##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

(Mark One)



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |   | For the quarterly period ended September 30, 2004                                          

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)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of The Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days. Yes x No
o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes x No
o

Number of shares outstanding of registrants
common stock as of March 14, 2005: 241,723,694



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##### 






Explanatory Statement



| |                                                          
| | ---------------------------------------------------------
| | Restatement of previously issued financial
    statements

We have restated our previously issued financial
statements for the years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004, primarily
to reflect the correction of methodological errors related to
our reserve for product returns.

After experiencing an unusually high level of
product returns during late 2003 and the first three quarters of
2004, we decided to conduct a thorough evaluation of our returns
reserve before formally closing the third quarter of 2004. We
subsequently delayed the filing of this Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004,
which we are filing contemporaneously with our Annual Report on
Form 10-K for the year ended December 31, 2004.

In connection with our now-completed review, we
have concluded that the recent large returns were primarily the
result of our entry into inventory management agreements, which
we refer to as IMAs, with our largest wholesalers,
together with several product-specific developments. However, we
have also determined that our methodology for reserving for
product returns from the first quarter of 2000 through the
second quarter of 2004 contained errors, with the result that
estimated product returns were not recorded in the period
required under generally accepted accounting principles, which
we refer to as GAAP. Also in connection with our
review, we concluded that certain other immaterial items should
have been recognized in earlier periods.

For a discussion of the restatement see
Note 2 to the Condensed Consolidated Financial Statements.

All amounts referenced in this Quarterly Report
for 2002 and 2003, including interim periods in 2003, and the
first two quarters of 2004 reflect the relevant amounts on a
restated basis. We will not amend our Annual Reports on
Form 10-K for the years ended December 31, 2002 or
2003, or our Quarterly Reports on Form 10-Q for quarterly
periods from January 1, 2002 through June 30, 2004.
The previously issued financial statements for the years ended
2002 and 2003, including interim periods in 2003, and the first
two quarters of 2004 should no longer be relied upon.

1



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##### 



PART I  FINANCIAL
INFORMATION



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

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

(Unaudited)


(In thousands)


|                                                                |                                                                                        |                                            |                           |              |           |           |           |         |           |           | 
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | ------------ | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                                                |                                                                                        |                                            |                           | December 31,
|                                                                |                                                                                        | September 30,                              |                           | 2003        
|                                                                |                                                                                        | 2004                                       |                           | (restated)  
|                                                                |                                                                                        |                                            |                           |             
|ASSETS                                                         
|Current Assets:                                                 |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                | Cash and cash equivalents                                                              |                                            | $                         | 248,151      |           |           | $         | 146,053 |          
|                                                                | Restricted cash                                                                        |                                            |                           | 113,685      |           |           |           | 133,969 |          
|                                                                | Marketable securities                                                                  |                                            |                           | 16,217       |           |           |           |        |          
|                                                                | Accounts receivable, net of allowance for
    doubtful accounts of $11,728 and $11,055 |                                            |                           | 245,982      |           |           |           | 246,417 |          
|                                                                | Inventories                                                                            |                                            |                           | 244,371      |           |           |           | 260,886 |          
|                                                                | Deferred income taxes                                                                  |                                            |                           | 179,911      |           |           |           | 148,479 |          
|                                                                | Prepaid expenses and other current assets                                              |                                            |                           | 52,582       |           |           |           | 30,036  |          
|                                                                | Assets related to discontinued operations                                              |                                            |                           | 717          |           |           |           | 4,012   |          
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                |                                                                                        |                                            | Total current assets      |              |           | 1,101,616 |           |         |           | 969,852   | 
|Property, plant and equipment, net                              |                                                                                        |                                            | 279,223                   |              |           |           | 257,659   |        
|Goodwill                                                        |                                                                                        |                                            | 121,355                   |              |           |           | 121,355   |        
|Intangible assets, net                                          |                                                                                        |                                            | 1,318,616                 |              |           |           | 1,552,492 |        
|Other assets (includes restricted cash of $660
    and $30,265) |                                                                                        |                                            | 13,725                    |              |           |           | 76,517    |        
|Deferred income taxes                                           |                                                                                        |                                            | 91,116                    |              |           |           | 19,154    |        
|Assets related to discontinued operations                       |                                                                                        |                                            | 25,400                    |              |           |           | 204,501   |        
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                |                                                                                        |                                            | Total assets              |              | $         | 2,951,051 |           |         | $         | 3,201,530 | 
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                       
|Current Liabilities:                                            |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                | Accounts payable                                                                       |                                            | $                         | 58,345       |           |           | $         | 81,648  |          
|                                                                | Accrued expenses                                                                       |                                            |                           | 644,402      |           |           |           | 566,704 |          
|                                                                | Income taxes payable                                                                   |                                            |                           | 20,270       |           |           |           | 79,641  |          
|                                                                | Current portion of long-term debt                                                      |                                            |                           |             |           |           |           | 97      |          
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                |                                                                                        |                                            | Total current liabilities |              |           | 723,017   |           |         |           | 728,090   | 
|Long-term debt                                                  |                                                                                        |                                            | 345,000                   |              |           |           | 345,000   |        
|Other liabilities                                               |                                                                                        |                                            | 49,602                    |              |           |           | 123,949   |        
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                |                                                                                        |                                            | Total liabilities         |              |           | 1,117,619 |           |         |           | 1,197,039 | 
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|Commitments and contingencies (Note 11)                         |                                                                                        |                                            |                           |              |           |           |           |        
|Shareholders equity                                            |                                                                                        |                                            | 1,833,432                 |              |           |           | 2,004,491 |        
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        
|                                                                |                                                                                        | Total liabilities and shareholders equity |                           | $            | 2,951,051 |           |           | $       | 3,201,530 |          
|                                                                |                                                                                        |                                            |                           |              |           |           |           |        

See accompanying notes.

2



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##### 



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |           |       |           |  
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------- | ----------------- | ----- | ------- | ------- | ---------- | ----- | ------- | -------- | -------- | ----- | --------- | ------- | --------- | ----- | --------- | -
|                                                                 |                                                                                          |                                          |                                                   |                  
|                                                                 |                                                                                          | Three Months Ended                       |                                                   | Nine Months Ended
|                                                                 |                                                                                          | September 30,                            |                                                   | September 30,    
|                                                                 |                                                                                          |                                          |                                                   |                  
|                                                                 |                                                                                          |                                          |                                                   | 2003              |       |         |         | 2003      
|                                                                 |                                                                                          | 2004                                     |                                                   | (restated)        |       | 2004    |         | (restated)
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |           
|Revenues:                                                        |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Net sales                                                                                |                                          | $                                                 | 374,432           |       |         | $       | 408,538    |       |         | $        | 903,617  |       |           | $       | 1,078,929 |      
|                                                                 | Royalty revenue                                                                          |                                          |                                                   | 20,252            |       |         |         | 16,275     |       |         |          | 58,128   |       |           |         | 47,875    |      
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Total revenues                                    |                   |       | 394,684 |         |            |       | 424,813 |          |          |       | 961,745   |         |           |       | 1,126,804 |  
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|Operating costs and expenses:                                    |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Cost of revenues, exclusive of depreciation,
    amortization and impairment shown below |                                          |                                                   | 97,422            |       |         |         | 89,990     |       |         |          | 266,087  |       |           |         | 261,043   |      
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees                  |                                          |                                                   | 97,810            |       |         |         | 86,832     |       |         |          | 289,537  |       |           |         | 203,396   |      
|                                                                 | Co-promotion fees                                                                        |                                          |                                                   | 39,301            |       |         |         | 46,741     |       |         |          | 82,247   |       |           |         | 163,922   |      
|                                                                 | Medicaid related charge (Note 11)                                                        |                                          |                                                   |                  |       |         |         |           |       |         |          | 65,000   |       |           |         |          |      
|                                                                 | Mylan transaction costs (Note 17)                                                        |                                          |                                                   | 2,787             |       |         |         |           |       |         |          | 5,913    |       |           |         |          |      
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Total selling, general and administrative expense |                   |       | 139,898 |         |            |       | 133,573 |          |          |       | 442,697   |         |           |       | 367,318   |  
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Research and development                                                                 |                                          |                                                   | 16,280            |       |         |         | 8,758      |       |         |          | 49,780   |       |           |         | 29,487    |      
|                                                                 | Research and development-in process upon
    acquisition                                 |                                          |                                                   | 17,145            |       |         |         |           |       |         |          | 17,145   |       |           |         | 193,000   |      
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Total research and development                    |                   |       | 33,425  |         |            |       | 8,758   |          |          |       | 66,925    |         |           |       | 222,487   |  
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Depreciation and amortization                                                            |                                          |                                                   | 38,843            |       |         |         | 36,926     |       |         |          | 116,627  |       |           |         | 75,200    |      
|                                                                 | Intangible asset impairment                                                              |                                          |                                                   | 97,320            |       |         |         |           |       |         |          | 132,257  |       |           |         | 110,970   |      
|                                                                 | Restructuring charges (Note 14)                                                          |                                          |                                                   | 4,674             |       |         |         |           |       |         |          | 10,828   |       |           |         |          |      
|                                                                 | Gain on sale of products (Note 8)                                                        |                                          |                                                   | (5,245            | )     |         |         | (10,312    | )     |         |          | (9,524   | )     |           |         | (10,312   | )    
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Total operating costs and expenses                |                   |       | 406,337 |         |            |       | 258,935 |          |          |       | 1,025,897 |         |           |       | 1,026,706 |  
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Operating (loss) income                                                                  |                                          |                                                   | (11,653           | )     |         |         | 165,878    |       |         |          | (64,152  | )     |           |         | 100,098   |      
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|Other income (expense):                                          |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Interest income                                                                          |                                          |                                                   | 1,124             |       |         |         | 1,037      |       |         |          | 3,259    |       |           |         | 5,730     |      
|                                                                 | Interest expense                                                                         |                                          |                                                   | (3,147            | )     |         |         | (3,669     | )     |         |          | (9,518   | )     |           |         | (10,138   | )    
|                                                                 | Valuation benefit (charge)  convertible
    notes receivable                            |                                          |                                                   |                  |       |         |         | 9,338      |       |         |          | (2,887   | )     |           |         | 24,952    |      
|                                                                 | Write down of investment                                                                 |                                          |                                                   | (6,520            | )     |         |         |           |       |         |          | (6,520   | )     |           |         |          |      
|                                                                 | Other, net                                                                               |                                          |                                                   | (640              | )     |         |         | (36        | )     |         |          | (175     | )     |           |         | (134      | )    
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Total other (expense) income                      |                   |       | (9,183  | )       |            |       | 6,670   |          |          |       | (15,841   | )       |           |       | 20,410    |  
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|(Loss) income from continuing operations before
    income taxes |                                                                                          |                                          | (20,836                                           | )                 |       |         | 172,548 |            |       |         | (79,993  | )        |       |           | 120,508 |          
|Income tax (benefit) expense                                     |                                                                                          |                                          | (17,197                                           | )                 |       |         | 63,070  |            |       |         | (14,372  | )        |       |           | 53,884  |          
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|(Loss) income from continuing operations                         |                                                                                          |                                          | (3,639                                            | )                 |       |         | 109,478 |            |       |         | (65,621  | )        |       |           | 66,624  |          
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|Discontinued operations (Note 10):                               |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Loss from discontinued operations, including
    impairment loss                         |                                          |                                                   | (6,996            | )     |         |         | (5,021     | )     |         |          | (172,310 | )     |           |         | (6,373    | )    
|                                                                 | Income tax benefit                                                                       |                                          |                                                   | (2,621            | )     |         |         | (1,908     | )     |         |          | (62,915  | )     |           |         | (2,389    | )    
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          |                                          | Loss from discontinued operations net of tax      |                   |       | (4,375  | )       |            |       | (3,113  | )        |          |       | (109,395  | )       |           |       | (3,984    | )
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|Net (loss) income                                                |                                                                                          | $                                        | (8,014                                            | )                 |       | $       | 106,365 |            |       | $       | (175,016 | )        |       | $         | 62,640  |          
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|(Loss) income per common share:                                  |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Basic:                                                                                   |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |           |      
|                                                                 |                                                                                          | (Loss) income from continuing operations |                                                   | $                 | (0.01 | )       |         | $          | 0.45  |         |          | $        | (0.27 | )         |         | $         | 0.28  |          
|                                                                 |                                                                                          | Loss from discontinued operations        |                                                   |                   | (0.02 | )       |         |            | (0.01 | )       |          |          | (0.45 | )         |         |           | (0.02 | )        
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          | Net (loss) income                        |                                                   | $                 | (0.03 | )       |         | $          | 0.44  |         |          | $        | (0.72 | )         |         | $         | 0.26  |          
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 | Diluted:                                                                                 |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |           |      
|                                                                 |                                                                                          | (Loss) income from continuing operations |                                                   | $                 | (0.01 | )       |         | $          | 0.45  |         |          | $        | (0.27 | )         |         | $         | 0.28  |          
|                                                                 |                                                                                          | Loss from discontinued operations        |                                                   |                   | (0.02 | )       |         |            | (0.01 | )       |          |          | (0.45 | )         |         |           | (0.02 | )        
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          
|                                                                 |                                                                                          | Net (loss) income                        |                                                   | $                 | (0.03 | )       |         | $          | 0.44  |         |          | $        | (0.72 | )         |         | $         | 0.26  |          
|                                                                 |                                                                                          |                                          |                                                   |                   |       |         |         |            |       |         |          |          |       |           |         |          

See accompanying notes.

