##### Table of Contents



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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2008ORo

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

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
    Large
    accelerated
    filer þ
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o  o þ




---



##### 



TABLE OF
    CONTENTS
   
 PagePart I  Financial
    InformationItem 1.

Financial Statements


3Condensed Consolidated Balance Sheets


3Condensed Consolidated Statements of
    Operations


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


5Condensed Consolidated Statements of Cash
    Flows


6Notes to Condensed Consolidated Financial
    Statements


7Item 2.

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


33Item 3.

Quantitative and Qualitative Disclosures about
    Market Risk


62Item 4.

Controls and Procedures


62Part II  Other
    InformationItem 1.

Legal Proceedings


62Item 1A.

Risk Factors


62Item 6.

Exhibits


63Signatures


64EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO   2




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##### Table of Contents



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


December 31,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
1,231,451


$
20,009Investments in debt securities


71,823



1,344,980Marketable securities


795



1,135Accounts receivable, net of allowance of $4,733 and $5,297


168,597



183,664Inventories


92,391



110,308Deferred income tax assets


79,651



100,138Income taxes receivable






20,175Prepaid expenses and other current assets


55,396



39,245Total current assets


1,700,104



1,819,654Property, plant and equipment, net


257,166



257,093Intangible assets, net


655,472



780,974Goodwill


129,150



129,150Deferred income tax assets


357,418



343,700Investment in debt securities


343,912



Other assets (includes restricted cash of $16,486 and $16,480)


68,533



96,251Total assets

$
3,511,755


$
3,426,822LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
68,900


$
76,481Accrued expenses


226,508



376,604Income taxes payable


22,674



Total current liabilities


318,082



453,085Long-term debt


400,000



400,000Other liabilities


60,810



62,980Total liabilities


778,892



916,065Commitments and contingencies (Note 8)Shareholders equity


2,732,863



2,510,757Total liabilities and shareholders equity

$
3,511,755


$
3,426,822    3




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Revenues:Net sales

$
369,989


$
524,812


$
1,156,072


$
1,542,848Royalty revenue


18,456



20,042



61,257



60,762Total revenues


388,445



544,854



1,217,329



1,603,610Operating costs and expenses:Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below


101,465



197,761



295,111



434,745Selling, general and administrative, exclusive of co-promotion
    fees


93,291



136,286



307,102



384,324Co-promotion fees


5,987



48,971



34,007



142,453Total selling, general and administrative expense


99,278



185,257



341,109



526,777Research and development


33,855



34,889



111,025



104,515Research and
    development-in-process
    upon acquisition






200



5,500



3,300Total research and development


33,855



35,089



116,525



107,815Depreciation and amortization


29,695



36,762



121,198



112,852Asset impairments






147,838



39,429



222,648Restructuring charges (Note 12)


1,153



20,274



1,670



20,734Total operating costs and expenses


265,446



622,981



915,042



1,425,571Operating income (loss)


122,999



(78,127
)


302,287



178,039Other income (expense):Interest income


8,110



10,678



31,000



28,461Interest expense


(1,828
)


(1,792
)


(5,470
)


(5,670
)Loss on investment






(10,453
)






(10,453
)Other, net


(1,024
)


(416
)


(1,851
)


(681
)Total other income (expense)


5,258



(1,983
)


23,679



11,657Income (loss) from continuing operations before income taxes


128,257



(80,110
)


325,966



189,696Income tax expense (benefit)


43,507



(39,583
)


110,562



49,310Income (loss) from continuing operations


84,750



(40,527
)


215,404



140,386Discontinued operations:Loss from discontinued operations






(16
)






(351
)Income tax benefit






(5
)






(125
)Total loss from discontinued operations, net






(11
)






(226
)Net income (loss)

$
84,750


$
(40,538
)

$
215,404


$
140,160Income (loss) per common share:Basic:Income (loss) from continuing operations

$
0.35


$
(0.17
)

$
0.88


$
0.58Total loss from discontinued operations














Net income (loss)

$
0.35


$
(0.17
)

$
0.88


$
0.58Diluted:Income (loss) from continuing operations

$
0.34


$
(0.17
)

$
0.88


$
0.57Total loss from discontinued operations














Net income (loss)

$
0.34


$
(0.17
)

$
0.88


$
0.57    4




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##### Table of Contents



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


Retained


ComprehensiveShares


Amount


Earnings


Income (Loss)


TotalBalance at December 31, 2006


243,151,223


$
1,244,986


$
1,043,902


$
(282
)

$
2,288,606Comprehensive income:Net income










140,160







140,160Reclassification of unrealized losses on marketable securities
    to earnings, net of tax of $377














615



615Foreign currency translation














1,126



1,126Total comprehensive income


















141,901Adoption of Financial Accounting Standards Board Interpretation
    No. 48










(1,523
)






(1,523
)Stock-based award activity


1,263,325



29,564











29,564Balance at September 30, 2007


244,414,548


$
1,274,550


$
1,182,539


$
1,459


$
2,458,548Balance at December 31, 2007


245,937,709


$
1,283,440


$
1,225,360


$
1,957


$
2,510,757Comprehensive income:Net income










215,404







215,404Net unrealized loss on investments in debt securities, net of
    taxes of $8,693














(13,897
)


(13,897
)Foreign currency translation














(1,018
)


(1,018
)Total comprehensive income


















200,489Stock-based award activity


531,630



21,617











21,617Balance at September 30, 2008


246,469,339


$
1,305,057


$
1,440,764


$
(12,958
)

$
2,732,863    5




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
 (In thousands)
 (Unaudited)
  Nine Months Ended September 30,2008


2007Cash flows provided by operating activities

$
349,884


$
426,995Cash flows from investing activities:Transfers to restricted cash


(6
)


(392
)Purchases of investments in debt securities


(279,175
)


(1,574,031
)Proceeds from maturities and sales of investments in debt
    securities


1,185,830



1,412,340Purchases of property, plant and equipment


(45,523
)


(36,672
)Proceeds from sale of property and equipment


10,390



3Acquisition of
    Avinza®


(43
)


(296,664
)Loan repayment from Ligand






37,750Purchases of intellectual property and product rights


(7,890
)


(67,932
)Net cash provided by (used in) investing activities


863,583



(525,598
)Cash flows from financing activities:Net (payments) proceeds related to stock-based award activity


(2,025
)


11,296Debt issuance costs






(1,527
)Net cash (used in) provided by financing activities


(2,025
)


