agreements or if our estimated 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 |  
|                                                          |  |      |         |      |            |  

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  |  
|                       |  |      |         |      |            |  

38



---



##### Table of Contents



Accrual for Chargebacks (in
thousands):


|                     |  |      |         |      |            |   |         |  
|-------------------- |  | ---- | ------- | ---- | ---------- | - | ------- | -
|                     |  |      |         | 2004 |           
|                     |  | 2005 |         |      | (restated) |  
|                     |  |      |         |      |            |  
|Balance at 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  |  
|                     |  |      |         |      |            |  





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

39



---



##### Table of Contents






RISK FACTORS


Before you purchase our securities, you should carefully
consider the risks described below and the other information
contained in this report, including our unaudited consolidated
financial statements and related notes. You should also consider
the information contained in our annual report on Form 10-K
for the year ended December 31, 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, derivative and ERISA litigation could have a
    material adverse effect on our business.









40



---



##### Table of Contents

















41



---



##### Table of Contents











| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot successfully enforce our rights under the
    patents relating to two of our largest products,
    Altace® and Skelaxin®, 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.





42



---



##### Table of Contents















43



---



##### Table of Contents







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





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management has 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 the 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.



44



---



##### Table of Contents





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





| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 ED and FSD;                                                
|
| |  | 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.                                                                                        

45



---



##### Table of Contents







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







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



46



---



##### Table of Contents







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





47



---



##### Table of Contents













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





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





48



---



##### Table of Contents







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





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



49



---



##### Table of Contents





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





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







50



---



##### Table of Contents







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

3 4




| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 DoD and other government
    entities is subject to risks associated with doing business with
    the government.



51



---



##### Table of Contents









| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 before we realize all of the benefits of the
    agreement, it could be assigned to another company by Wyeth, or
    Wyeth could market a competing product.





52



---



##### Table of Contents







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





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



53



---



##### Table of Contents





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





54



---



##### Table of Contents















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



55



---



##### Table of Contents









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





56



---



##### Table of Contents







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







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



57



---



##### Table of Contents





The Medicare Prescription Drug, Improvement and Modernization
Act of 2003




| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The 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.


58



---



##### Table of Contents







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

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® and Skelaxin®;                                          
|
| |  | expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;                                                                             

59



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
    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 Disclosure about Market
    Risk







60



---



##### Table of Contents










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



61



---



##### Table of Contents














PART II  OTHER INFORMATION







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








|        |                                 
|------- | --------------------------------
|Item 6. | Exhibits and Reports on Form 8-K



| |    |    |  |   |  |                                                                                                                                                                            
| | -- | -- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 James R. Lattanzi, Chief Financial Officer of
    King Pharmaceuticals, Inc. Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.               
| | 32 | .1 |  |  |  | Certification of 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 James R. Lattanzi, Chief Financial Officer of
    King Pharmaceuticals, Inc. Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.               







| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) On February 22, 2005, we furnished under
    Item 2.02 a press release regarding the completion of a
    previously announced review of the reserve for product returns.                                                                                                      
|
| | (2) On March 1, 2005, we furnished under
    Item 1.02 a press release announcing the mutual agreement
    to terminate the Agreement and Plan of Merger by and among Mylan
    Laboratories, Inc., Summit Merger Corporation and King, and the
    related Termination Agreement.
|
| | (3) On March 17, 2005 we furnished under
    Item 2.02 a press release announcing our financial results
    for the fourth quarter and year ended December 31, 2004.                                                                                                              
|
| | (4) On March 21, 2005 we filed under Item 1.01 a
    material definitive agreement, the King Pharmaceuticals, Inc.
    Severance Pay Plan: Tier I as effective March 15, 2005.                                                                                                    

62



---



##### Table of Contents






SIGNATURES






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



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

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





| |     |                      
| | --- | ---------------------
| | By: | /s/ James R. Lattanzi

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



63