3



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##### 



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |          |          |  
|---------------------------------------- | -------------------------------------------------------------------- | -------------------------- | ----------- | -------- |  | ------------- | --------- | ------ |  | ----- | ------- | -------- | - | - | ----- | ----- | - | - | --------- | -------- | -------- | -
|                                         |                                                                      |                            |             |          |  | Accumulated   |           |       
|                                         |                                                                      | Common Stock               |             |          |  | Other         |           |       
|                                         |                                                                      |                            |             | Retained |  | Comprehensive |           |       
|                                         |                                                                      | Shares                     |             | Amount   |  | Earnings      |           | Income |  | Total
|                                         |                                                                      |                            |             |          |  |               |           |        |  |      
|Balance at December 31, 2002 (restated)  |                                                                      |                            | 240,624,751 |          |  | $             | 1,201,897 |        |  | $     | 705,454 |          |   | $ | 45    |       |   | $ | 1,907,396 |         
|Comprehensive income:                    |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|                                         | Net income (restated)                                                |                            |             |         |  |               |           |       |  |       |         | 62,640   |   |   |       |      |   |   |           | 62,640   |         
|                                         | Net unrealized gain on marketable securities, net
    of tax of $132 |                            |             |         |  |               |           |       |  |       |         |         |   |   |       | 1,341 |   |   |           | 1,341    |         
|                                         | Foreign currency translation                                         |                            |             |         |  |               |           |       |  |       |         |         |   |   |       | 144   |   |   |           | 144      |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|                                         |                                                                      | Total comprehensive income |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |          | 64,125   |  
|Stock option activity                    |                                                                      |                            | 512,476     |          |  |               | 3,575     |        |  |       |        |          |   |   |      |       |   |   | 3,575     |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|Balance at September 30, 2003 (restated) |                                                                      |                            | 241,137,227 |          |  | $             | 1,205,472 |        |  | $     | 768,094 |          |   | $ | 1,530 |       |   | $ | 1,975,096 |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|Balance at December 31, 2003 (restated)  |                                                                      |                            | 241,190,852 |          |  | $             | 1,205,970 |        |  | $     | 797,408 |          |   | $ | 1,113 |       |   | $ | 2,004,491 |         
|Comprehensive loss:                      |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|                                         | Net loss                                                             |                            |             |         |  |               |           |       |  |       |         | (175,016 | ) |   |       |      |   |   |           | (175,016 | )       
|                                         | Net unrealized loss on marketable securities, net
    of tax of $159 |                            |             |         |  |               |           |       |  |       |         |         |   |   |       | (295  | ) |   |           | (295     | )       
|                                         | Foreign currency translation, net of tax of $42                      |                            |             |         |  |               |           |       |  |       |         |         |   |   |       | 32    |   |   |           | 32       |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|                                         |                                                                      | Total comprehensive loss   |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |          | (175,279 | )
|Stock option activity                    |                                                                      |                            | 454,754     |          |  |               | 4,220     |        |  |       |        |          |   |   |      |       |   |   | 4,220     |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         
|Balance at September 30, 2004            |                                                                      |                            | 241,645,606 |          |  | $             | 1,210,190 |        |  | $     | 622,392 |          |   | $ | 850   |       |   | $ | 1,833,432 |         
|                                         |                                                                      |                            |             |          |  |               |           |        |  |       |         |          |   |   |       |       |   |   |           |         

See accompanying notes.

4



---



##### 



KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands)


|                                                                   |                                                                             |                                                                        |         |            |         |   |          |          |          |  
|------------------------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ---------- | ------- | - | -------- | -------- | -------- | -
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             | Nine Months Ended                                                     
|                                                                   |                                                                             | September 30,                                                         
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             |                                                                        |         | 2003      
|                                                                   |                                                                             | 2004                                                                   |         | (restated)
|                                                                   |                                                                             |                                                                        |         |           
|Cash flows from operating activities of
    continuing operations  |                                                                             | $                                                                      | 158,293 |            |         | $ | 366,070  |         
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|Cash flows from investing activities of
    continuing operations: |                                                                             |                                                                        |         |            |         |   |          |         
|                                                                   | Transfer from (to) restricted cash                                          |                                                                        |         | 344        |         |   |          | (48,083  | )       
|                                                                   | Purchase of marketable securities                                           |                                                                        |         |           |         |   |          | (25,903  | )       
|                                                                   | Proceeds from sale of marketable securities                                 |                                                                        |         |           |         |   |          | 253,097  |         
|                                                                   | Proceeds from loan receivable                                               |                                                                        |         |           |         |   |          | 8,668    |         
|                                                                   | Purchases of property, plant and equipment                                  |                                                                        |         | (41,916    | )       |   |          | (33,530  | )       
|                                                                   | Purchases of product rights                                                 |                                                                        |         | (1,000     | )       |   |          |         |         
|                                                                   | Proceeds from sale of products                                              |                                                                        |         | 27,388     |         |   |          | 13,310   |         
|                                                                   | Proceeds from sale of assets                                                |                                                                        |         | 115        |         |   |          | 261      |         
|                                                                   | Acquisition of primary care business of Elan                                |                                                                        |         | (36,000    | )       |   |          | (761,745 | )       
|                                                                   | Palatin collaboration                                                       |                                                                        |         | (20,000    | )       |   |          |         |         
|                                                                   | Investment in Meridian Medical Technologies,
    Inc., net of cash acquired |                                                                        |         |           |         |   |          | (238,498 | )       
|                                                                   | Purchase of product rights                                                  |                                                                        |         |           |         |   |          | (9,000   | )       
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|                                                                   |                                                                             | Net cash used in investing activities of
    continuing operations     |         |            | (71,069 | ) |          |          | (841,423 | )
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|Cash flows from financing activities of
    continuing operations: |                                                                             |                                                                        |         |            |         |   |          |         
|                                                                   | Proceeds from exercise of stock options, net                                |                                                                        |         | 4,220      |         |   |          | 3,555    |         
|                                                                   | Payments on other long-term debt and capital
    lease obligations          |                                                                        |         | (97        | )       |   |          | (124     | )       
|                                                                   | Proceeds from revolving credit facility                                     |                                                                        |         |           |         |   |          | 125,000  |         
|                                                                   | Payments on revolving credit facility                                       |                                                                        |         |           |         |   |          | (125,000 | )       
|                                                                   | Debt issuance costs                                                         |                                                                        |         |           |         |   |          | (214     | )       
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|                                                                   |                                                                             | Net cash provided by financing activities of
    continuing operations |         |            | 4,123   |   |          |          | 3,217    |  
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|Net cash provided by discontinued operations                       |                                                                             |                                                                        | 10,751  |            |         |   | 2,415    |         
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|Increase (decrease) in cash and cash equivalents                   |                                                                             |                                                                        | 102,098 |            |         |   | (469,721 | )       
|Cash and cash equivalents, beginning of period                     |                                                                             |                                                                        | 146,053 |            |         |   | 588,225  |         
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         
|Cash and cash equivalents, end of period                           |                                                                             | $                                                                      | 248,151 |            |         | $ | 118,504  |         
|                                                                   |                                                                             |                                                                        |         |            |         |   |          |         

See accompanying notes.

5



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2004 and 2003


(Unaudited)


(In thousands)




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

The accompanying unaudited interim condensed
consolidated financial statements of King Pharmaceuticals, Inc.
(King or the Company) have been prepared
by the Company in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
(GAAP) for complete financial statements. In the
opinion of management, all adjustments (consisting of items of a
normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three
and nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2004. These consolidated
statements should be read in conjunction with the restated
audited consolidated financial statements and notes thereto for
the year ended December 31, 2003 included in the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2004. The year-end condensed
balance sheet was derived from the restated consolidated
financial statements but does not include all disclosures
required by GAAP.

These consolidated financial statements include
the accounts of King and all of its wholly owned subsidiaries.
See Note 19.

Certain amounts from prior consolidated financial
statements have been reclassified to conform to the presentation
in 2004. The consolidated financial statements reflect the
Companys Prefest® and Nordette® product rights,
each of which the Company has since divested, as discontinued
operations.



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

The Company has restated its previously issued
financial statements for the years 2002 and 2003, including
interim periods in 2003, and the first two quarters of 2004,
primarily to reflect the correction of methodological errors
related to its reserve for product returns.

Returns reserve.GAAP requires that the Company reserve for expected product
returns when recognizing sales to wholesalers and other
customers, who have the right to return products for specified
periods. From the first quarter of 2000 through the second
quarter of 2002, the Company used the replacement cost method to
value its reserve for product returns. Under that method, the
Companys reserve for future product returns was valued at
the cost to manufacture replacement product. The Company
discontinued use of the replacement cost method effective
July 1, 2002, and began valuing its returns reserve at the
sales value of returned products. In connection with the recent
review of its returns reserve, management has concluded that use
of the replacement cost method constituted an error. From the
third quarter of 2002 through the second quarter of 2004, the
Company accrued for product returns based in part on the
Companys estimate of inventory in the wholesale and retail
distribution channels. Management has concluded that this
methodology also contained an error, because it did not take
into account the shelf life of its products in the wholesale
distribution channels. As a result of these conclusions, the
Company has adopted revised policies and procedures for
establishing reserves for product returns. The revised
methodology is described in Note 3.

Previously disclosed immaterial Medicaid
errors.The restatement has not
resulted in any change in the amounts of previously reported
errors in respect of Medicaid and other governmental pricing
programs. The restatement has, however, changed how the
immaterial Medicaid errors are reflected in the 2002 financial
statements. The Company previously disclosed immaterial Medicaid
errors that had arisen during 1998 through 2001 and recorded
those amounts in the fourth quarter of 2002. As described below,
as part of the restatement, all immaterial errors, including
those Medicaid errors, which arose prior to 2002 and that were
previously recorded as charges in 2002 have been removed as
charges from the 2002 income statement. The

6



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

aggregate amount of those immaterial errors is
instead recorded as part of the adjustment to the opening
balance (January 1, 2002) of retained earnings in the
restated 2002 financial statements.

Other immaterial
items.In the course of its returns
review, the Company determined that in some instances its
estimates of inventory in the distribution channel did not
properly reflect relevant data in its possession, and that it
thereby inadvertently under-accrued for estimated future
chargeback amounts. Chargebacks are credits issued to
wholesalers (who purchase at published wholesale prices) when
they resell the Companys products to a customer entitled
to a discount pursuant to the customers agreement with
King. The wholesaler allows its customer to purchase at the
discounted price, and then the wholesaler recovers the amount of
the discount from King via a chargeback.

Following the Companys determination that
it would restate its financial statements for 2002, 2003 and the
first two quarters of 2004, the Company also determined that it
would correct for other known miscellaneous immaterial errors
made in the application of GAAP that arose during those periods.
The Companys restated financial statements reflect each of
these items in the period in which it actually arose.

7



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Restated Income Statement Amounts

The table below sets forth the effect of the
adjustments for the three months ended September 30, 2003:

|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |         |         |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------- | ------- | ---------- | ----- | -------- | ----- | - | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|                                                                 |                                                                                     |                                                      |         | Returns |         | Other      |       |         
|                                                                 |                                                                                     | As Originally                                        |         | Reserve |         | Immaterial |       | As      
|                                                                 |                                                                                     | Reported                                             |         | Errors  |         | Items      |       | Restated
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |         
|Revenues:                                                        |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Net sales                                                                           |                                                      | $       | 406,862 |         |            | $     | 4,389    |       |   | $      | (2,713 | )      |   | $       | 408,538 |        
|                                                                 | Royalty revenue                                                                     |                                                      |         | 16,275  |         |            |       | 0        |       |   |        | 0      |        |   |         | 16,275  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total revenues                                       |         |         | 423,137 |            |       |          | 4,389 |   |        |        | (2,713 | ) |         |         | 424,813 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Operating costs and expenses:                                    |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below                         |                                                      |         | 89,845  |         |            |       | 143      |       |   |        | 2      |        |   |         | 89,990  |        
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees             |                                                      |         | 87,082  |         |            |       | 0        |       |   |        | (250   | )      |   |         | 86,832  |        
|                                                                 | Co-promotion fees                                                                   |                                                      |         | 46,109  |         |            |       | 239      |       |   |        | 393    |        |   |         | 46,741  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total selling, general and administrative expense    |         |         | 133,191 |            |       |          | 239   |   |        |        | 143    |   |         |         | 133,573 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Research and development                                                            |                                                      |         | 8,758   |         |            |       | 0        |       |   |        | 0      |        |   |         | 8,758   |        
|                                                                 | Depreciation and amortization                                                       |                                                      |         | 36,926  |         |            |       | 0        |       |   |        | 0      |        |   |         | 36,926  |        
|                                                                 | (Gain) loss on sale of products                                                     |                                                      |         | (10,312 | )       |            |       | 0        |       |   |        | 0      |        |   |         | (10,312 | )      
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total operating costs and expenses                   |         |         | 258,408 |            |       |          | 382   |   |        |        | 145    |   |         |         | 258,935 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Operating income (loss)                                                             |                                                      |         | 164,729 |         |            |       | 4,007    |       |   |        | (2,858 | )      |   |         | 165,878 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Total other (expense) income                                     |                                                                                     |                                                      | 6,670   |         |         |            | 0     |          |       |   | 0      |        |        |   | 6,670   |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Income (loss) from continuing operations
    before income taxes |                                                                                     |                                                      | 171,399 |         |         |            | 4,007 |          |       |   | (2,858 | )      |        |   | 172,548 |        
|Income tax expense (benefit)                                     |                                                                                     |                                                      | 62,630  |         |         |            | 1,534 |          |       |   | (1,094 | )      |        |   | 63,070  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Income (loss) from continuing operations                         |                                                                                     |                                                      | 108,769 |         |         |            | 2,473 |          |       |   | (1,764 | )      |        |   | 109,478 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Discontinued operations:                                         |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Income (loss) from discontinued operations,
    including expected loss on disposal |                                                      |         | (4,323  | )       |            |       | (717     | )     |   |        | 19     |        |   |         | (5,021  | )      
|                                                                 | Income tax expense (benefit)                                                        |                                                      |         | (1,641  | )       |            |       | (274     | )     |   |        | 7      |        |   |         | (1,908  | )      
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total income (loss) from discontinued
    operations |         |         | (2,682  | )          |       |          | (443  | ) |        |        | 12     |   |         |         | (3,113  | )
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Net income (loss)                                                |                                                                                     | $                                                    | 106,087 |         |         | $          | 2,030 |          |       | $ | (1,752 | )      |        | $ | 106,365 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Basic income (loss) per common share                             |                                                                                     | $                                                    | 0.44    |         |         | $          | 0.01  |          |       | $ | (0.01  | )      |        | $ | 0.44    |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Diluted income (loss) per common share                           |                                                                                     | $                                                    | 0.44    |         |         | $          | 0.01  |          |       | $ | (0.01  | )      |        | $ | 0.44    |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        