9,769Increase (decrease) in cash and cash equivalents


1,211,442



(88,834
)Cash and cash equivalents, beginning of period


20,009



113,777Cash and cash equivalents, end of period

$
1,231,451


$
24,943    6




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008 and 2007
 (In thousands, except share and per share data)
 (Unaudited)
  1.
    General  Form 10-Q Rule 10-01 Regulation S-X Form 10-K
    2.
    Earnings
    Per Share    Three Months Ended September 30,


Nine Months Ended September 30,2008


2007


2008


2007Basic income per common share:Weighted average common shares


243,695,777



243,119,415



243,475,338



242,751,864Diluted income per common share:Weighted average common shares


243,695,777



243,119,415



243,475,338



242,751,864Effect of stock options


84,090







52,631



519,086Effect of dilutive share awards


2,054,129







1,655,874



871,350Weighted average common shares


245,833,996



243,119,415



245,183,843



244,142,300        7




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  1 4
  3.
    Fair
    Value Measurements  Cash and Cash Equivalents.
  Marketable Securities.
  Investments in Debt Securities. Accounting for Certain Investments in Debt and
    Equity Securities,
       8




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value
    Measurements No. 157-2, Effective Date of FASB Statement No. 157, The Fair
    Value Option for Financial Assets and Financial Liabilities contract-by-contract
    Fair Value Measurements at September 30, 2008 UsingQuoted Prices in


Significant Other


SignificantActive Markets for


Observable


UnobservableSeptember 30,


Identical Assets


Inputs


InputsDescription

2008


(Level 1)


(Level 2)


(Level 3)Money Market Funds

$
1,225,092


$
1,225,092


$



$
Marketable Securities


795



795







Investments in Debt Securities


415,735











415,735Total

$
1,641,622


$
1,225,887


$



$
415,735      9




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value Measurements UsingSignificant UnobservableInputs (Level 3)Investments in DebtSecuritiesBeginning balance, December 31, 2007

$
Total gains or losses (realized/unrealized)Included in other comprehensive income (loss)


(28,418
)Transfers to Level 3


569,775Ending balance, March 31, 2008

$
541,357Total gains or losses (realized/unrealized)Included in other comprehensive income (loss)


(5,648
)Settlements


(103,675
)Transfers out of Level 3


(16,075
)Ending balance, June 30, 2008

$
415,959Total gains or losses (realized/unrealized)Included in other comprehensive income (loss)


11,476Settlements


(11,700
)Transfers out of Level 3


Ending balance, September 30, 2008

$
415,735     4.
    Inventories   September 30,


December 31,2008


2007Raw materials

$
109,877


$
129,781Work-in-process


30,065



27,590Finished goods (including $4,043 and $3,901 of sample inventory,
    respectively)


59,465



61,324199,407



218,695Inventory valuation allowance


(107,016
)


(108,387
)Total inventories

$
92,391


$
110,308   ®
 10




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ® ® ® ®
  5.
    Property,
    Plant and Equipment  ®
    6.
    Acquisitions,
    Dispositions, Co-Promotions and Alliances    Hart-Scott-Rodino
   11




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business Combinations
  ® ® ® ® ®
  ®
  ® ® ® ®
 12




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  ® ®
    ® ® ® ®
  ®
  
    If calendar year net sales are $200,000 or less the royalty
    payment will be 5% of all net sales. 13




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    If calendar year net sales are greater than $200,000 then the
    royalty payment will be 10% of all net sales up to $250,000,
    plus 15% of net sales greater than $250,000.  ® ® ®
    Intangible assets

$
285,700Goodwill


7,997Inventory


2,800$
296,497     tm ® tm ® tm ® tm
  7.
    Intangible
    Assets and Goodwill    September 30, 2008


December 31, 2007Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
854,559


$
475,833


$
890,091


$
407,264Patents


451,025



174,538



447,821



149,959Other intangibles


1,345



1,086



1,345



1,060Total intangible assets

$
1,306,929


$
651,457


$
1,339,257


$
558,283    14




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ® ® ® ®
  ® en
    banc ® ® ®
  ® ® ® ® ® ® ® ® ®
    Branded


MeridianSegment


Segment


TotalGoodwill

$
20,740


$
108,410


$
129,150   8.
    Commitments
    and Contingencies  Intellectual
    Property Matters
  Altace®
  ® ® ®
 15




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ® ®
  ®
  Skelaxin®
  ® ® ® ® ®
  30-month 30-month 30-month
 16




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ®
  ® ® ® ®
  ® ® ®
 17




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Avinza®
  ® ®
  ® ® ®
  Adenoscan®
  ®
  Average
    Wholesale Price Litigation
  In re:
    Pharmaceutical Industry Average Wholesale Pricing Litigation
 18




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Governmental
    Pricing Investigation and Related Matters
       19




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
    and/or
       20




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fen/Phen
    Litigation
  In re Fen-Phen Litigation. and/or
  ®
  ®
     21




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Hormone
    Replacement Therapy
  In re: Prempro Products
    Liability Litigation
  Other
    Contingencies
  ® ®
    9.
    Accounting
    Developments  14-1, Accounting for Convertible Debt Instruments that May be
    Settled in Cash Upon Conversion 14-1). 14-1 14-1 14-1, 1 4
 22




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14-1 14-1
  Disclosures about Derivative
    Instruments and Hedging Activities  an amendment of
    FASB Statement No. 133
  07-01, Accounting for Collaborative Arrangements 07-01). 07-01 07-01 07-01
  Business Combinations
  10.
    Income
    Taxes      11.
    Segment
    Information   23




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
      Three Months EndedSeptember 30,


Nine Months Ended September 30,2008


2007


2008


2007Total revenues:Branded pharmaceuticals

$
301,879


$
472,363


$
986,966


$
1,388,381Meridian Auto-Injector


67,515



47,919



165,687



141,830Royalties


18,456



20,042



61,257



60,762Contract manufacturing


109,874



186,631



363,210



503,597All other


(63
)


2,496



2,345



3,945Eliminations


(109,216
)


(184,597
)


(362,136
)


(494,905
)Consolidated total net revenues

$
388,445


$
544,854


$
1,217,329


$
1,603,610Segment profit:Branded pharmaceuticals

$
227,701


$
298,590


$
761,710


$
1,031,975Meridian Auto-Injector


42,810



28,750



103,868



83,473Royalties


16,175



17,600



53,772



53,250Contract manufacturing


359



(478
)


537



(109
)All other


(65
)


2,631



2,331



276Other operating costs and expense


(163,981
)


(425,220
)


(619,931
)


(990,826
)Other income


5,258



(1,983
)


23,679



11,657Income (loss) from continuing operations before tax

$
128,257


$
(80,110
)