8



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below sets forth the effect of the
adjustments for the nine months ended September 30, 2003:

|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |           |           |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------ | ----------- | ---- | - | ---- | ----- | ---- | - | ------- | --------- | --------- | -
|                                                                 |                                                                                     | As                                                |         | Returns   |           | Other      |        |            
|                                                                 |                                                                                     | Originally                                        |         | Reserve   |           | Immaterial |        |            
|                                                                 |                                                                                     | Reported                                          |         | Errors    |           | Items      |        | As Restated
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |            
|Revenues:                                                        |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Net sales                                                                           |                                                   | $       | 1,080,698 |           |            | $      | (940        | )    |   | $    | (829  | )    |   | $       | 1,078,929 |          
|                                                                 | Royalty revenue                                                                     |                                                   |         | 47,875    |           |            |        | 0           |      |   |      | 0     |      |   |         | 47,875    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total revenues                                    |         |           | 1,128,573 |            |        |             | (940 | ) |      |       | (829 | ) |         |           | 1,126,804 |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Operating costs and expenses:                                    |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below                         |                                                   |         | 260,930   |           |            |        | 89          |      |   |      | 24    |      |   |         | 261,043   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees             |                                                   |         | 204,146   |           |            |        | 0           |      |   |      | (750  | )    |   |         | 203,396   |          
|                                                                 | Co-promotion fees                                                                   |                                                   |         | 163,050   |           |            |        | 154         |      |   |      | 718   |      |   |         | 163,922   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total selling, general and administrative expense |         |           | 367,196   |            |        |             | 154  |   |      |       | (32  | ) |         |           | 367,318   |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Research and development                                                            |                                                   |         | 29,487    |           |            |        | 0           |      |   |      | 0     |      |   |         | 29,487    |          
|                                                                 | Research and development-in process upon
    acquisition                            |                                                   |         | 193,000   |           |            |        | 0           |      |   |      | 0     |      |   |         | 193,000   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total research and development                    |         |           | 222,487   |            |        |             | 0    |   |      |       | 0    |   |         |           | 222,487   |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Depreciation and amortization                                                       |                                                   |         | 75,200    |           |            |        | 0           |      |   |      | 0     |      |   |         | 75,200    |          
|                                                                 | Intangible asset impairment                                                         |                                                   |         | 110,970   |           |            |        | 0           |      |   |      | 0     |      |   |         | 110,970   |          
|                                                                 | (Gain) loss on sale of products                                                     |                                                   |         | (10,312   | )         |            |        | 0           |      |   |      | 0     |      |   |         | (10,312   | )        
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total operating costs and expenses                |         |           | 1,026,471 |            |        |             | 243  |   |      |       | (8   | ) |         |           | 1,026,706 |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Operating income (loss)                                                             |                                                   |         | 102,102   |           |            |        | (1,183      | )    |   |      | (821  | )    |   |         | 100,098   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Total other (expense) income                                     |                                                                                     |                                                   | 20,410  |           |           |            | 0      |             |      |   | 0    |       |      |   | 20,410  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                                     |                                                   | 122,512 |           |           |            | (1,183 | )           |      |   | (821 | )     |      |   | 120,508 |          
|Income tax expense (benefit)                                     |                                                                                     |                                                   | 54,653  |           |           |            | (454   | )           |      |   | (315 | )     |      |   | 53,884  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Income (loss) from continuing operations                         |                                                                                     |                                                   | 67,859  |           |           |            | (729   | )           |      |   | (506 | )     |      |   | 66,624  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Discontinued operations:                                         |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss on disposal |                                                   |         | (6,367    | )         |            |        | (1,091      | )    |   |      | 1,085 |      |   |         | (6,373    | )        
|                                                                 | Income tax expense (benefit)                                                        |                                                   |         | (2,387    | )         |            |        | (417        | )    |   |      | 415   |      |   |         | (2,389    | )        
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total income (loss) from discontinued operations  |         |           | (3,980    | )          |        |             | (674 | ) |      |       | 670  |   |         |           | (3,984    | )
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Net income (loss)                                                |                                                                                     | $                                                 | 63,879  |           |           | $          | (1,403 | )           |      | $ | 164  |       |      | $ | 62,640  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Basic income (loss) per common share                             |                                                                                     | $                                                 | 0.27    |           |           | $          | (0.01  | )           |      | $ | 0.00 |       |      | $ | 0.26    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Diluted income (loss) per common share                           |                                                                                     | $                                                 | 0.26    |           |           | $          | 0.00   |             |      | $ | 0.00 |       |      | $ | 0.26    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          

9



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Restated Balance Sheet Amounts

The table below sets forth the effect of the
adjustments on the balance sheet as of December 31, 2003:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | As                                         |           | Returns   |           | Other      |   |            
|                                          |                                           | Originally                                 |           | Reserve   |           | Immaterial |   |            
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Current Assets:                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 146,053   |           |            |   |             |         |   |       |        |        |   | $         | 146,053   |          
|                                          | Restricted Cash                           |                                            |           | 133,969   |           |            |   |             |         |   |       |        |        |   |           | 133,969   |          
|                                          | Accounts Receivable, net                  |                                            |           | 246,417   |           |            |   |             |         |   |       |        |        |   |           | 246,417   |          
|                                          | Inventories                               |                                            |           | 260,886   |           |            |   |             |         |   |       |        |        |   |           | 260,886   |          
|                                          | Deferred income tax assets                |                                            |           | 124,930   |           |            | $ | 19,864      |         |   | $     | 3,685  |        |   |           | 148,479   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 30,036    |           |            |   |             |         |   |       |        |        |   |           | 30,036    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,012     |           |            |   |             |         |   |       |        |        |   |           | 4,012     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 946,303   |            |   |             | 19,864  |   |       |        | 3,685  |   |           |           | 969,852   | 
|Property, plant and equipment, net        |                                           |                                            | 257,659   |           |           |            |   |             |         |   |       |        |        |   | 257,659   |          
|Goodwill                                  |                                           |                                            | 121,355   |           |           |            |   |             |         |   |       |        |        |   | 121,355   |          
|Intangible assets, net                    |                                           |                                            | 1,552,492 |           |           |            |   |             |         |   |       |        |        |   | 1,552,492 |          
|Other assets                              |                                           |                                            | 76,117    |           |           |            |   |             |         |   | 400   |        |        |   | 76,517    |          
|Deferred income tax assets                |                                           |                                            | 19,307    |           |           |            |   |             |         |   | (153  | )      |        |   | 19,154    |          
|Assets related to discontinued operations |                                           |                                            | 204,501   |           |           |            |   |             |         |   |       |        |        |   | 204,501   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts Payable                          |                                            | $         | 83,078    |           |            |   |             |         |   | $     | (1,430 | )      |   | $         | 81,648    |          
|                                          | Accrued expenses                          |                                            |           | 506,033   |           |            | $ | 51,864      |         |   |       | 8,807  |        |   |           | 566,704   |          
|                                          | Income taxes payable                      |                                            |           | 79,641    |           |            |   |             |         |   |       |        |        |   |           | 79,641    |          
|                                          | Current portion of long term debt         |                                            |           | 97        |           |            |   |             |         |   |       |        |        |   |           | 97        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 668,849   |            |   |             | 51,864  |   |       |        | 7,377  |   |           |           | 728,090   | 
|Long-term debt                            |                                           |                                            | 345,000   |           |           |            |   |             |         |   |       |        |        |   | 345,000   |          
|Other liabilities                         |                                           |                                            | 121,705   |           |           |            |   |             |         |   | 2,244 |        |        |   | 123,949   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 1,135,554 |            |   |             | 51,864  |   |       |        | 9,621  |   |           |           | 1,197,039 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,205,970 |           |            |   |             |         |   |       |        |        |   |           | 1,205,970 |          
|                                          | Retained earnings                         |                                            |           | 835,097   |           |            |   | (32,000     | )       |   |       | (5,689 | )      |   |           | 797,408   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 1,113     |           |            |   |             |         |   |       |        |        |   |           | 1,113     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 2,042,180 |            |   |             | (32,000 | ) |       |        | (5,689 | ) |           |           | 2,004,491 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

10



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                               
|-- | ----------------------------------------------
|3. | Summary of Significant Accounting
    Policies

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.

Significant estimates for which it is reasonably
possible that a material change in estimate could occur in the
near term include forecasted future cash flows used in testing
for impairments of intangible and tangible assets and loss
accruals for excess inventory and fixed purchase commitments
under the Companys supply contracts. Forecasted future
cash flows in particular require considerable judgment and are
subject to inherent imprecision. In the case of impairment
testing, changes in estimates of future cash flows could result
in an immediate material impairment charge and, whether or not
they result in an impairment charge, could result prospectively
in a reduction in the estimated remaining useful life of
tangible or intangible assets, which could be material to the
financial statements.

Other significant estimates include accruals for
Medicaid and other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy and accounting for the co-promotion agreement
with Wyeth.

The Company is subject to risks and uncertainties
that may cause actual results to differ from the related
estimates, and the Companys estimates may change from time
to time in response to actual developments and new information.



| |                                                                          
| | -------------------------------------------------------------------------
| | Accounting Policy for Accruals for Rebates,
    Returns, and Chargebacks.

The Company establishes accruals for returns,
chargebacks and commercial and Medicaid rebates in the same
period it recognizes 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, the
Company records 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 the Companys
estimates.

The Companys product returns accrual is
primarily based on estimates of future product returns over the
period during which customers have a right of return, which in
turn is based in part on estimates of the remaining shelf life
of its products when sold to customers. Future product returns
are estimated primarily based on historical sales and return
rates. The Company estimates its Medicaid rebate and commercial
contractual rebate accruals based on estimates of usage by
rebate-eligible customers, estimates of the level of inventory
of its products in the distribution channel that remain
potentially subject to those rebates, and the terms of its
contractual and regulatory rebate obligations. The Company
estimates its chargeback accrual based on its estimates of the
level of inventory of its products in the distribution channel
that remain subject to chargebacks, and specific contractual and
historical chargeback rates.

The Companys accruals for returns,
chargebacks and rebates are adjusted as appropriate for specific
known developments that may result in a change in its product
returns or its rebate and chargeback obligations. In the case of
product returns, the Company monitors demand levels for its
products and the effects of the introduction of competing
products and other factors on this demand. When the Company
identifies decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, it further analyzes these products for potential
additional supplemental reserves.

11



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock
Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. Accordingly, since options were
granted at fair value, no compensation cost is recognized for
stock options granted to date. If compensation cost for these
plans for options granted was recognized, consistent with
SFAS No. 123, the Companys net income (loss) and
diluted income (loss) per common share would include adjustments
for the following pro forma amounts:

|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |        |  
|--------------------------------------- | -------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ---------- | - |  | - | -------- | - |  | - | ------ | -
|                                        |                                        |                    |   |                  
|                                        |                                        | Three Months Ended |   | Nine Months Ended
|                                        |                                        | September 30,      |   | September 30,    
|                                        |                                        |                    |   |                  
|                                        |                                        |                    |   | 2003              |   |      |   | 2003      
|                                        |                                        | 2004               |   | (restated)        |   | 2004 |   | (restated)
|                                        |                                        |                    |   |                   |   |      |   |           
|Net income (loss):                      |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | As reported                            |                    | $ | (8,014            | ) |      | $ | 106,365    |   |  | $ | (175,016 | ) |  | $ | 62,640 |  
|                                        | Compensation costs for options granted |                    |   | (1,719            | ) |      |   | (353       | ) |  |   | (5,287   | ) |  |   | (445   | )
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | Pro forma                              |                    | $ | (9,733            | ) |      | $ | 106,012    |   |  | $ | (180,303 | ) |  | $ | 62,195 |  
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|Basic income (loss) per common share:   |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | As reported                            |                    | $ | (0.03             | ) |      | $ | 0.44       |   |  | $ | (0.72    | ) |  | $ | 0.26   |  
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | Pro forma                              |                    | $ | (0.04             | ) |      | $ | 0.44       |   |  | $ | (0.75    | ) |  | $ | 0.26   |  
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|Diluted income (loss) per common share: |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | As reported                            |                    | $ | (0.03             | ) |      | $ | 0.44       |   |  | $ | (0.72    | ) |  | $ | 0.26   |  
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       
|                                        | Pro forma                              |                    | $ | (0.04             | ) |      | $ | 0.44       |   |  | $ | (0.75    | ) |  | $ | 0.26   |  
|                                        |                                        |                    |   |                   |   |      |   |            |   |  |   |          |   |  |   |       

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model.



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

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

|                                        |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |         | 
|--------------------------------------- | ------------------------------ | ------------------ |  | ----------------- |  | ---- |  | ---------- |  |  |  | ------- |  |  |  | ------- | 
|                                        |                                |                    |  |                  
|                                        |                                | Three Months Ended |  | Nine Months Ended
|                                        |                                | September 30,      |  | September 30,    
|                                        |                                |                    |  |                  
|                                        |                                |                    |  | 2003              |  |      |  | 2003      
|                                        |                                | 2004               |  | (restated)        |  | 2004 |  | (restated)
|                                        |                                |                    |  |                   |  |      |  |           
|Basic income (loss) per common share:   |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,551           |  |      |  | 241,066    |  |  |  | 241,411 |  |  |  | 240,932 | 
|                                        |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |        
|Diluted income (loss) per common share: |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,551           |  |      |  | 241,066    |  |  |  | 241,411 |  |  |  | 240,932 | 
|                                        | Effect of stock options        |                    |  |                  |  |      |  | 517        |  |  |  |        |  |  |  | 567     | 
|                                        | Convertible debentures         |                    |  |                  |  |      |  |           |  |  |  |        |  |  |  |        | 
|                                        |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,551           |  |      |  | 241,583    |  |  |  | 241,411 |  |  |  | 241,499 | 
|                                        |                                |                    |  |                   |  |      |  |            |  |  |  |         |  |  |  |        

For the nine months ended September 30,
2004, options to purchase 445 shares of common stock, were
not included in the computation of diluted earnings per share
because their inclusion would have been antidilutive and would
have reduced the loss per share. The Companys convertible
debentures could also be converted into 6,878 shares of
common stock in the future, subject to certain contingencies
outlined in the

12



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

indenture. Because these contingencies were
anti-dilutive, the convertible debentures were not included in
the calculation of diluted loss per common share.



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

Inventories consist of the following:

|                                                                                                      |  |               |         |              |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | -
|                                                                                                      |  | September 30, |         | December 31,
|                                                                                                      |  | 2004          |         | 2003        
|                                                                                                      |  |               |         |             
|Raw materials                                                                                         |  | $             | 147,716 |              |  | $ | 139,675 |  
|Work-in-process                                                                                       |  |               | 21,450  |              |  |   | 11,508  |  
|Finished goods (including $16,384 and $18,252 of
    sample inventory in 2004 and 2003, respectively) |  |               | 118,828 |              |  |   | 140,308 |  
|                                                                                                      |  |               |         |              |  |   |         |  
|                                                                                                      |  |               | 287,994 |              |  |   | 291,491 |  
|Inventory valuation allowance                                                                         |  |               | (43,623 | )            |  |   | (30,605 | )
|                                                                                                      |  |               |         |              |  |   |         |  
|                                                                                                      |  | $             | 244,371 |              |  | $ | 260,886 |  
|                                                                                                      |  |               |         |              |  |   |         |  



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

In June 2004, the U.S. Food and Drug
Administration (FDA) approved supplemental New Drug
Applications (sNDA) which provide that
Unithroid® (levothyroxine sodium tablets, USP) and
Levo-T® (levothyroxine sodium tablets, USP) are
bioequivalent and therapeutically equivalent
(AB-Rated) to Levoxyl® (levothyroxine sodium
tablets, USP). Similarly, in July 2004, the FDA approved a
supplemental Abbreviated New Drug Application
(sANDA) which provides that a previously approved
generic for Unithroid® is AB-Rated to Levoxyl®.
Accordingly, some prescriptions written for Levoxyl® are
being filled with AB-Rated product instead of Levoxyl®. As
a result, sales of Levoxyl® are likely to be materially
adversely affected in future periods. The Company does not have
any intangible assets recorded on its balance sheet related to
Levoxyl®. However, the St. Petersburg, Florida facility
manufactures Levoxyl® exclusively. At September 30,
2004, the net carrying value of the property, plant and
equipment at the St. Petersburg facility was $14,486. Management
currently believes that these assets are not impaired based on
estimated undiscounted future cash flows.

The Companys Rochester, Michigan facility
manufactures products for the Company and various third parties.
As of September 30, 2004, the net carrying value of the
property, plant and equipment at the Rochester facility was
$87,629. Overall production volume at this facility has been
declining. The Company currently has plans to transfer to this
facility the manufacture of certain products that are currently
manufactured for the Company at other facilities or by third
parties. As an example, prior to May 2004, the Company relied
solely on third parties to manufacture Brevital®. Since May
2004, the Rochester facility is qualified in accordance with FDA
guidance as a manufacturing, testing and packaging site for
Brevital® and the Company is currently distributing
Brevital® that is produced at this site. These transfers
should increase production and cash flow at the Rochester
facility. Management currently believes that the long-term
assets associated with the Rochester facility are not impaired
based on estimated undiscounted future cash flows. However, if
production volumes continue to decline or if the Company is not
successful in transferring additional production to Rochester,
the Company may have to write off a portion of the property,
plant, and equipment associated with this facility.



|   |                              
|-- | -----------------------------
|8. | Acquisitions and Dispositions

On August 12, 2004, the Company entered into
a collaborative agreement with Palatin Technologies, Inc.
(Palatin) to jointly develop and, on obtaining
necessary regulatory approvals, commercialize Palatins
PT-141 for the treatment of male and female sexual dysfunction
for $20,000 plus acquisition costs of $498.

13



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pursuant to the terms of the agreement, Palatin
has granted King a co-exclusive license with Palatin to PT-141
in North America and an exclusive right to collaborate in the
licensing or sublicensing of PT-141 with Palatin outside North
America. At the time of closing King received approximately
1,176 shares of Palatin common stock and approximately
235 warrants for the right to purchase Palatin common
stock. Of the total purchase price, $3,093 was allocated to the
common stock, $260 was allocated to the warrants, and the
remaining $17,145 was allocated to in-process research and
development. In addition to the initial purchase price, King may
pay potential milestone payments to Palatin of up to $100,000
for achieving certain development and regulatory approval
targets. A portion of these milestone payments could consist of
additional equity investments in Palatin. After regulatory
approval and commercialization of PT-141, King may also pay
potential milestone payments to Palatin of up to $130,000 upon
achieving specified annual North American net sales thresholds.
King and Palatin will share all collaboration development and
marketing costs associated with and collaboration net profits
derived from PT-141 based upon an agreed percentage.

On July 19, 2004, the Company and Novavax,
Inc. (Novavax) mutually agreed to end their
co-promotion and license agreements regarding
EstrasorbTM. As part of this transaction, Novavax
reacquired all rights to EstrasorbTM as well as all
rights to other womens health products that Novavax may
successfully develop utilizing its micellar nanoparticle
technology. Additionally, Novavax repurchased all of its
convertible notes held by King, acquired a portion of
Kings womens health field sales force, and received
approximately $8,000 from the Company to provide support for
marketing and promotion. In return, Novavax paid King $22,000
and issued approximately 3,776 shares of Novavax common
stock to King. This transaction resulted in a net gain in the
amount of $4,021 during the third quarter of 2004. As a result
of this transaction, King now owns approximately
4,101 shares of common stock of Novavax that the Company
will account for as available for sale securities. Such shares
are currently restricted and are required to be held by the
Company until July 2005. As of September 30, 2004, the
Company determined the decline in fair value of the
Companys equity interest in Novavax required it to record
an other than temporary decline in value of $6,520, which is
reflected in other income (expense) in the accompanying
financial statements.

On June 30, 2004, the Company sold the
Anusol-HC® and Proctocort® product lines to Salix
Pharmaceuticals, Inc. (Salix) for $13,000. In
addition, the Company sold inventory of Anusol-HC® and
Proctocort® to Salix for $337. The assets sold included
related product assets, intangible property, advertising and
promotional materials, and labeling and packaging materials. As
part of the transaction, the Company will contract manufacture
the Anusol-HC® and Proctocort® product lines for two
years. The Company recorded a $4,715 gain on the sale of the
Anusol-HC® and Proctocort® product lines, which is
included as a reduction in total operating costs and expenses in
the accompanying financial statements.

On June 12, 2003, the Company acquired the
primary care business of Elan Corporation, plc
(Elan) and of some of its subsidiaries in the United
States and Puerto Rico, including the rights to Sonata® and
Skelaxin® and rights pertaining to potential new
formulations of these products, together with Elans United
States primary care field sales force. Additionally, on
January 8, 2003, the Company completed its acquisition of
Meridian Medical Technologies, Inc. (Meridian). The
following unaudited pro forma summary presents the financial
information as if the acquisitions of Meridian and the primary
care business of Elan had occurred on January 1, 2003 for
the three and nine months ended September 30, 2003
(including the effects of charges for in-process research and
development). These pro forma results have been prepared for
comparative

14



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purposes and do not purport to indicate what
would have occurred had the acquisitions been made on
January 1, 2003, nor do they purport to indicate future
results.

|                                          |  |                    |         |                    |  |   |           | 
|----------------------------------------- |  | ------------------ | ------- | ------------------ |  | - | --------- | 
|                                          |  | Three Months Ended |         | Nine Months Ended 
|                                          |  | September 30, 2003 |         | September 30, 2003
|                                          |  |                    |         |                   
|Total revenues from continuing operations |  | $                  | 424,813 |                    |  | $ | 1,243,569 | 
|                                          |  |                    |         |                    |  |   |           | 
|Net income                                |  | $                  | 106,365 |                    |  | $ | 72,144    | 
|                                          |  |                    |         |                    |  |   |           | 
|Basic income per common share             |  | $                  | 0.44    |                    |  | $ | 0.30      | 
|                                          |  |                    |         |                    |  |   |           | 
|Diluted income per common share           |  | $                  | 0.44    |                    |  | $ | 0.30      | 
|                                          |  |                    |         |                    |  |   |           | 



|   |                               
|-- | ------------------------------
|9. | Intangible Assets and Goodwill

The following table reflects the components of
intangible assets as of September 30, 2004:

|                              |                         |          |           |              |  |            |         |         |  |   |           |           | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | ---------- | ------- | ------- |  | - | --------- | --------- | 
|                              |                         | Gross    |           |              |  | Net       
|                              |                         | Carrying |           | Accumulated  |  | Intangible
|                              |                         | Amount   |           | Amortization |  | Assets    
|                              |                         |          |           |              |  |           
|Trademarks and product rights |                         | $        | 1,383,908 |              |  | $          | 210,333 |         |  | $ | 1,173,575 |          
|Patents                       |                         |          | 258,881   |              |  |            | 115,267 |         |  |   | 143,614   |          
|Other intangibles             |                         |          | 9,819     |              |  |            | 8,392   |         |  |   | 1,427     |          
|                              |                         |          |           |              |  |            |         |         |  |   |           |          
|                              | Total intangible assets |          | $         | 1,652,608    |  |            | $       | 333,992 |  |   | $         | 1,318,616 | 
|                              |                         |          |           |              |  |            |         |         |  |   |           |          

Amortization expense for the three months ended
September 30, 2004 and 2003 was $31,834 and $33,781,
respectively. Estimated annual amortization expense as of
September 30, 2004 for each of the five succeeding fiscal
years is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount
|                               |  |       
|2004                           |  | $      | 134,600 | 
|2005                           |  |        | 108,704 | 
|2006                           |  |        | 91,325  | 
|2007                           |  |        | 89,892  | 
|2008                           |  |        | 84,385  | 

During the third quarter of 2004, the Company
recorded intangible asset impairment charges totaling $97,320
primarily due to the Companys material change in estimate
of future cash flows from the development of a modified-release
formulation of Sonata® and a decline in demand for products
associated with the Companys Rochester, Michigan facility,
each of which is more fully discussed below.

Pursuant to an agreement between the Company and
Elan, Elan commenced a Phase II clinical trial program for
the purpose of developing a modified release formulation of
Sonata® (Sonata® MR) in March 2004.
However, the Phase II clinical trial results received
during the third quarter of 2004 showed that the Sonata® MR
formulations that Elan developed did not meet contractually
required specifications. After several months of review,
subsequent to September 30, 2004, the Company concluded
that it was not possible for Elan to develop a Sonata® MR
formulation meeting the contractually required specifications.
Accordingly, the Company decided to discontinue the Sonata®
MR clinical program and intends to terminate the agreement with
Elan. Although the Company believes it is entitled to terminate
the agreement, it can provide no assurance that it will
effectively terminate the agreement and, if it does, under what
terms. The agreement currently requires the Company to pay up to
an additional $60,000 if Elan achieves certain milestones in
connection with the development of a reformulated version of
Sonata® and $15,000 as a milestone payment if

15



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

annual net sales of a reformulated version of
Sonata® exceed $100,000, plus costs associated with the
development of a reformulated version of Sonata®. During
the third quarter of 2004, the Company recorded an intangible
asset impairment charge of $64,717, related to Sonata® MR
based on the fair value of the expected cash flows related to
the intangible asset as of September 30, 2004. The
Sonata® MR intangible is part of the branded pharmaceutical
segment.

The Rochester, Michigan facility manufactures
several products for the Company, including Aplisol® and
Coly-Mycin®. The products that are manufactured at this
facility are considered one asset group and evaluated for
impairment together. The Company reviewed the Rochester
intangible assets for impairment under SFAS No. 144.
Based on that review, the Company determined that the Rochester
intangible assets were impaired and recorded an impairment
charge of $17,492 during the third quarter of 2004. The
Rochester intangible assets are part of the branded
pharmaceutical segment.

During January 2003, the Company was notified of
the approval by the FDA of a second generic fludrocortisone
acetate, USP, a product that represents additional competition
for the Companys Florinef® (fludrocortisone acetate,
USP) product. The Company recorded an impairment charge in the
amount of $110,970 in the first quarter of 2003 reflecting the
reduction in the fair value of the Florinef® intangible
assets. During the first quarter of 2004, the Company recorded
intangible asset impairment charges totaling $34,936 primarily
due to a greater than anticipated decline in prescriptions for
Florinef® and Tapazole® as a result of the
availability of generics for these products. The Company
determined the fair value of the intangible assets associated
with Florinef® and Tapazole® based on
managements discounted cash flow projections for these
products. Florinef® and Tapazole® are included in the
Companys branded pharmaceuticals segment.

Demand for some of the Companys non-key
products, including but not limited to Intal®, Tilade®
and Corzide®, declined over the past year at a rate which
triggered a review of the intangible assets associated with
these products. The net intangible assets associated with these
products totals approximately $161,028. The Company believes
that these intangible assets are not currently impaired based on
estimated undiscounted cash flows associated with these assets.
However, if demand for the products associated with these
intangible assets declines below current expectations, the
Company may have to write off a portion or all of these
intangible assets.

Goodwill at December 31, 2003 and
September 30, 2004 includes the following by segment:

|         |  |         |        |          |  |       |         |  |  |   |         | 
|-------- |  | ------- | ------ | -------- |  | ----- | ------- |  |  | - | ------- | 
|         |  | Branded |        | Meridian |  |      
|         |  | Segment |        | Segment  |  | Total
|         |  |         |        |          |  |      
|Goodwill |  | $       | 12,742 |          |  | $     | 108,613 |  |  | $ | 121,355 | 
|         |  |         |        |          |  |       |         |  |  |   |         | 

During the first quarter of 2004, the Company
paid a $25,000 milestone payment to Elan relating to the
continued exclusivity of Skelaxin® and an
$11,000 milestone payment to Elan in connection with the
development of new formulations of Sonata®. During the
first and second quarters of 2004, a portion of the milestone
payments, $13,537, was reflected as an increase to goodwill to
the extent it was not accrued by the Company at the time of
purchase. The Company does not currently believe that the total
contingent payments for this acquisition will exceed the
estimated fair value at the time of acquisition, and that no
goodwill has been created. Accordingly, as of September 30,
2004, the Company has recorded the full milestone payments made
as a reduction to the contingent liability established at the
time of the acquisition.



|    |                        
|--- | -----------------------
|10. | Discontinued Operations

Ongoing research, referred to as the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it created negatively affected the entire combination
hormone therapy

16



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and the oral estrogen therapy markets including
certain of the Companys products. Prescriptions for some
of the Companys other womens health products have
also continued to decline over the past few years primarily due
to the availability of generics. During the first quarter of
2004, the Companys Board of Directors approved
managements decision to market for divestiture many of the
Companys womens health products. On
November 22, 2004 the Company sold all of its rights in
Prefest® for approximately $15,000. On December 23,
2004, the Company sold all of its rights in Nordette® for
approximately $12,000.

The Prefest® and Nordette® product
rights, which the Company divested on November 22, 2004 and
December 23, 2004, respectively, have identifiable cash
flows that are largely independent of the cash flows of other
groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Prefest® and Nordette® formerly were
included in the Companys branded pharmaceuticals segment.
During the first quarter of 2004 and the third quarter of 2004,
the Company wrote down intangible assets by the amount of
$169,591 and $5,735, respectively, to reduce the carrying value
of the intangible assets associated with these products to their
estimated fair value less costs to sell. During the first
quarter of 2004, the Company determined the fair value of these
intangible assets based on managements discounted cash
flow projections for the products less expected selling costs.
During the third quarter of 2004, the Company determined the
fair value of these assets based on the offer for the purchase
of these products, less expected selling costs.