$
325,966


$
189,696   24




---



##### Table of Contents



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


As ofSeptember 30,


December 31,2008


2007Total assets:Branded pharmaceuticals

$
3,165,118


$
3,097,153Meridian Auto-Injector


319,476



299,098Royalties


27,078



30,562Contract manufacturing and all other


83



9Consolidated total assets

$
3,511,755


$
3,426,822     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007Total revenues:Neuroscience

$
150,084


$
155,316


$
466,377


$
460,134Hospital


70,084



75,367



207,987



219,519Acute care


14,801



19,828



50,004



58,668Legacy:Cardiovascular/metabolic


63,441



205,770



251,623



605,061Other


3,469



16,082



10,975



44,999Consolidated branded pharmaceutical revenues

$
301,879


$
472,363


$
986,966


$
1,388,381   12.
    Restructuring
    Activities  ®
  ®
    tm
 25




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##### Table of Contents



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











AccruedBalance at


Income








Balance atDecember 31,


Statement


Cash


Non-Cash


September 30,2007


Impact in 2008


Payments


Costs


2008Third quarter of 2008 actionEmployee separation payments

$



$
265


$
9


$
2


$
254Third quarter of 2007 actionEmployee separation payments


21,144



1,530



22,536







138Contract termination






(103
)


(300
)


197



Accelerated depreciation(1)






(88
)






(88
)


Other


880



201



1,081







First quarter of 2007 actionEmployee separation payments


1,061



(1,061
)










Third quarter of 2006 actionEmployee separation payments


3,475



82



661



129



2,767Accelerated depreciation(1)






2,023







2,023



Fourth quarter of 2005 actionEmployee separation payments


774



756



1,486







44$
27,334


$
3,605


$
25,473


$
2,263


$
3,203     (1)
    
    Included in depreciation and amortization on the Consolidated
    Statements of Operations.    13.
    Stock-Based
    Compensation     26




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            14.
    Change in
    Estimate  ® ® ® ® ®
   27




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Guarantor
    Financial Statements  1 4
   28




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
 (In thousands)
 (Unaudited)
  September 30, 2008


December 31, 2007Non-














Non-Guarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
1,222,691


$
2,894


$
5,866


$



$
1,231,451


$
9,718


$
4,645


$
5,646


$



$
20,009Investments in debt securities


71,823















71,823



1,344,980















1,344,980Marketable securities


795















795



1,135















1,135Accounts receivable, net


(42
)


167,848



791







168,597



9



182,575



1,080







183,664Inventories


62,813



29,577



1







92,391



76,981



33,361



269



(303
)


110,308Deferred income tax assets


51,626



28,025











79,651



54,917



45,182



39







100,138Income tax receivable






















18,721



1,454











20,175Prepaid expenses and other current assets


47,568



7,831



(3
)






55,396



28,315



10,926



4







39,245Total current assets


1,457,274



236,175



6,655







1,700,104



1,534,776



278,143



7,038



(303
)


1,819,654Property, plant and equipment, net


131,938



125,228











257,166



125,847



131,246











257,093Intangible assets, net






652,926



2,546







655,472







778,248



2,726







780,974Goodwill






129,150











129,150







129,150











129,150Deferred income tax assets


7,903



349,452



63







357,418



4,529



339,107



64







343,700Investment in debt securities


343,912















343,912



















Other assets


40,368



28,165











68,533



42,315



53,936











96,251Investments in subsidiaries


1,875,031











(1,875,031
)






1,671,776











(1,671,776
)


Total assets

$
3,856,426


$
1,521,096


$
9,264


$
(1,875,031
)

$
3,511,755


$
3,379,243


$
1,709,830


$
9,828


$
(1,672,079
)

$
3,426,822LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
51,249


$
17,596


$
55


$



$
68,900


$
52,664


$
23,408


$
409


$



$
76,481Accrued expenses


43,214



183,276



18







226,508



69,849



306,732



23







376,604Income taxes payable


24,662



(1,988
)










22,674



















Total current liabilities


119,125



198,884



73







318,082



122,513



330,140



432







453,085Long-term debt


400,000















400,000



400,000















400,000Other liabilities


55,628



5,182











60,810



55,227



7,753











62,980Intercompany payable (receivable)


548,810



(549,486
)


676











290,443



(291,114
)


671







Total liabilities


1,123,563



(345,420
)


749







778,892



868,183



46,779



1,103







916,065Shareholders equity


2,732,863



1,866,516



8,515



(1,875,031
)


2,732,863



2,511,060



1,663,051



8,725



(1,672,079
)


2,510,757Total liabilities and shareholders equity

$
3,856,426


$
1,521,096


$
9,264


$
(1,875,031
)

$
3,511,755


$
3,379,243


$
1,709,830


$
9,828


$
(1,672,079
)

$
3,426,822  29




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##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
    (In thousands)
    (Unaudited)
  Three Months Ended September 30, 2008


Three Months Ended September 30, 2007Non-














Non-Guarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


ConsolidatedRevenues:Net sales

$
96,526


$
372,073


$
1,141


$
(99,751
)

$
369,989


$
136,214


$
522,082


$
140


$
(133,624
)

$
524,812Royalty revenue






18,456











18,456







20,042











20,042Total revenues


96,526



390,529



1,141



(99,751
)


388,445



136,214



542,124



140



(133,624
)


544,854Operating costs and expenses:Cost of revenues


27,727



172,779



755



(99,796
)


101,465



126,006



205,302



77



(133,624
)


197,761Selling, general and administrative


51,926



47,297



55







99,278



79,024



106,189



44







185,257Research and development


1,764



32,091











33,855



1,265



33,824











35,089Depreciation and amortization


4,730



24,905



60







29,695



4,873



31,829



60







36,762Asset impairments


























147,838











147,838Restructuring charges


26



1,127











1,153



2,967



17,307











20,274Total operating costs and expenses


86,173



278,199



870



(99,796
)


265,446



214,135



542,289



181



(133,624
)


622,981Operating income (loss)


10,353



112,330



271



45



122,999



(77,921
)


(165
)


(41
)






(78,127
)Other income (expense):Interest income


8,092



14



4







8,110



10,650



23



5







10,678Interest expense


(1,823
)


(5
)










(1,828
)


(1,781
)


(11
)










(1,792
)Loss on investment






















(10,453
)














(10,453
)Other, net


(1,084
)


776



(716
)






(1,024
)


(731
)


7



308







(416
)Equity in earnings (loss) of subsidiaries


93,757











(93,757
)






11,345











(11,345
)


Intercompany interest (expense) income


(2,704
)


2,710



(6
)










5,523



(5,571
)


48







Total other income (expense)


96,238



3,495



(718
)


(93,757
)


5,258



14,553



(5,552
)


361



(11,345
)


(1,983
)Income (loss) from continuing operations before income taxes


106,591



115,825



(447
)


(93,712
)


128,257



(63,368
)


(5,717
)


320



(11,345
)


(80,110
)Income tax expense (benefit)


21,841



21,651



15







43,507



(22,830
)


(16,998
)


245







(39,583
)Income (loss) from continuing operations


84,750



94,174



(462
)


(93,712
)


84,750



(40,538
)


11,281



75



(11,345
)


(40,527
)Discontinued operations:Loss from discontinued operations


























(16
)










(16
)Income tax benefit


























(5
)










(5
)Total loss from discontinued operations, net


























(11
)










(11
)Net income (loss)

$
84,750


$
94,174


$
(462
)

$
(93,712
)

$
84,750


$
(40,538
)

$
11,270


$
75


$
(11,345
)

$
(40,538
)  30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
    (In thousands)
    (Unaudited)
  Nine Months Ended September 30, 2008


Nine Months Ended September 30, 2007Non-














Non-Guarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
326,231


$
1,157,558


$
1,420


$
(329,137
)

$
1,156,072


$
394,909


$
1,538,190


$
267


$
(390,518
)

$
1,542,848Royalty revenue






61,257











61,257







60,762











60,762Total revenues


326,231



1,218,815



1,420



(329,137
)


1,217,329



394,909



1,598,952



267



(390,518
)


1,603,610Operating costs and expenses:Cost of revenues


94,076



529,399



1,076



(329,440
)


295,111



219,301



605,649



313



(390,518
)


434,745Selling, general and administrative


186,684



154,349



76







341,109



218,094



308,544



139







526,777Research and development


4,068



112,457











116,525



3,287



104,528











107,815Depreciation and amortization


14,755



106,263



180







121,198



14,553



98,119



180







112,852Asset impairments


114



39,315











39,429







222,648











222,648Restructuring charges


(330
)


2,000











1,670



3,427



17,307











20,734Total operating costs and expenses


299,367



943,783



1,332



(329,440
)


915,042



458,662



1,356,795



632



(390,518
)


1,425,571Operating income (loss)


26,864



275,032



88



303



302,287



(63,753
)


242,157



(365
)






178,039Other income (expense):Interest income


30,910



81



9







31,000



28,369



83



9







28,461Interest expense


(5,443
)


(27
)










(5,470
)


(5,633
)


(37
)










(5,670
)Loss on investment






















(10,453
)














(10,453
)Other, net


(1,613
)


7



(245
)






(1,851
)


(1,115
)






434







(681
)Equity in earnings of subsidiaries


204,577











(204,577
)






171,844











(171,844
)


Intercompany interest (expense) income


(9,424
)


9,443



(19
)










(5,465
)


5,536



(71
)






Total other income (expenses)


219,007



9,504



(255
)


(204,577
)


23,679



177,547



5,582



372



(171,844
)


11,657Income (loss) from continuing operations before income taxes


245,871



284,536



(167
)


(204,274
)


325,966



113,794



247,739



7



(171,844
)


189,696Income tax expense (benefit)


30,467



80,054



41







110,562



(26,366
)


75,541



135







49,310Income (loss) from continuing operations


215,404



204,482



(208
)


(204,274
)


215,404



140,160



172,198



(128
)


(171,844
)


140,386Discontinued operations:Loss from discontinued operations


























(351
)










(351
)Income tax benefit


























(125
)










(125
)Total loss from discontinued operations


























(226
)










(226
)Net income (loss)

$
215,404


$
204,482


$
(208
)

$
(204,274
)

$
215,404


$
140,160


$
171,972


$
(128
)

$
(171,844
)

$
140,160  31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
    (In thousands)
    (Unaudited)
  Nine Months Ended September 30, 2008


Nine Months Ended September 30, 2007Non-











Non-Guarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


ConsolidatedCash flows provided by (used in) operating activities

$
69,823


$
279,846


$
215


$
349,884


$
18,388


$
407,461


$
1,146


$
426,995Cash flows from investing activities:Transfers from (to) restricted cash


(6
)










(6
)


(392
)










(392
)Purchases of investments in debt securities


(279,175
)










(279,175
)


(1,574,031
)










(1,574,031
)Proceeds from maturities and sales of investments in debt
    securities


1,185,830











1,185,830



1,412,340











1,412,340Purchases of property, plant and equipment


(34,901
)


(10,622
)






(45,523
)


(25,676
)


(10,996
)






(36,672
)Proceeds from sale of property and equipment


10,350



40







10,390







3







3Acquisition of
    Avinza®


(43
)










(43
)


(23
)


(296,641
)






(296,664
)Loan repayment from Ligand


















37,750











37,750Purchases of intellectual property and product rights






(7,890
)






(7,890
)






(67,932
)






(67,932
)Net cash provided by (used in) investing activities


882,055



(18,472
)






863,583



(150,032
)


(375,566
)






(525,598
)Cash flows from financing activities:Net (payments) proceeds related to stock-based award activity


(2,025
)










(2,025
)


11,296











11,296Debt issuance costs


















(1,527
)










(1,527
)Intercompany


263,120



(263,125
)


5







36,864



(37,440
)


576



Net cash provided by (used in) financing activities


261,095



(263,125
)


5



(2,025
)


46,633



(37,440
)


576



9,769Increase (decrease) in cash and cash equivalents


1,212,973



(1,751
)


220



1,211,442



(85,011
)


(5,545
)


1,722



(88,834
)Cash and cash equivalents, beginning of period


9,718



4,645



5,646



20,009



101,210



8,749



3,818



113,777Cash and cash equivalents, end of period

$
1,222,691


$
2,894


$
5,866


$
1,231,451


$
16,199


$
3,204


$
5,540


$
24,943  32




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion contains certain forward-looking
    statements that reflect managements current views of
    future events and operations. This discussion should be read in
    conjunction with the following: (a) Risk
    Factors in our Annual Report on
    Form 10-K
    for the year ended December 31, 2007 and in Part II,
    Item 1A of this report, which are supplemented by the discussion
    which follows; (b) our audited consolidated financial
    statements and related notes which are included in our Annual
    Report on
    Form 10-K
    for the year ended December 31, 2007; 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  Our
    Business
          
    neuroscience (including
    Skelaxin®

    ,
    Avinza®

    and
    Sonata®

    ),
    hospital (including
    Thrombin-JMI®

    and
    Synercid®

    ),
    acute care (including
    Bicillin®

    and
    Intal®

    ), and
    legacy products (including
    Altace®

    ,
    Levoxyl®

    and
    Cytomel®

    ).  ®
  Recent
    Developments
  Tender
    Offer to Acquire Alpharma
   33




---



##### Table of Contents



® ® tm
  ® ® tm ® ® tm ®
  Hart-Scott-Rodino
    Remoxy®
  ® ® ® ®
  ® ® ® 80-proof ®
  ®
 34