The major classes of assets associated with
discontinued operations in the accompanying financial statements
are as follows:

|                       |              |               |        |              |  |   |         |         | 
|---------------------- | ------------ | ------------- | ------ | ------------ |  | - | ------- | ------- | 
|                       |              | September 30, |        | December 31,
|                       |              | 2004          |        | 2003        
|                       |              |               |        |             
|Inventories            |              | $             | 717    |              |  | $ | 4,012   |        
|Intangible assets, net |              |               | 25,400 |              |  |   | 204,501 |        
|                       |              |               |        |              |  |   |         |        
|                       | Total assets |               | $      | 26,117       |  |   | $       | 208,513 | 
|                       |              |               |        |              |  |   |         |        

Summarized financial information for the
discontinued operations are as follows:

|                                                        |  |                    |        |                   |  |      |        |            |  |   |          |   |  |   |        |  
|------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---------- |  | - | -------- | - |  | - | ------ | -
|                                                        |  |                    |        |                  
|                                                        |  | Three Months Ended |        | Nine Months Ended
|                                                        |  | September 30,      |        | September 30,    
|                                                        |  |                    |        |                  
|                                                        |  |                    |        | 2003              |  |      |        | 2003      
|                                                        |  | 2004               |        | (restated)        |  | 2004 |        | (restated)
|                                                        |  |                    |        |                   |  |      |        |           
|Total revenues                                          |  | $                  | (689   | )                 |  | $    | 343    |            |  | $ | 13,250   |   |  | $ | 10,134 |  
|Operating loss, including expected loss on
    disposal |  |                    | (6,996 | )                 |  |      | (5,021 | )          |  |   | (172,310 | ) |  |   | (6,373 | )
|Net loss                                                |  |                    | (4,375 | )                 |  |      | (3,113 | )          |  |   | (109,395 | ) |  |   | (3,984 | )



|    |              
|--- | -------------
|11. | Contingencies



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

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court supervised
medical monitoring of persons who have ingested the product. The
Company is one of many defendants in no more than
6 lawsuits that claim damages for personal injury arising
from the Companys production of the anorexigenic drug
phentermine under contract for GlaxoSmithKline.

17



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

While the Company cannot predict the outcome of
these suits, the Company believes that the claims against it are
without merit and intends to vigorously pursue all defenses
available to it. The Company is being indemnified in all of
these suits by GlaxoSmithKline for which the Company
manufactured the anorexigenic product, provided that neither the
lawsuits nor the associated liabilities are based upon the
independent negligence or intentional acts of the Company, and
intends to submit a claim for all unreimbursed costs to the
Companys product liability insurance carrier. However, in
the event that GlaxoSmithKline is unable to satisfy or fulfill
its obligations under the indemnity, the Company would have to
defend the lawsuits and be responsible for damages, if any, that
are awarded against it or for amounts in excess of the
Companys product liability coverage. A reasonable estimate
of potential losses related to these suits cannot be made.

In addition, King Research and Development, Inc.
(King R&D), successor to Jones Pharma
Incorporated (Jones) and a wholly owned subsidiary
of the Company, is a defendant in approximately 381
multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine. These suits have
been filed in various jurisdictions throughout the United
States, and in each of these suits King R&D is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine, or phentermine, Jones was a
distributor of a generic phentermine product and, after the
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®, its branded phentermine product. The plaintiffs in
these cases claim injury as a result of ingesting a combination
of these weight-loss drugs and are seeking compensatory and
punitive damages as well as medical care and court supervised
medical monitoring. The plaintiffs claim liability based on a
variety of theories including but not limited to, product
liability, strict liability, negligence, breach of warranty, and
misrepresentation.

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

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



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

King and Parkedale Pharmaceuticals, Inc.
(Parkedale), a wholly owned subsidiary of King, have
been named as defendants in California, Illinois and
Mississippi, along with other pharmaceutical companies that have
manufactured or sold products containing the mercury-based
preservative, thimerosal.

In these cases, the plaintiffs attempt to link
the receipt of the mercury-based products to neurological
defects. The plaintiffs claim unfair business practices,
fraudulent misrepresentations, negligent misrepresentations, and
breach of implied warranty, which are all arguments premised on
the idea that the defendants promoted products without any
reference to the toxic hazards and potential public health
ramifications resulting from the mercury-containing
preservative. The plaintiffs also allege that the defendants
knew of the dangerous propensities of thimerosal in their
products.

The Companys product liability insurance
carrier has been given proper notice of all of these matters and
defense counsel is vigorously defending the Companys
interests. The Company has filed motions to dismiss

18



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

due, among other things, to lack of product
identity in the plaintiffs complaints. In 2001, the
Company was dismissed on this basis in a similar case. The
Company intends to defend these lawsuits vigorously but is
unable currently to predict the outcome or reasonably estimate
the range of potential loss, if any.



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

King has been named as a defendant in four
lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. Numerous pharmaceutical companies
have also been sued. These cases have been filed in Alabama,
Pennsylvania, Ohio and Mississippi. The plaintiffs allege that
the Company and other defendants failed to conduct adequate
pre-approval research and post-approval surveillance to
establish the safety of the long-term hormone therapy regimen,
thus misleading consumers when marketing their products.
Plaintiffs claims include allegations of negligence,
strict liability, breach of implied warranty, breach of express
warranty, fraud and misrepresentation. The Company intends to
defend these lawsuits vigorously but is unable currently to
predict the outcome or reasonably estimate the range of
potential loss, if any.



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

As previously reported, in March 2003 the SEC
initiated a formal investigation of King relating to, among
other topics, sales of its products to VitaRx and Prison Health
Services, its best price lists, the pricing of its
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., its calculations related to Medicaid
rebates, and the Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, the Company received a
subpoena duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to its sales, marketing and other
business practices for Altace®, Aplisol®, and
Levoxyl®. More recently, the Company has reviewed with the
staff of the SEC the circumstances giving rise to the
restatement of previously issued financial statements as
discussed in Note 2.

In connection with the Companys
determination that it underpaid amounts due to Medicaid and
other government pricing programs from 1998 through 2002, the
Company has continued to engage in discussions with
representatives of the SEC, the United States Attorney for the
Eastern District of Pennsylvania, the Department of Justice, the
National Association of Medicaid Fraud Control Units, the Office
of Inspector General of the Department of Health and Human
Services, the Department of Veterans Affairs, the Centers for
Medicare & Medicaid Services, and the Public Health
Service. The Companys objective in these discussions has
been to achieve a comprehensive settlement relating to all the
matters being investigated by or discussed with all the
governmental authorities.

The Company has not yet reached any agreements or
understandings with respect to the terms of such a settlement,
and may not ever be able to reach such an agreement. However,
based on the status of the discussions to date, the Company now
believes that it is reasonably likely that it will be able to
achieve a comprehensive settlement with all relevant
governmental parties on the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has previously accrued $130,400 in
    respect of its estimated underpayments to Medicaid and other
    government pricing programs and estimated settlement costs with
    all relevant governmental parties. This amount includes $65,400
    accrued for estimated underpayments to Medicaid and other
    government pricing programs, and an additional $65,000 for
    estimated settlement costs as an operating expense during the
    second quarter of 2004 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.

19



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | With respect to the matters being investigated by
    or discussed with the staff of the SEC, the Company currently
    anticipates that it would settle, without admitting or denying,
    one or more charges that the Company had failed to maintain
    adequate books and records and internal controls. The Company
    anticipates that the action to be settled could also include one
    or more charges that its public filings contained material
    misstatements or omissions relating to its financial results for
    some or all of the periods for which results have been restated
    as discussed under Note 2. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

The Companys ability to achieve a
settlement on these or other terms is subject to substantial
uncertainties. The Companys discussions to date have been
conducted with the staffs of various agencies and other
governmental authorities. The Company does not yet have any
agreements or understandings with any of them. Even if the
Company were to reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. The Company expects that
its agreements with the various governmental parties would also
require that those governmental parties reach numerous
agreements among themselves, and that the consummation of the
Companys agreement with each governmental party would be
dependent on consummation of the Companys agreements with
other governmental parties. The Company also expects that some
aspects of a comprehensive settlement would require court
approval.

In light of these uncertainties, the Company
stresses that it may not be able to reach a settlement with the
governmental parties, whether on the terms described above or at
all. As a result, the ultimate amount that the Company will
actually have to pay to resolve these matters could be
materially more than the amount accrued to date, and the terms
could otherwise be materially less favorable than those
described above. Because of these uncertainties and the
complexity of completing a comprehensive resolution, the Company
is not yet able to estimate with reasonable confidence the
amount of time that will be required to enter into and
consummate comprehensive settlement agreements.

The possible settlement described above would not
apply to the related pending class actions and derivative suits,
or any other claims by private plaintiffs. While the Company
denies any liability, it is unable to predict the outcome of the
class actions and derivative suits or reasonably estimate the
range of loss, if any.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of the
Companys securities against the Company, its directors,
former directors, executive officers, former executive officers,
a Company subsidiary, and a former director of the subsidiary in
the United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the Securities Exchange Act of 1934. These 22 complaints
have been consolidated in the United States District Court for
the Eastern District of Tennessee. In addition, holders of the
Companys securities filed two class action complaints
alleging violations of the Securities Act

20



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of 1933 in Tennessee state court. The Company
removed these two cases to the United States District Court for
the Eastern District of Tennessee, where these two cases were
consolidated with the other class actions. Plaintiffs in these
actions unsuccessfully moved to remand these two cases back to
Tennessee state court. These two actions therefore remain part
of the consolidated action. The district court has appointed
lead plaintiffs in the consolidated action, and those lead
plaintiffs filed a consolidated amended complaint on
October 21, 2003 alleging that King, through some of its
executive officers, former executive officers, directors, and
former directors, made false or misleading statements concerning
its business, financial condition, and results of operations
during periods beginning February 16, 1999 and continuing
until March 10, 2003. Plaintiffs in the consolidated action
have also named the underwriters of Kings November 2001
public offering as defendants. The Company and other defendants
filed motions to dismiss the consolidated amended complaint.

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones and as to defendants Dennis Jones and Henry
Richards. The Court also dismissed certain claims as to five
other individual defendants. The Court denied the motions to
dismiss in all other respects. Following the Courts
ruling, on September 20, 2004, the Company and the other
remaining defendants filed answers to plaintiffs
consolidated amended complaint. Discovery and other proceedings
in the case are continuing, and no trial date has been set.

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of the Companys officers and directors. On
October 26, 2004, all of the defendants named in this
action filed an answer to the amended consolidated derivative
and class action complaint. Discovery in this action has
commenced. No trial date has been set.

Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
the Company and the members of the Companys board of
directors. This new case largely asserts substantially the same
claims and seeks the same relief as the class action claim that
was recently added to the state derivative action described
above. Defendants in that action filed a motion to dismiss on
November 30, 2004; that motion is pending and no hearing
date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that the
Company and certain of its executive officers, former executive
officers, directors, former directors and an employee of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying this action are similar in many respects to those in
the class action litigation described above. The defendants
filed a motion to dismiss the ERISA action on March 5,
2004. The District Court Judge referred the motion to a
Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005.

The Company intends to defend all of these
lawsuits vigorously but is unable currently to predict the
outcome or reasonably estimate the range of potential loss, if
any.

If any governmental sanctions are imposed in
excess of those described above, or if the Company were not to
prevail in the pending litigation, neither of which the Company
can predict or reasonably estimate at this time, the
Companys business, financial condition, results of
operations and cash flows could be materially adversely
affected. Responding to the government investigations, resolving
the amounts owed to governmental agencies in connection with the
underpayments and defending King in the pending litigation has
resulted, and

21



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##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

is expected to continue to result, in a
significant diversion of managements attention and
resources and the payment of additional professional fees.



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

The Rochester facility was one of six facilities
owned by Pfizer subject to a Consent Decree of Permanent
Injunction issued August 1993 in United States of
America v. Warner-Lambert Company and Melvin R. Goodes and
Lodewijk J.R. DeVink (U.S. Dist. Ct., Dist. of N.J.) (the
Consent Decree). The Company acquired the Rochester
facility in February 1998. The Rochester facility is currently
manufacturing pharmaceutical products subject to the Consent
Decree that prohibits the manufacture and delivery of specified
drug products unless, among other things, the products conform
to current good manufacturing practices and are produced in
accordance with an approved ANDA or New Drug Application
(NDA). The Company intends, when appropriate, to
petition for relief from the Consent Decree.

Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, filed an ANDA with the FDA seeking
permission to market a generic version of Altace®. The
following U.S. patents are listed for Altace® in the
FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations(the Orange Book):
U.S. Patent Nos. 4,587,258 (the 258 patent) and
5,061,722 (the 722 patent), two composition of matter
patents related to Altace®, and U.S. Patent
No. 5,403,856 (the 856 patent), a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
federal Hatch-Waxman Act of 1984, any generic manufacturer may
file an ANDA with a certification (a Paragraph IV
certification) challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and the Company filed suit in the District
Court for the District of Massachusetts on March 14, 2003
to enforce its rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides the Company
an automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003. In
March 2004, Cobalt stipulated to infringement of the 722
patent. Should the court find in favor of a Cobalt summary
judgment motion on the validity of the 722 patent,
however, the Company would not receive the full benefit of that
30 month stay. Subsequent to filing its original complaint,
the Company amended its complaint to add an allegation of
infringement of the 856 patent. The 856 patent
covers one of Altace®s three indications for use. In
response to the amended complaint, Cobalt informed the FDA that
it no longer seeks approval to market its proposed product for
the indication covered by the 856 patent. On this basis,
the court granted Cobalt summary judgment of non-infringement of
the 856 patent. The courts decision does not affect
Cobalts infringement of the 722 patent. The Company
intends to vigorously enforce its rights under the 722 and
856 patents.