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##### Table of Contents



® ®
  Acurox®

    Tablets
  ® ® ® ®
  ® ®
 35




---



##### Table of Contents



II.
    RESULTS
    OF OPERATIONS  Three
    and Nine Months Ended September 30, 2008 and
    2007
    For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2008


2007


2008


2007(In thousands)


(In thousands)Total RevenuesBranded pharmaceuticals

$
301,879


$
472,363


$
986,966


$
1,388,381Meridian Auto-Injector


67,515



47,919



165,687



141,830Royalties


18,456



20,042



61,257



60,762Contract manufacturing


658



2,034



1,074



8,692Other


(63
)


2,496



2,345



3,945Total revenues

$
388,445


$
544,854


$
1,217,329


$
1,603,610Cost of Revenues, exclusive of depreciation, amortization and
    impairmentsBranded pharmaceuticals

$
74,178


$
173,773


$
225,256


$
356,406Meridian Auto-Injector


24,705



19,169



61,819



58,357Royalties


2,281



2,442



7,485



7,512Contract manufacturing


299



2,512



537



8,801Other


2



(135
)


14



3,669Total cost of revenues

$
101,465


$
197,761


$
295,111


$
434,745     For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2008


2007


2008


2007(In thousands)


(In thousands)Gross Sales

$
458,171


$
673,111


$
1,482,548


$
1,975,373Commercial Rebates


15,390



48,902



72,398



142,965Medicare Part D Rebates


3,830



14,334



25,460



43,970Medicaid Rebates


8,045



8,323



29,351



29,219Chargebacks


21,283



26,200



67,069



72,427Returns


2,927



5,900



11,352



11,136Trade Discounts/Other


18,251



24,614



59,589



72,398388,445



544,838



1,217,329



1,603,258Discontinued Operations






(16
)






(352
)Net Sales

$
388,445


$
544,854


$
1,217,329


$
1,603,610   ® ® ®
  ® ® ® ® ®
 36




---



##### Table of Contents



Accrual
    for Rebates, including Administrative Fees (in
    thousands):
  2008


2007Balance at January 1, net of prepaid amounts

$
65,301


$
53,765Current provision related to sales made in current period


67,155



72,088Current provision related to sales made in prior periods


2,982



534Rebates paid


(83,660
)


(67,255
)Balance at March 31, net of prepaid amounts

$
51,778


$
59,132Current provision related to sales made in current period


36,297



72,822Current provision related to sales made in prior periods


(6,490
)


(849
)Rebates paid


(55,692
)


(72,924
)Balance at June 30, net of prepaid amounts

$
25,893


$
58,181Current provision related to sales made in current period


27,225



73,760Current provision related to sales made in prior periods


40



(2,201
)Rebates paid


(34,028
)


(74,672
)Balance at September 30, net of prepaid amounts

$
19,130


$
55,068     ® ® ® ® ® ® ® ®
  ® ® ® ®
 37




---



##### Table of Contents



Accrual
    for Returns (in thousands):
  2008


2007Balance at January 1

$
32,860


$
42,001Current provision


4,450



(1,254
)Actual returns


(4,135
)


(6,295
)Ending balance at March 31

$
33,175


$
34,452Current provision


3,975



6,490Actual returns


(6,845
)


(4,767
)Ending balance at June 30

$
30,305


$
36,175Current provision


2,927



5,900Actual returns


(5,832
)


(4,713
)Ending balance at September 30

$
27,400


$
37,362     Accrual
    for Chargebacks (in thousands):
  2008


2007Balance at January 1

$
11,120


$
13,939Current provision


20,212



23,645Actual chargebacks


(21,080
)


(26,557
)Ending balance at March 31

$
10,252


$
11,027Current provision


25,574



22,582Actual chargebacks


(25,286
)


(22,962
)Ending balance at June 30

$
10,540


$
10,647Current provision


21,283



26,200Actual chargebacks


(22,918
)


(25,289
)Ending balance at September 30

$
8,905


$
11,558  38




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##### Table of Contents



Branded
    Pharmaceuticals Segment
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








(In thousands)Branded Pharmaceutical revenue:Skelaxin®

$
109,990


$
105,653


$
4,337



4.1
%

$
333,095


$
325,778


$
7,317



2.2
%Thrombin-JMI®


66,813



68,968



(2,155
)


(3.1
)


197,585



198,099



(514
)


(0.3
)Altace®


29,950



168,524



(138,574
)


(82.2
)


154,485



488,440



(333,955
)


(68.4
)Avinza®


35,928



31,802



4,126



13.0



102,941



76,051



26,890



35.4Levoxyl®


17,608



20,596



(2,988
)


(14.5
)


53,462



68,237



(14,775
)


(21.7
)Other


41,590



76,820



(35,230
)


(45.9
)


145,398



231,776



(86,378
)


(37.3
)Total revenue

$
301,879


$
472,363


$
(170,484
)


(36.1
)%

$
986,966


$
1,388,381


$
(401,415
)


(28.9
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments

$
74,178


$
173,773


$
(99,595
)


(57.3
)%

$
225,256


$
356,406


$
(131,150
)


(36.8
)%   Sales
    of Key Products
  Skelaxin®
  ® ® ® ®
  ®
  Thrombin-JMI®
  ® ®
  Altace®
  ® ® ® ® ®
 39




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##### Table of Contents



®
  Avinza®
  ® ® ® ®
  ® ® ®
  ®
  Levoxyl®
  ® ® ®
  Other
  ® ®
  ® ® ®
  ® ® ®
 40




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##### Table of Contents



Cost
    of Revenues
  ® ®
      
    A charge of $2.6 million in the in the second quarter of
    2008 primarily associated with minimum purchase requirements
    under a supply agreement to purchase raw materials associated
    with
    Altace®

    .
    A charge of $3.8 million in the second quarter of 2007
    related to the termination of certain contracts.
    An inventory valuation allowance of $17.3 million for raw
    material inventory associated with
    Altace®

    and a charge of $39.9 million for the write-down of prepaid
    raw material inventory associated with
    Altace®

    in the third quarter of 2007. For additional information, please
    see Note 4, Inventories, in Item 1,
    Financial Statements.
    A charge of $24.6 million primarily associated with minimum
    purchase requirements under a supply agreement to purchase raw
    material inventory associated with
    Altace®

    in the third quarter of 2007. For additional information, please
    see Note 4, Inventories, in Item 1,
    Financial Statements.  Meridian
    Auto-Injector
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








(In thousands)Meridian Auto-Injector revenue

$
67,515


$
47,919


$
19,596



40.9
%

$
165,687


$
141,830


$
23,857



16.8
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


24,705



19,169



5,536



28.9



61,819



58,357



3,462



5.9   ® ®
  ® ® ®
 41




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##### Table of Contents



®
    Royalties
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








(In thousands)Royalty revenue

$
18,456


$
20,042


$
(1,586
)


(7.9
)%

$
61,257


$
60,762


$
495



0.8
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


2,281



2,442



(161
)


(6.6
)


7,485



7,512



(27
)


(0.4
)   ®
  ® ® ® ® ®
 42




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##### Table of Contents



Operating
    Costs and Expenses
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








(In thousands)Cost of revenues, exclusive of depreciation, amortization and
    impairments as shown below

$
101,465


$
197,761


$
(96,296
)


(48.7
)%

$
295,111


$
434,745


$
(139,634
)


(32.1
)%Selling, general and administrative


99,278



185,257



(85,979
)


(46.4
)


341,109



526,777



(185,668
)


(35.2
)Research and development


33,855



35,089



(1,234
)


(3.5
)


116,525



107,815



8,710



8.1Depreciation and amortization


29,695



36,762



(7,067
)


(19.2
)


121,198



112,852



8,346



7.4Asset impairments






147,838



(147,838
)


(100.0
)


39,429



222,648



(183,219
)


(82.3
)Restructuring charges


1,153



20,274



(19,121
)


(94.3
)


1,670



20,734



(19,064
)


(91.9
)Total operating costs and expenses

$
265,446


$
622,981


$
(357,535
)


(57.4
)%

$
915,042


$
1,425,571


$
(510,529
)


(35.8
)%   Selling,
    General and Administrative Expenses
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








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

$
93,291


$
136,286


$
(42,995
)


(31.5
)%

$
307,102


$
384,324


$
(77,222
)


(20.1
)%Co-promotion fees


5,987



48,971



(42,984
)


(87.8
)


34,007



142,453



(108,446
)


(76.1
)Total selling, general and administrative

$
99,278


$
185,257


$
(85,979
)


(46.4
)%

$
341,109


$
526,777


$
(185,668
)


(35.2
)%     ® ® ® ® ®
 43




---



##### Table of Contents



®
    Business
    Combinations
  Research
    and Development Expense
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2008 vs. 2007


Ended September 30,


2008 vs. 20072008


2007


$


%


2008


2007


$


%(In thousands)








(In thousands)Research and development

$
33,855


$
34,889


$
(1,034
)


(3.0
)%

$
111,025


$
104,515


$
6,510



6.2
%Research and development 
    in-process upon acquisition






200



(200
)


(100.0
)


5,500



3,300



2,200



66.7Total research and development

$
33,855


$
35,089


$
(1,234
)


(3.5
)%

$
116,525


$
107,815


$
8,710



8.1
%   ® ®
    
    A charge of $3.0 million in the first nine months of 2008
    for our acquisition of in-process research and development
    related to the exercise of our option for a third
    immediate-release opioid product under a License, Development
    and Commercialization Agreement with Acura to develop and
    commercialize certain opioid analgesic products utilizing
    Acuras
    Aversion®

    Technology in the United States, Canada and Mexico. We believe
    there is a reasonable probability of completing the project
    successfully, 44




---



##### Table of Contents



however the success of the project depends on the successful
    outcome of the clinical development program and approval of the
    product by the FDA. The estimated cost to complete the project
    at the time of the execution of the agreement was approximately
    $16.0 million.  
    A charge of $2.5 million in the first nine months of 2008
    for our acquisition of in-process research and development
    associated with our Product Development Agreement with
    CorePharma LLC (CorePharma) to develop new
    formulations of
    Skelaxin®

    . Any intellectual property created as a result of the agreement
    will belong to us and we will grant CorePharma a non-exclusive,
    royalty-free license to use this newly created intellectual
    property with any product not containing metaxalone. The success
    of the project depends on additional development activities and
    FDA approval. The estimated cost to complete the development
    activities at the time of the execution of the agreement was
    approximately $2.5 million.
    A charge of $3.1 million in the first nine months of 2007
    for our acquisition of in-process research development under an
    agreement with Mutual Pharmaceutical Company
    (Mutual) to jointly research and develop one or more
    improved formulations of metaxalone. The development activities
    under the agreement with Mutual ceased in December 2007.  Depreciation
    and Amortization Expense
  ®
  ® ® ®
  ® ®
  ® ® ® ® ® ®
  ®
 45




---



##### Table of Contents



Other
    Operating Expenses
    
    Asset impairment charges of $39.4 million in the second
    quarter of 2008 and $29.3 million in the second quarter of
    2007. The intangible asset impairment charge in the second
    quarter of 2008 was primarily associated with a decline in
    end-user demand for
    Synercid®

    . The intangible asset impairment charge in the second quarter
    of 2007 was primarily related to our decision to no longer
    pursue the development of a new formulation of
    Intal®

    utilizing hydrofluoroalkane as a propellant.
    A charge of $45.6 million in the second quarter of 2007 and
    a charge of $1.4 million in the third quarter of 2007
    related to the write-down of our Rochester, Michigan sterile
    manufacturing facility and certain legacy branded pharmaceutical
    products which were sold to JHP in October 2007. For additional
    information, please see Note 6, Acquisitions,
    Dispositions, Co-promotions and Alliances in Part I,
    Item 1, Financial Statements.
    An intangible asset impairment charge of $146.4 million in
    the third quarter of 2007 related to our
    Altace®

    product. On September 11, 2007 the Circuit Court declared
    invalid the 722 patent that covers our
    Altace®

    product. Following the Circuit Courts decision, we reduced
    the estimated useful life of this product and forecasted net
    sales which reduced the probability-weighted estimated
    undiscounted future cash flows associated with
    Altace®

    intangible assets to a level below their carrying value. We
    determined the fair value of these assets based on
    probability-weighted estimated discounted future cash flows.
    Restructuring charges in the amount of $20.3 million in the
    third quarter of 2007 primarily due to our restructuring
    initiative designed to accelerate a planned strategic shift
    emphasizing our focus in neuroscience, hospital and acute care
    medicine and separation payments associated with the sale of the
    Rochester, Michigan sterile manufacturing facility discussed
    above.  ® ® ® ®
  Non-Operating
    Items
  For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2008