Eon Labs, Inc. (Eon Labs),
CorePharma, LLC (CorePharma) and Mutual
Pharmaceutical Co., Inc. (Mutual) have each filed an
ANDA with the FDA seeking permission to market a generic version
of Skelaxin® 400 mg tablets. Additionally, Eon
Labs ANDA seeks permission to market a generic version of
Skelaxin® 800 mg tablets. United States Patent Nos.
6,407,128 (the 128 patent) and 6,683,102 (the 102
patent), two method-of-use patents relating to Skelaxin®,
are listed in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications against the 128 and
102 patents alleging noninfringement and invalidity of
those patents. Mutual has filed a Paragraph IV
certification against the 102 patent alleging
noninfringement and invalidity of that patent. The Company filed
a patent infringement suit against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
CorePharma on March 7, 2003 in the District Court for the
District of New Jersey (subsequently transferred to the District
Court for the Eastern District of New York); and Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, the Company filed a separate suit
against Eon Labs on December 17, 2004 in the District Court
for the Eastern District of New York, concerning its proposed
800 mg product. Pursuant to the

22



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Hatch-Waxman Act, the filing of the suit against
CorePharma provides the Company with an automatic stay of FDA
approval of CorePharmas ANDA for 30 months from no
earlier than January 24, 2003. Also pursuant to the Hatch-Waxman
Act, the filing of the suits against Eon Labs provides the
Company with an automatic stay of FDA approval of Eon Labs
ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002, and
November 3, 2004, respectively. The Company intends to
vigorously enforce its rights under the 128 and 102
patents to the full extent of the law.

On March 9, 2004, the Company received a
copy of a letter from the FDA to all ANDA applicants for
Skelaxin® stating that the use listed in the FDAs
Orange Book for the 128 patent may be deleted from the
ANDA applicants product labeling. The Company believes
that this decision is arbitrary, capricious, and inconsistent
with the FDAs previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and July 21, 2004), requesting the FDA to
rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent, and
prohibit the removal of information corresponding to the use
listed in the Orange Book. King concurrently filed a Petition
for Stay of Action requesting the FDA to stay approval of any
generic metaxalone products until the FDA has fully evaluated
the Companys Citizen Petition.

On March 12, 2004, the FDA sent a letter to
the Company explaining that Kings proposed labeling
revision, which includes references to additional clinical
studies relating to food, age, and gender effects, was
approvable and only required certain formatting changes. On
April 5, 2004, the Company submitted amended labeling text
that incorporated those changes. On April 5, 2004, Mutual
filed a Petition for Stay of Action requesting the FDA to stay
approval of the Companys proposed labeling revision until
the FDA has fully evaluated and ruled upon the Companys
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. The Company, CorePharma and
Mutual have filed responses and supplements to the pending
Citizen Petition.

If the Companys Citizen Petition is
rejected, there is a substantial likelihood that a generic
version of Skelaxin® will enter the market, and our
business, financial condition, results of operations and cash
flows could be materially adversely affected. At
September 30, 2004, the Company had net intangible assets
related to Skelaxin® of $216,679.

Mylan and KV Pharmaceutical Company
(KV) each filed an ANDA with the FDA seeking
permission to market a generic version of Levoxyl®. United
States Patent No. 6,555,581 (the 581 patent), a
utility patent with formulation claims relating to
Levoxyl®, was issued to the Company on April 29, 2003. The
581 patent is listed in the FDAs Orange Book and
does not expire until February 15, 2022. No earlier than
April 30, 2003, the Company received notice of Mylans
Paragraph IV certification, which alleges noninfringement
of the 581 patent. The Company filed suit against Mylan on
June 13, 2003 in the Eastern District of Pennsylvania and
on June 16, 2003 in the Northern District of West Virginia;
these suits have been consolidated in the Northern District of
West Virginia and trial is currently scheduled in June 2005.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Mylan provides the Company with an automatic stay of FDA
approval of Mylans ANDA for 30 months from no earlier
than April 30, 2003. On June 24, 2003, the Company
received notice of KVs Paragraph IV certification,
which alleges noninfringement and invalidity of the 581
patent. On July 14, 2004, the FDA approved a sNDA filed by
Mylan under 21 U.S.C. § 355(j), seeking to market
Mylans currently approved levothyroxine sodium tablets as
AB-Rated to Levoxyl®. The Company filed suit against KV on
August 7, 2003. However, in view of the FDAs decision
to designate other levothyroxine sodium products as AB-Rated to
Levoxyl® and in further view of the Companys
acquisition by Mylan that was pending at that time, the KV suit
was dismissed on September 8, 2004 pursuant to our
application for dismissal, and the Mylan suit has been suspended.

Barr Laboratories Inc. (Barr) filed
an ANDA, which included a Paragraph IV certification, with
the FDA seeking permission to market a generic version of
Prefest®. United States Patent No. 5,108,995 (the
995 patent), a utility patent with method of treatment
claims relating to Prefest®, was issued on April 28,

23



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1992 and United States Patent No. 5,382,573
(the 573 patent), a utility patent with pharmaceutical
preparation claims relating to Prefest®, was issued on
January 17, 1995. The 995 patent and the 573
patent are both listed in the FDAs Orange Book. The
995 patent does not expire until April 28, 2009, and
the 573 patent does not expire until January 17,
2012. On October 15, 2003, the Company received notice of
Barrs Paragraph IV certification, which alleges
noninfringement and invalidity of the 995 patent and the
573 patent. On November 26, 2003, the Company filed a
complaint against Barr in the Southern District of New York for
infringement of the 995 and 573 patents. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides the
Company an automatic stay of FDA approval of Barrs ANDA
for 30 months from no earlier than October 15, 2003.

On June 8, 2004, the U.S. Patent and
Trademark Office issued United States Patent No. 6,747,019
(the 019 patent). The 019 patent relates to
pharmaceutical preparations, pharmaceutical packages and methods
of treating a female in need of hormone replacement therapy by
administering a specific dose combination of estrogen and
progestin. The Company has certified that the 019 patent
covers the Prefest® product and, therefore the patent has
been listed in the Orange Book. On June 30, 2004, the
Company received a Notice Letter from Barr concerning its
amended Paragraph IV Certification to its ANDA for
Prefest®. The Notice Letter outlines Barrs assertions
of invalidity and noninfringement of the 019 patent. On
July 9, 2004, the Company filed a complaint in the Southern
District of New York for infringement of the 019 patent.
On November 22, 2004, the Company sold all of its right in
Prefest® for approximately $15,000. As a result of this
transaction, the lawsuit was dismissed on January 11, 2005.

In August 2004, King and Monarch Pharmaceuticals,
Inc. (Monarch), a wholly owned subsidiary of King,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their Average
Wholesale Prices (AWP) and fraudulently failed to
accurately report their Best Prices and their
Average Manufacturers Prices (AMP) and failed
to pay proper rebates pursuant to federal law. Additional claims
allege violations of federal and New York statutes, fraud and
unjust enrichment. For the period from 1992 to the present, NYC
is requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits, and
treble and punitive damages.

In August 2004, a defendant in the NYC action
sought to have the action transferred to the United States
District Court for the District of Massachusetts and combined
with existing multi-district litigation, entitled In re
Average Wholesale Pricing Litigation, being heard by that
court. A conditional transfer order was issued during September
2004 indicating that the action is subject to transfer for
pretrial proceedings to the United States District Court for the
District of Massachusetts. The Company intends to defend this
lawsuit vigorously but is unable currently to predict the
outcome or reasonably estimate the range of loss, if any.

The Company also has been named as a defendant
along with other pharmaceutical manufacturers in four other
lawsuits containing allegations of fraudulently inflating AWP.
These lawsuits have been filed in federal courts in
New York and Massachusetts, and in state courts in
New York and Alabama, all of which the Company will seek to
have transferred to the United States District Court for the
District of Massachusetts and combined with the existing
multi-district litigation.

The Company is involved in various routine legal
proceedings incident to the ordinary course of its business. The
Company does not believe that unfavorable outcomes as a result
of these routine legal proceedings will have a material adverse
effect on its financial position, results of operations and cash
flows.



|    |             
|--- | ------------
|12. | Income Taxes

The effective tax rate varies from the statutory
rate for the nine months ended September 30, 2004 due
primarily to the nondeductibility of certain estimated Medicaid
settlement charges (Note 11). The effective

24



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

tax rate varies from the statutory rate for the
three months ended September 30, 2004 due to a change in
estimate in the effective rate for the year ending December 31,
2004. Such change was due to changes in estimated pre tax income
for the year and higher estimates of charitable donations for
the year.



|    |                    
|--- | -------------------
|13. | Segment Information

The Companys business is classified into
five reportable segments: branded pharmaceuticals, Meridian
Medical Technologies, royalties, contract manufacturing and
other. Branded pharmaceuticals include a variety of branded
prescription products over seven therapeutic areas:
cardiovascular, endocrinology/womens health, neuroscience,
critical care, anti-infective, respiratory, and other. Such
branded prescription products have been aggregated because of
the similarity in regulatory environment, manufacturing
processes, methods of distribution, and types of customer. The
Meridian Medical Technologies segment was added as a new segment
during 2003 as a result of the acquisition of Meridian on
January 8, 2003. Meridian develops, manufactures, and sells
auto-injector pharmaceutical products to both commercial and
government markets. The principal source of revenues in the
commercial market is the EpiPen® product line marketed by
Dey, L.P., which is primarily prescribed for the treatment of
severe allergic reactions. Government revenues are principally
derived from the sale of nerve agent antidotes and other
emergency medicine auto-injector products marketed to the
U.S. Department of Defense and other federal, state and
local agencies, particularly those involved in homeland
security, as well as to approved foreign governments. Royalties
include revenues the Company derives from pharmaceutical
products after the Company has transferred the manufacturing or
marketing rights to third parties in exchange for licensing fees
or royalty payments. Contract manufacturing and other primarily
includes pharmaceutical manufacturing services the Company
provides to third-party pharmaceutical and biotechnology
companies.

The Company primarily evaluates its segments
based on gross profit. Reportable segments were separately
identified based on revenues, gross profit (excluding
depreciation) and total assets. Revenues among the segments are
presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment.

25



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                  |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |          |           | 
|--------------------------------- | -------------------------------- | ---------------------------------------------------------------- | -------- | ----------------- | ------- | ---- | -------- | ---------- | ------- |  | -------- | -------- | ------- | - | -------- | -------- | --------- | 
|                                  |                                  |                                                                  |          |                  
|                                  |                                  | Three Months Ended                                               |          | Nine Months Ended
|                                  |                                  | September 30,                                                    |          | September 30,    
|                                  |                                  |                                                                  |          |                  
|                                  |                                  |                                                                  |          | 2003              |         |      |          | 2003      
|                                  |                                  | 2004                                                             |          | (restated)        |         | 2004 |          | (restated)
|                                  |                                  |                                                                  |          |                   |         |      |          |           
|Total revenues:                   |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         
|                                  | Branded pharmaceuticals          |                                                                  | $        | 334,839           |         |      | $        | 364,501    |         |  | $        | 788,912  |         |   | $        | 960,988  |          
|                                  | Meridian Medical Technologies    |                                                                  |          | 33,934            |         |      |          | 38,379     |         |  |          | 96,115   |         |   |          | 98,317   |          
|                                  | Royalties                        |                                                                  |          | 20,252            |         |      |          | 16,275     |         |  |          | 58,128   |         |   |          | 47,875   |          
|                                  | Contract manufacturing and other |                                                                  |          | 212,319           |         |      |          | 58,425     |         |  |          | 497,750  |         |   |          | 215,595  |          
|                                  | Eliminations                     |                                                                  |          | (206,660          | )       |      |          | (52,767    | )       |  |          | (479,160 | )       |   |          | (195,971 | )        
|                                  |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         
|                                  |                                  | Consolidated total net revenues                                  |          | $                 | 394,684 |      |          | $          | 424,813 |  |          | $        | 961,745 |   |          | $        | 1,126,804 | 
|                                  |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         
|Segment profit (loss):            |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         
|                                  | Branded pharmaceuticals          |                                                                  | $        | 261,293           |         |      | $        | 299,033    |         |  | $        | 598,911  |         |   | $        | 777,002  |          
|                                  | Meridian Medical Technologies    |                                                                  |          | 18,028            |         |      |          | 22,272     |         |  |          | 51,482   |         |   |          | 45,544   |          
|                                  | Royalties                        |                                                                  |          | 17,602            |         |      |          | 13,788     |         |  |          | 49,757   |         |   |          | 39,919   |          
|                                  | Contract manufacturing and other |                                                                  |          | 339               |         |      |          | (270       | )       |  |          | (4,492   | )       |   |          | 3,267    |          
|Other operating costs and expense |                                  |                                                                  | (308,915 | )                 |         |      | (168,945 | )          |         |  | (759,810 | )        |         |   | (765,634 | )       
|Other (expense) income            |                                  |                                                                  | (9,183   | )                 |         |      | 6,670    |            |         |  | (15,841  | )        |         |   | 20,410   |         
|                                  |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         
|                                  |                                  | (Loss) income from continuing operations before
    income taxes |          | $                 | (20,836 | )    |          | $          | 172,548 |  |          | $        | (79,993 | ) |          | $        | 120,508   | 
|                                  |                                  |                                                                  |          |                   |         |      |          |            |         |  |          |          |         |   |          |         

The three and nine months ended
September 30, 2003 segment profit amounts reflect
reclassifications of $1,067 and $10,184, respectively,
decreasing the branded pharmaceuticals segment profit and
decreasing the contract manufacturing and other segment loss,
from amounts previously reported as a result of the
reclassification of certain expenses.

|              |                                  |                           |   |              |           |  |   |           |           | 
|------------- | -------------------------------- | ------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|              |                                  |                           |   | As of       
|              |                                  | As of                     |   | December 31,
|              |                                  | September 30,             |   | 2003        
|              |                                  | 2004                      |   | (restated)  
|              |                                  |                           |   |             
|Total assets: |                                  |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals          |                           | $ | 2,894,758    |           |  | $ | 3,174,823 |          
|              | Meridian Medical Technologies    |                           |   | 266,556      |           |  |   | 250,953   |          
|              | Royalties                        |                           |   | 27,552       |           |  |   | 20,032    |          
|              | Contract manufacturing and other |                           |   | 97,465       |           |  |   | 91,002    |          
|              | Eliminations                     |                           |   | (335,280     | )         |  |   | (335,280  | )        
|              |                                  |                           |   |              |           |  |   |          
|              |                                  | Consolidated total assets |   | $            | 2,951,051 |  |   | $         | 3,201,530 | 
|              |                                  |                           |   |              |           |  |   |          

26



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                              |                                              |   |                   |         |      |   |            |         |  |   |         |         |  |   |         |         | 
|--------------- | ---------------------------- | -------------------------------------------- | - | ----------------- | ------- | ---- | - | ---------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                              |                                              |   |                  
|                |                              | Three Months Ended                           |   | Nine Months Ended
|                |                              | September 30,                                |   | September 30,    
|                |                              |                                              |   |                  
|                |                              |                                              |   | 2003              |         |      |   | 2003      
|                |                              | 2004                                         |   | (restated)        |         | 2004 |   | (restated)
|                |                              |                                              |   |                   |         |      |   |           
|Total revenues: |                              |                                              |   |                   |         |      |   |            |         |  |   |         |         |  |   |        
|                | Cardiovascular               |                                              | $ | 128,579           |         |      | $ | 137,060    |         |  | $ | 269,233 |         |  | $ | 449,750 |        
|                | Anti-infective               |                                              |   | 17,024            |         |      |   | 11,270     |         |  |   | 38,528  |         |  |   | 71,689  |        
|                | Critical care                |                                              |   | 54,879            |         |      |   | 42,328     |         |  |   | 134,227 |         |  |   | 113,676 |        
|                | Endocrinology/womens health |                                              |   | 37,041            |         |      |   | 48,967     |         |  |   | 113,202 |         |  |   | 132,348 |        
|                | Respiratory                  |                                              |   | 3,652             |         |      |   | 9,325      |         |  |   | 13,747  |         |  |   | 24,095  |        
|                | Neuroscience                 |                                              |   | 25,632            |         |      |   | 20,374     |         |  |   | 49,329  |         |  |   | 36,285  |        
|                | Other branded                |                                              |   | 68,032            |         |      |   | 95,177     |         |  |   | 170,646 |         |  |   | 133,145 |        
|                |                              |                                              |   |                   |         |      |   |            |         |  |   |         |         |  |   |        
|                |                              | Consolidated branded pharmaceutical revenues |   | $                 | 334,839 |      |   | $          | 364,501 |  |   | $       | 788,912 |  |   | $       | 960,988 | 
|                |                              |                                              |   |                   |         |      |   |            |         |  |   |         |         |  |   |        



|    |              
|--- | -------------
|14. | Restructuring

During the second and third quarters of 2004 the
Company incurred restructuring charges as a result of separation
agreements with several executives, the relocation of the
Companys sales and marketing operations from Bristol,
Tennessee to Princeton, New Jersey, the termination of the
womens health sales force, and the decision to end
principal operations of a small subsidiary of Meridian Medical
Technologies located in Northern Ireland. A summary of the types
of costs accrued and incurred are summarized below:

|                             |  |              |       |            |  |           |       |          |  |            |       |           |  |          |        |          |  |               |       |  |  |   |       |  |  |   |        |   |  |   |        |   |  |   |       | 
|---------------------------- |  | ------------ | ----- | ---------- |  | --------- | ----- | -------- |  | ---------- | ----- | --------- |  | -------- | ------ | -------- |  | ------------- | ----- |  |  | - | ----- |  |  | - | ------ | - |  | - | ------ | - |  | - | ----- | 
|                             |  | Accrued      |       | Accrued    |  |           |       |          |  | Accrued    |       |           |  |          |        |          |  | Accrued      
|                             |  | Balance at   |       | Balance at |  | Income    |       |          |  | Balance at |       | Income    |  |          |        |          |  | Balance at   
|                             |  | December 31, |       | March 31,  |  | Statement |       |          |  | June 30,   |       | Statement |  |          |        |          |  | September 30,
|                             |  | 2003         |       | 2004       |  | Impact    |       | Payments |  | 2004       |       | Impact    |  | Payments |        | Non-Cash |  | 2004         
|                             |  |              |       |            |  |           |       |          |  |            |       |           |  |          |        |          |  |              
|Employee separation payments |  | $            |      |            |  | $         |      |          |  | $          | 5,772 |           |  | $        | (2,373 | )        |  | $             | 3,399 |  |  | $ | 1,697 |  |  | $ | (4,468 | ) |  | $ |       |   |  | $ | 628   | 
|Employee relocation          |  |              |      |            |  |           |      |          |  |            | 476   |           |  |          | (136   | )        |  |               | 340   |  |  |   | 1,334 |  |  |   | (1,507 | ) |  |   |       |   |  |   | 167   | 
|Previously accrued amounts   |  |              | 1,019 |            |  |           | 1,019 |          |  |            | (95   | )         |  |          |       |          |  |               | 924   |  |  |   |      |  |  |   |       |   |  |   |       |   |  |   | 924   | 
|Write-down of assets         |  |              |      |            |  |           |      |          |  |            |      |           |  |          |       |          |  |               |      |  |  |   | 1,643 |  |  |   |       |   |  |   | (1,643 | ) |  |   |      | 
|                             |  |              |       |            |  |           |       |          |  |            |       |           |  |          |        |          |  |               |       |  |  |   |       |  |  |   |        |   |  |   |        |   |  |   |       | 
|                             |  | $            | 1,019 |            |  | $         | 1,019 |          |  | $          | 6,153 |           |  | $        | (2,509 | )        |  | $             | 4,663 |  |  | $ | 4,674 |  |  | $ | (5,975 | ) |  | $ | (1,643 | ) |  | $ | 1,719 | 
|                             |  |              |       |            |  |           |       |          |  |            |       |           |  |          |        |          |  |               |       |  |  |   |       |  |  |   |        |   |  |   |        |   |  |   |       | 

It is anticipated that the relocation of key
sales and marketing employees to New Jersey will be completed
within the next year and will require additional costs, which in
accordance with FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, have not yet
been accrued. All of the restructuring charges relate to the
branded pharmaceutical segment, except for $374 related to
contract manufacturing, and $2,932 related to Meridian Medical
Technologies. As of September 30, 2004, $608 of the
Meridian Medical Technologies restructuring charges and $926 of
the contract manufacturing restructuring charges had not yet
been paid and remained accrued. The remaining accrual related to
the branded pharmaceutical segment.



|    |                  
|--- | -----------------
|15. | Subsequent Events

GAAP requires the Company to include in its
results for the third quarter of 2004 adjustments for the effect
of some events that have arisen subsequent to September 30,
2004 through the date of filing these financial statements.
These subsequent events and their effect on the third quarter
ending September 30, 2004 are discussed below.

27



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Impairment of intangible
assets.The Company recorded
additional intangible asset impairment charges totaling $97,320,
primarily related to Sonata® MR and a decline in demand for
some of the Companys products associated with its
Rochester, Michigan facility, as discussed more fully under
Note 9. Intangible Assets and Goodwill.

Accruals for rebates, returns and
chargebacks.The Company recorded
additional charges for rebates, returns and chargebacks in the
amount of $16,165. The Company establishes accruals for rebates,
returns, and chargebacks based in part on estimates of actual
rebate, return and chargeback amounts that are actually reported
to it in later periods. These estimates require judgment, and
actual claims for rebates, returns and chargebacks can be
different from the estimates. In particular, the Companys
reserve for product returns during the third quarter of 2004 was
adjusted due to a major wholesale customer informing the Company
in early January 2005 that the customer had incorrectly omitted
information it was contractually obligated to provide to the
Company under its inventory management agreements. The omitted
information regarded inventory of Altace® that the customer
was likely to return, and as a result, the Company received an
unanticipated product return. With the exception of this
unanticipated return, the Companys level of product
returns since the conclusion of the third quarter of 2004 has
remained within the Companys expected rate.

The additional charges for rebates, returns and
chargebacks are partially offset by a corresponding reduction in
the co-promotion fee of $13,200 the Company is required to pay
to its co-promotion partner under the co-promotion agreement
with respect to Altace®. The co-promotion fee is generally
equal to a specified portion of the Companys net sales for
Altace®. The Company estimates the total annual payments
based on sales projections for the year, and accrues a portion
of those payment obligations each quarter. Accordingly, the
unexpected Altace® return described above together with
other routine adjustments to the Companys co-promotion fee
estimates during the course of the year as the Company receives
more data on actual results effectively reduced the
Companys accrual for the co-promotion fee during the third
quarter of 2004 to a level that was lower than it anticipated
previously.

Other subsequent event
adjustments.Other subsequent events
affecting the third quarter of 2004 resulted in charges totaling
$12,686 due primarily to an adjustment to the carrying value of
the shares of Novavax common stock the Company holds due to a
decline in the value of the Novavax shares that under accounting
interpretations the Company has determined is other than
temporary, a write-off for excess purchase commitments primarily
related to Lorabid®, and other immaterial adjustments.



|    |                           
|--- | --------------------------
|16. | Related Party Transactions

The Company periodically makes contributions to
charitable and not-for-profit organizations in communities where
its facilities are located. In April 2004, the Company made a
three-year pledge totaling $900 to Sullins Academy, a private
school offering education in grades K-8. The Company
recorded the pledge during the second quarter of 2004. During
the fourth quarter of 2003 and the first quarter of 2004, the
Company made a contribution to Sullins Academy of $150. At
certain times during this period, children of some Company
employees, including the Companys former Chief Executive
Officer and the former President, attended Sullins Academy, and
the former President and the spouse of the former Chief
Executive Officer served as volunteer members of the Sullins
Academy board of directors.



|    |             
|--- | ------------
|17. | Mylan Merger

On July 26, 2004, the Company entered into a
merger agreement with Mylan Laboratories Inc. and a wholly owned
subsidiary of Mylan, pursuant to which Mylan agreed to acquire
King in a stock-for-stock transaction. On February 27,
2005, Mylan and King announced that they had mutually agreed to
terminate that agreement. As of March 1, 2005 both Mylan
and King would have had a right to terminate the merger
agreement and, following discussions, the companies were not
able to agree on terms for a revised transaction.

28



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                     
|--- | ------------------------------------
|18. | Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS
No. 123(R), (Share-based Payment) that requires it to
expense costs related to share-based payment transactions with
employees. SFAS No. 123(R) becomes mandatorily effective on
July 1, 2005. The Company is in the process of evaluating
the impact of this standard.

In November 2004, the FASB issued SFAS
No. 151, (Inventory Costs), an amendment of ARB
No. 43. SFAS No. 151 requires certain abnormal
expenditures to be recognized as expenses in the current period.
It also requires that the amount of fixed production overhead
allocated to inventory be based on the normal capacity of the
production facilities. The standard is effective for the fiscal
year beginning January 1, 2006. The Company is currently
evaluating the effect on its financial reporting.



|    |       
|--- | ------
|19. | FIN 46

The Financial Accounting Standards Board issued
FASB Interpretations No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (ARB No. 51), in January 2003,
and a further interpretation of FIN 46 in December 2003
(FIN 46-R, and collectively FIN 46). FIN 46 clarifies
the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties, referred to as variable
interest entities (VIE). FIN 46 generally
requires consolidation by the party that has a majority of the
risk and/or rewards, referred to as the primary beneficiary.
While the Company has interests in two VIEs, Novavax and
Palatin, the Company is not considered to be the primary
beneficiary of these entities. Therefore, in accordance with the
provisions of FIN 46, the Company has not consolidated the
financial statements of those entities into its consolidated
financial statements.



|    |                               
|--- | ------------------------------
|20. | Guarantor Financial Statements

Each of the Companys subsidiaries, except
Monarch Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), has guaranteed, on a full, unconditional
and joint and several basis, the Companys performance
under the $345,000, Debentures and under the $400,000 Senior
Secured Revolving Credit Facility on a joint and several basis.
There are no restrictions under the Companys financing
arrangements on the ability of the Guarantor Subsidiaries to
distribute funds to the Company in the form of cash dividends,
loans or advances. The following combined financial data
provides information regarding the financial position, results
of operations and cash flows of the Guarantor Subsidiaries
(condensed consolidating financial data). Separate financial
statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined
that such information would not be material to the holders of
the debt.

29



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS


(In thousands, except per share
data)