2007


2008


2007(In thousands)


(In thousands)Interest income

$
8,110


$
10,678


$
31,000


$
28,461Interest expense


(1,828
)


(1,792
)


(5,470
)


(5,670
)Loss on investment






(10,453
)






(10,453
)Other, net


(1,024
)


(416
)


(1,851
)


(681
)Total other income (expense)


5,258



(1,983
)


23,679



11,657Income tax expense (benefit)


43,507



(39,583
)


110,562



49,310Discontinued operations






(11
)






(226
)     Interest
    Income
   46




---



##### Table of Contents



Income
    Tax Expense
        Liquidity
    and Capital Resources
  General
         47




---



##### Table of Contents



Fair Value
    Measurements
            Hart-Scott-Rodino
      ®
 48




---



##### Table of Contents



® ® ® ®
  ® ® ®
  ® ® ® ® ®
  ®
  ®
 49




---



##### Table of Contents



® ® ® ®
  ®
  
    If calendar year net sales are $200.0 million or less, the
    royalty payment will be 5% of all net sales.
    If calendar year net sales are greater than $200.0 million,
    then the royalty payment will be 10% of all net sales up to
    $250.0 million, plus 15% of net sales greater than
    $250.0 million.  ® ® ®
  tm ® tm ® tm ® tm
  ® ® ®
 50




---



##### Table of Contents



®
  
    For 2007, 30% of
    Altace®

    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®

    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®

    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®

    net sales, with the fee not to exceed $5.0 million.  ® ®
  tm
  ® ® earn-out
  ® ®
  ®
  ® ®
 51




---



##### Table of Contents



® ® ®
  ® ® ® ®
  Governmental
    Pricing Investigation and Related Matters
    Patent
    Challenges
  ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For theNine Months EndedSeptember 30,2008

2007(In thousands)Net cash provided by operating activities

$
349,884


$
426,995   ®
 52




---



##### Table of Contents



For theNine Months EndedSeptember 30,2008


2007(In thousands)Accounts receivable, net of allowance

$
14,563


$
(397
)Inventories


17,917



38,457Prepaid expenses and other current assets


(16,151
)


(37,047
)Accounts payable


(2,294
)


(17,689
)Accrued expenses and other liabilities


(152,662
)


(26,753
)Income taxes payable


46,411



8,691Deferred revenue


(3,510
)


(3,510
)Other assets


23,177



(5,433
)Deferred taxes


12,957



(98,540
)Total changes in operating assets and liabilities and deferred
    taxes

$
(59,592
)

$
(142,221
)   Investing
    Activities
  For theNine Months EndedSeptember 30,2008

2007(In thousands)Net cash provided by (used in) investing activities

$
863,583


$
(525,598
)     ®
    Financing
    Activities
  For theNine Months EndedSeptember 30,2008

2007(In thousands)Net cash (used in) provided by financing activities

$
(2,025
)

$
9,769    53




---



##### Table of Contents



Certain
    Indebtedness and Other Matters
  1 4 1 4
        dollar-for-dollar
 54




---



##### Table of Contents



Impact
    of Inflation
    Recently
    Issued Accounting Standards
    Critical
    Accounting Policies and Estimates
              
    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 consultants. 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 when
    the product faces potential generic competition, as the
    amortization on the patent is eliminated. Because we have no
    discernible evidence to show a decline in cash flows for
    trademarks and product rights, or for patents, we use the
    straight-line method of amortization for both intangibles. 55




---



##### Table of Contents



GrossCarrying


Accumulated


Net BookAmount


Amortization


Value(In thousands)BrandedAvinza®

$
285,700


$
42,295


$
243,405Skelaxin®


278,853



155,940



122,913Sonata®


61,961



61,961



Neuroscience


626,514



260,196



366,318Synercid®


72,525



40,461



32,064Other hospital


8,442



6,351



2,091Hospital


80,967



46,812



34,155Intal®


34,033



32,573



1,460Bicillin®


92,350



30,345



62,005Other acute care


5,992



5,910



82Acute care


132,375



68,828



63,547Altace®


156,744



156,744



Other legacy products


127,266



76,617



50,649Legacy products


284,010



233,361



50,649Total Branded


1,123,866



609,197



514,669Meridian Auto-Injector


179,332



39,268



140,064Royalties


3,731



2,992



739Contract manufacturing










All other










Total intangible assets

$
1,306,929


$
651,457


$
655,472  56




---



##### Table of Contents



Trademarks, Product


Net BookPatents


Rights and Other


Value(In thousands)BrandedAvinza®

$
243,405


$



$
243,405Skelaxin®


2,800



120,113



122,913Neuroscience


246,205



120,113



366,318Synercid®


29,815



2,249



32,064Other hospital






2,091



2,091Hospital


29,815



4,340



34,155Intal®






1,460



1,460Bicillin®






62,005



62,005Other acute care






82



82Acute care






63,547



63,547Altace®










Other legacy products






50,649



50,649Legacy products






50,649



50,649Total Branded


276,020



238,649



514,669Meridian Auto-Injector






140,064



140,064Royalties


467



272



739Contract manufacturing










All other










Total intangible assets

$
276,487


$
378,985


$
655,472  57




---



##### Table of Contents



Three Months Ended


Three Months EndedSeptember 30, 2008


September 30, 2007Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)BrandedAvinza®

$



$
6,638


$



$
6,638Skelaxin®






5,973







3,887Sonata®














55Neuroscience






12,611







10,580Synercid®






1,491







2,375Other hospital






76







197Hospital






1,567







2,572Intal®






1,459







1,459Bicillin®






926







925Other acute care






82







111Acute care






2,467







2,495Altace®










146,444



7,563Other legacy products






1,429







1,456Legacy products






1,429



146,444



9,019Total Branded






18,074



146,444



24,666Meridian Auto-Injector






1,981







2,012Royalties






185







71Contract manufacturing














All other














Total intangible assets

$



$
20,240


$
146,444


$
26,749  58




---



##### Table of Contents



Nine Months Ended


Nine Months EndedSeptember 30, 2008


September 30, 2007Amortization





AmortizationImpairments


Expense


Impairments


Expense(In thousands)


(In thousands)BrandedAvinza®

$



$
19,915


$



$
15,742Skelaxin®






17,686







11,661Sonata®






315







55Neuroscience






37,916







27,458Synercid®


38,064



6,241







7,125Other hospital






228







1,033Hospital


38,064



6,469







8,158Intal®






4,377



27,693



4,263Bicillin®






2,777







2,776Other acute care






247



1,566



854Acute care






7,401



29,259



7,893Altace®






29,687



146,444



22,591Other legacy products


1,251



4,340







8,889Legacy products


1,251



34,027



146,444



31,480Total Branded


39,315



85,813



175,703



74,989Meridian Auto-Injector






5,846







5,962Royalties






552







93Contract manufacturing














All other














Total intangible assets

$
39,315


$
92,211


$
175,703


$
81,044     Remaining Life at September 30, 2008Trademark &Patent


Product RightsSkelaxin®






5 years 3 monthsAvinza®


9 years 2 months



Intal®






3 monthsSynercid®


5 years 3 months



5 years 3 monthsBicillin®






16 years 9 months   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. We evaluate our entire inventory
    for short dated or slow moving product and inventory commitments
    under supply agreements based on projections of future demand
    and market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with 59




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##### Table of Contents



some of our vendors which contain minimum purchase requirements.
    We estimate future inventory requirements based on current facts
    and trends. Should our minimum purchase requirements under
    supply agreements or if our estimated future inventory
    requirements exceed actual inventory quantities that we will be
    able to sell to our customers, we record a charge in costs of
    revenues.  
    Accruals for rebates, returns and
    chargebacks.  We establish accruals for returns,
    chargebacks and Medicaid, Medicare and commercial rebates in the
    same period we recognize the related sales. The accruals reduce
    revenues and are included in accrued expenses. At the time a
    rebate or chargeback payment is made or a product return is
    received, which occurs with a delay after the related sale, we
    record a reduction to accrued expenses and, at the end of each
    quarter, adjust accrued expenses for differences between
    estimated and actual payments. Due to estimates and assumptions
    inherent in determining the amount of returns, chargebacks and
    rebates, the actual amount of product returns and claims for
    chargebacks and rebates may be different from our estimates.      
    Revenue recognition.  Revenue is recognized
    when title and risk of loss are transferred to customers,
    collection of sales is reasonably assured and we have no further
    performance obligations. This is generally at the time products
    are received by the customer. Accruals for estimated returns,
    rebates and chargebacks, determined based on historical
    experience, reduce revenues at the time of sale and are included
    in accrued expenses. Medicaid and certain other governmental
    pricing programs involve particularly difficult interpretations
    of relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. Royalty revenue is recognized based on a percentage of
    sales (namely, contractually
    agreed-upon
    royalty rates) reported by third parties.  A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
     60




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
    the potential of, including anticipated net sales and
    prescription trends for, our branded pharmaceutical products,
    particularly
    Altace®

    ,
    Skelaxin®

    ,
    Avinza®

    ,
    Thrombin-JMI®

    ,
    Levoxyl®

    and
    Sonata®

    ;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Skelaxin®

    ,
    Avinza®

    and
    Adenoscan®

    ;
    expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the approval of the NDA for
    Remoxy®

    by the FDA;
    the development, approval and successful commercialization of
    Remoxy®

    ,
    Acurox®

    Tablets,
    CorVuetm

    and other products;
    the successful execution of our growth and restructuring
    strategies, including our accelerated strategic shift;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    products manufactured by third parties;
    the potential costs, outcomes and timing of research, clinical
    trials and other development activities involving pharmaceutical
    products, including, but not limited to, the magnitude and
    timing of potential payments to third parties in connection with
    development activities;
    the development of product line extensions;
    the expected timing of the initial marketing of certain products;
    our pending tender offer to acquire all of the outstanding
    shares of Class A Common Stock of Alpharma Inc.;
    products developed, acquired or in-licensed that may be
    commercialized;
    our intent, beliefs 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, cost and timing of various
    pending legal proceedings including the
    Skelaxin®

    and
    Avinza®

    patent challenges, derivative litigation and other legal
    proceedings described in this report;
    expectations regarding the NDA that Purdue submitted to the FDA
    for a reformulated version of its long-acting oxycodone product;
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings; and
    expectations regarding our ability to liquidate our holdings of
    auction rate securities and the temporary nature of the
    unrealized losses recorded in connection with these securities.   61




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Form 10-K,
  Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk          Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Rules 13a-15(f) 15d-15(f)
 PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K
  There are
    risks associated with a potential transaction with Alpharma
    Inc.
   62




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
    Our offer for Alpharma common stock is unsolicited and not
    supported by Alpharmas Board of Directors, and we may not
    be able to consummate the transaction;
    If we consummate the acquisition of Alpharma, the combination
    may not enhance our business as we expect or result in operating
    or product synergies, and could have a negative impact on our
    earnings;
    Incurring approximately $1.0 billion in debt in conjunction
    with the tender offer could adversely affect our financial
    condition and post-merger results of operations;
    Debt service requirements could limit our ability to invest in
    other aspects of our business, such as product development, or
    our ability to engage in other transactions;
    The process of acquiring and integrating Alpharmas
    business with ours,
    and/or the
    measures required to effectively use acquired intellectual
    property, products or other assets, could be time consuming and
    may result in unforeseen operating difficulties
    and/or
    expenses;
    Even assuming a successful tender offer and merger process, we
    may not be able to retain Alpharmas key employees or
    maintain Alpharmas central business and customer
    relationships;
    We have had limited access to information about Alpharma.
    Consequently, there may be unforeseen liabilities or other
    material facts that could adversely affect Alpharmas
    business and, subsequent to consummation of a merger, our
    business. For example:  
    a change of control of Alpharma could trigger a termination or
    modification of intellectual property or other contractual
    rights important to the operation of its business; or
    litigation or other claims made in connection with, or
    inheritance of claims or litigation risks as a result of, the
    acquisition of Alpharma could be time consuming and may create
    unforeseen difficulties and expenses;  
    Subsequent to consummation of a merger, our business would be
    subject to some or all of the risks, known and unknown, to which
    Alpharma is currently subject;
    The intangible assets and goodwill recorded in connection with
    the acquisition could be subject to impairment charges. There is
    also the risk of significant accounting charges resulting from
    the completion and integration of a sizeable acquisition and
    increased capital expenditures.  Item 6.
    Exhibits  Number



Exhibit Title10
.1(1)



Stipulation of Settlement dated August 21, 2008.31
.1



Certificate of Chief Executive Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.31
.2



Certificate of Chief Financial Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.32
.1



Certificate of Chief Executive Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.32
.2



Certificate of Chief Financial Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.     (1)
    
    Incorporated by reference to Kings Current Report on Form
    8-K filed August 27, 2008. 63




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SIGNATURES      By:
    /s/  BRIAN
    A. MARKISON   President and Chief Executive Officer
   By:
    /s/  JOSEPH
    SQUICCIARINO   Chief Financial Officer
   64