|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |           |           | 
|----------------------------------------- | ------------------------------------------ | ------------------------- | --------- | ------------ | --------- | ------------ | --------- | ----------- | --------- | ------------ | ----- | ------ | ------ | - | ---------- | ---------- | ---------- | - | --------- | --------- | --------- | 
|                                          |                                            |                          
|                                          |                                            | September 30, 2004       
|                                          |                                            | (unaudited)              
|                                          |                                            |                          
|                                          |                                            |                           |           | Non-         |           |             
|                                          |                                            |                           |           | Guarantor    |           | Guarantor    |           | Eliminating |           | King        
|                                          |                                            | King                      |           | Subsidiaries |           | Subsidiaries |           | Entries     |           | Consolidated
|                                          |                                            |                           |           |              |           |              |           |             |           |             
|ASSETS                                    |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Current assets:                           |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Cash and cash equivalents                 |                                            | $                         | 234,151   |              |           | $            | 12,922    |             |           | $            | 1,078 |        |        | $ |           |            |            | $ | 248,151   |          
|Restricted cash                           |                                            |                           | 66,216    |              |           |              | 47,469    |             |           |              |      |        |        |   |           |            |            |   | 113,685   |          
|Marketable securities                     |                                            |                           | 16,217    |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 16,217    |          
|Accounts receivable, net                  |                                            |                           | 6,351     |              |           |              | 237,805   |             |           |              | 1,826 |        |        |   |           |            |            |   | 245,982   |          
|Inventories                               |                                            |                           | 202,067   |              |           |              | 42,039    |             |           |              | 265   |        |        |   |           |            |            |   | 244,371   |          
|Deferred income tax assets                |                                            |                           | 28,305    |              |           |              | 151,606   |             |           |              |      |        |        |   |           |            |            |   | 179,911   |          
|Prepaid expenses and other current assets |                                            |                           | 13,020    |              |           |              | 39,551    |             |           |              | 11    |        |        |   |           |            |            |   | 52,582    |          
|Assets related to discontinued operations |                                            |                           | 717       |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 717       |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total current assets      |           |              | 567,044   |              |           |             | 531,392   |              |       |        | 3,180  |   |            |            |           |   |           |           | 1,101,616 | 
|Property, plant, and equipment, net       |                                            |                           | 114,044   |              |           |              | 165,177   |             |           |              | 2     |        |        |   |           |            |            |   | 279,223   |          
|Goodwill                                  |                                            |                           |          |              |           |              | 121,355   |             |           |              |      |        |        |   |           |            |            |   | 121,355   |          
|Intangible assets, net                    |                                            |                           | 235       |              |           |              | 1,310,255 |             |           |              | 8,126 |        |        |   |           |            |            |   | 1,318,616 |          
|Other assets                              |                                            |                           | 13,485    |              |           |              | 240       |             |           |              |      |        |        |   |           |            |            |   | 13,725    |          
|Deferred income tax assets                |                                            |                           | (10,597   | )            |           |              | 101,713   |             |           |              |      |        |        |   |           |            |            |   | 91,116    |          
|Investment in subsidiaries                |                                            |                           | 2,086,341 |              |           |              |          |             |           |              |      |        |        |   | (2,086,341 | )          |            |   |          |          
|Assets related to discontinued operations |                                            |                           |          |              |           |              | 25,400    |             |           |              |      |        |        |   |           |            |            |   | 25,400    |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total assets              |           | $            | 2,770,552 |              |           | $           | 2,255,532 |              |       | $      | 11,308 |   |            | $          | (2,086,341 | ) |           | $         | 2,951,051 | 
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                         
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Current liabilities:                      |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Accounts payable                          |                                            | $                         | 37,539    |              |           | $            | 20,728    |             |           | $            | 78    |        |        | $ |           |            |            | $ | 58,345    |          
|Accrued expenses                          |                                            |                           | 132,560   |              |           |              | 511,831   |             |           |              | 11    |        |        |   |           |            |            |   | 644,402   |          
|Income taxes payable                      |                                            |                           | 22,449    |              |           |              | (2,053    | )           |           |              | (126  | )      |        |   |           |            |            |   | 20,270    |          
|Current portion of long-term debt         |                                            |                           |          |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   |          |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total current liabilities |           |              | 192,548   |              |           |             | 530,506   |              |       |        | (37    | ) |            |            |           |   |           |           | 723,017   | 
|Long-term debt                            |                                            |                           | 345,000   |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 345,000   |          
|Other liabilities                         |                                            |                           | 30,854    |              |           |              | 18,748    |             |           |              |      |        |        |   |           |            |            |   | 49,602    |          
|Intercompany (receivable) payable         |                                            |                           | 368,718   |              |           |              | (373,729  | )           |           |              | 5,011 |        |        |   |           |            |            |   |          |          
|                                          |                                            | Total liabilities         |           |              | 937,120   |              |           |             | 175,525   |              |       |        | 4,974  |   |            |            |           |   |           |           | 1,117,619 | 
|Shareholders equity                      |                                            |                           | 1,833,432 |              |           |              | 2,080,007 |             |           |              | 6,334 |        |        |   | (2,086,341 | )          |            |   | 1,833,432 |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          | Total liabilities and shareholders equity |                           | $         | 2,770,552    |           |              | $         | 2,255,532   |           |              | $     | 11,308 |        |   | $          | (2,086,341 | )          |   | $         | 2,951,051 |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |           |           | 
|----------------------------------------- | ------------------------------------------ | ------------------------- | --------- | ------------ | --------- | ------------ | --------- | ----------- | --------- | ------------ | ----- | ------ | ------ | - | ---------- | ---------- | ---------- | - | --------- | --------- | --------- | 
|                                          |                                            |                          
|                                          |                                            | December 31, 2003        
|                                          |                                            | (restated)               
|                                          |                                            |                          
|                                          |                                            |                           |           | Non-         |           |             
|                                          |                                            |                           |           | Guarantor    |           | Guarantor    |           | Eliminating |           | King        
|                                          |                                            | King                      |           | Subsidiaries |           | Subsidiaries |           | Entries     |           | Consolidated
|                                          |                                            |                           |           |              |           |              |           |             |           |             
|ASSETS                                    |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Current assets:                           |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Cash and cash equivalents                 |                                            | $                         | 140,617   |              |           | $            | 3,641     |             |           | $            | 1,795 |        |        | $ |           |            |            | $ | 146,053   |          
|Restricted cash                           |                                            |                           | 67,199    |              |           |              | 66,770    |             |           |              |      |        |        |   |           |            |            |   | 133,969   |          
|Marketable securities                     |                                            |                           |          |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   |          |          
|Accounts receivable, net                  |                                            |                           | 4,529     |              |           |              | 240,574   |             |           |              | 1,314 |        |        |   |           |            |            |   | 246,417   |          
|Inventories                               |                                            |                           | 224,081   |              |           |              | 36,554    |             |           |              | 251   |        |        |   |           |            |            |   | 260,886   |          
|Deferred income tax assets                |                                            |                           | 16,236    |              |           |              | 132,243   |             |           |              |      |        |        |   |           |            |            |   | 148,479   |          
|Prepaid expenses and other current assets |                                            |                           | 5,250     |              |           |              | 24,786    |             |           |              |      |        |        |   |           |            |            |   | 30,036    |          
|Assets related to discontinued operations |                                            |                           | 4,012     |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 4,012     |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total current assets      |           |              | 461,924   |              |           |             | 504,568   |              |       |        | 3,360  |   |            |            |           |   |           |           | 969,852   | 
|Property, plant, and equipment, net       |                                            |                           | 115,442   |              |           |              | 142,217   |             |           |              |      |        |        |   |           |            |            |   | 257,659   |          
|Goodwill                                  |                                            |                           |          |              |           |              | 121,355   |             |           |              |      |        |        |   |           |            |            |   | 121,355   |          
|Intangible assets, net                    |                                            |                           | 6,955     |              |           |              | 1,538,035 |             |           |              | 7,502 |        |        |   |           |            |            |   | 1,552,492 |          
|Other assets                              |                                            |                           | 45,811    |              |           |              | 30,706    |             |           |              |      |        |        |   |           |            |            |   | 76,517    |          
|Deferred income tax assets                |                                            |                           | 14,678    |              |           |              | 4,476     |             |           |              |      |        |        |   |           |            |            |   | 19,154    |          
|Investment in subsidiaries                |                                            |                           | 2,270,679 |              |           |              |          |             |           |              |      |        |        |   | (2,270,679 | )          |            |   |          |          
|Assets related to discontinued operations |                                            |                           |          |              |           |              | 204,501   |             |           |              |      |        |        |   |           |            |            |   | 204,501   |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total assets              |           | $            | 2,915,489 |              |           | $           | 2,545,858 |              |       | $      | 10,862 |   |            | $          | (2,270,679 | ) |           | $         | 3,201,530 | 
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                         
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Current liabilities:                      |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|Accounts payable                          |                                            | $                         | 51,424    |              |           | $            | 30,205    |             |           | $            | 19    |        |        | $ |           |            |            | $ | 81,648    |          
|Accrued expenses                          |                                            |                           | 57,521    |              |           |              | 509,183   |             |           |              |      |        |        |   |           |            |            |   | 566,704   |          
|Income taxes payable                      |                                            |                           | 78,363    |              |           |              | 838       |             |           |              | 440   |        |        |   |           |            |            |   | 79,641    |          
|Current portion of long-term debt         |                                            |                           | 97        |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 97        |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          |                                            | Total current liabilities |           |              | 187,405   |              |           |             | 540,226   |              |       |        | 459    |   |            |            |           |   |           |           | 728,090   | 
|Long-term debt                            |                                            |                           | 345,000   |              |           |              |          |             |           |              |      |        |        |   |           |            |            |   | 345,000   |          
|Other liabilities                         |                                            |                           | 53,197    |              |           |              | 70,752    |             |           |              |      |        |        |   |           |            |            |   | 123,949   |          
|Intercompany (receivable) payable         |                                            |                           | 325,396   |              |           |              | (329,103  | )           |           |              | 3,707 |        |        |   |           |            |            |   |          |          
|                                          |                                            | Total liabilities         |           |              | 910,998   |              |           |             | 281,875   |              |       |        | 4,166  |   |            |            |           |   |           |           | 1,197,039 | 
|Shareholders equity                      |                                            |                           | 2,004,491 |              |           |              | 2,263,983 |             |           |              | 6,696 |        |        |   | (2,270,679 | )          |            |   | 2,004,491 |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          
|                                          | Total liabilities and shareholders equity |                           | $         | 2,915,489    |           |              | $         | 2,545,858   |           |              | $     | 10,862 |        |   | $          | (2,270,679 | )          |   | $         | 3,201,530 |          
|                                          |                                            |                           |           |              |           |              |           |             |           |              |       |        |        |   |            |            |            |   |           |          

30



---



##### 



KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |         |         |  
|---------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | ------------ | -------- | ----------- | ------- | ------------ | -- | --- | --- |  | ------ | -------- | -------- | - | ------- | ------- | ------- | -
|                                                                 |                                                     |                                           
|                                                                 |                                                     | Three Months Ended September 30, 2004     
|                                                                 |                                                     |                                           
|                                                                 |                                                     |                                            |        | Non-         |         |             
|                                                                 |                                                     |                                            |        | Guarantor    |         | Guarantor    |          | Eliminating |         | King        
|                                                                 |                                                     | King                                       |        | Subsidiaries |         | Subsidiaries |          | Entries     |         | Consolidated
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |             
|Revenues:                                                        |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 | Net sales                                           |                                            | $      | 177,050      |         |              | $        | 373,241     |         |              | $  | 427 |     |  | $      | (176,286 | )        |   | $       | 374,432 |        
|                                                                 | Royalty revenue                                     |                                            |        |             |         |              |          | 20,252      |         |              |    |    |     |  |        |         |          |   |         | 20,252  |        
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 |                                                     | Total revenues                             |        |              | 177,050 |              |          |             | 393,493 |              |    |     | 427 |  |        |          | (176,286 | ) |         |         | 394,684 |  
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|Operating costs and expenses:                                    |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 | Costs of revenues                                   |                                            |        | 31,938       |         |              |          | 241,596     |         |              |    | 174 |     |  |        | (176,286 | )        |   |         | 97,422  |        
|                                                                 | Selling, general and administrative                 |                                            |        | 47,379       |         |              |          | 89,629      |         |              |    | 103 |     |  |        |         |          |   |         | 137,111 |        
|                                                                 | Depreciation and amortization                       |                                            |        | 4,345        |         |              |          | 34,384      |         |              |    | 114 |     |  |        |         |          |   |         | 38,843  |        
|                                                                 | Research and development                            |                                            |        | 120          |         |              |          | 33,305      |         |              |    |    |     |  |        |         |          |   |         | 33,425  |        
|                                                                 | Medicaid related charge                             |                                            |        |             |         |              |          |            |         |              |    |    |     |  |        |         |          |   |         |         |        
|                                                                 | Transaction costs                                   |                                            |        | 2,787        |         |              |          |            |         |              |    |    |     |  |        |         |          |   |         | 2,787   |        
|                                                                 | Gain on sale of product lines                       |                                            |        | (4,022       | )       |              |          | (1,223      | )       |              |    |    |     |  |        |         |          |   |         | (5,245  | )      
|                                                                 | Restructuring charges                               |                                            |        | 1,363        |         |              |          | 3,311       |         |              |    |    |     |  |        |         |          |   |         | 4,674   |        
|                                                                 | Intangible asset impairment                         |                                            |        | 4,400        |         |              |          | 92,920      |         |              |    |    |     |  |        |         |          |   |         | 97,320  |        
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 |                                                     | Total operating costs and expenses         |        |              | 88,310  |              |          |             | 493,922 |              |    |     | 391 |  |        |          | (176,286 | ) |         |         | 406,337 |  
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|Operating (loss) income                                          |                                                     |                                            | 88,740 |              |         |              | (100,429 | )           |         |              | 36 |     |     |  |       |          |          |   | (11,653 | )      
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|Other income (expense):                                          |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 | Interest income                                     |                                            |        | 880          |         |              |          | 244         |         |              |    |    |     |  |        |         |          |   |         | 1,124   |        
|                                                                 | Interest expense                                    |                                            |        | (3,058       | )       |              |          | (89         | )       |              |    |    |     |  |        |         |          |   |         | (3,147  | )      
|                                                                 | Valuation charge  convertible notes
    receivable |                                            |        |             |         |              |          |            |         |              |    |    |     |  |        |         |          |   |         |        |        
|                                                                 | Loss on investment in Novavax                       |                                            |        | (6,520       | )       |              |          |            |         |              |    |    |     |  |        |         |          |   |         | (6,520  | )      
|                                                                 | Other, net                                          |                                            |        | (222         | )       |              |          | (440        | )       |              |    | 22  |     |  |        |         |          |   |         | (640    | )      
|                                                                 | Equity in loss of subsidiaries                      |                                            |        | (69,147      | )       |              |          |            |         |              |    |    |     |  |        | 69,147   |          |   |         |        |        
|                                                                 | Equity in earnings of subsidiaries                  |                                            |        |             |         |              |          |            |         |              |    |    |     |  |        |         |          |   |         |        |        
|                                                                 | Intercompany reclassification(1)                    |                                            |        |             |         |              |          |            |         |              |    |    |     |  |        |         |          |   |         |        |        
|                                                                 | Intercompany interest (expense) income              |                                            |        | (9,565       | )       |              |          | 9,565       |         |              |    |    |     |  |        |         |          |   |         |        |        
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 |                                                     | Total other (expense) income               |        |              | (87,632 | )            |          |             | 9,280   |              |    |     | 22  |  |        |          | 69,147   |   |         |         | (9,183  | )
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|(Loss) income from continuing operations before
    income taxes |                                                     |                                            | 1,108  |              |         |              | (91,149  | )           |         |              | 58 |     |     |  | 69,147 |          |          |   | (20,836 | )      
|Income tax (benefit) expense                                     |                                                     |                                            | 9,229  |              |         |              | (26,446  | )           |         |              | 20 |     |     |  |       |          |          |   | (17,197 | )      
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|(Loss) income from continuing operations                         |                                                     |                                            | (8,121 | )            |         |              | (64,703  | )           |         |              | 38 |     |     |  | 69,147 |          |          |   | (3,639  | )      
|Discontinued operations:                                         |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 | Loss from discontinued operations                   |                                            |        | 170          |         |              |          | (7,166      | )       |              |    |    |     |  |        |         |          |   |         | (6,996  | )      
|                                                                 | Income tax benefit                                  |                                            |        | 63           |         |              |          | (2,684      | )       |              |    |    |     |  |        |         |          |   |         | (2,621  | )      
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 |                                                     | Loss (income) from discontinued operations |        |              | 107     |              |          |             | (4,482  | )            |    |     |    |  |        |          |         |   |         |         | (4,375  | )
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        
|                                                                 |                                                     | Net (loss) income                          |        | $            | (8,014  | )            |          | $           | (69,185 | )            |    | $   | 38  |  |        | $        | 69,147   |   |         | $       | (8,014  | )
|                                                                 |                                                     |                                            |        |              |         |              |          |             |         |              |    |     |     |  |        |          |          |   |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | ------------ | ------- | ----------- | ------- | ------------ | --- | --- | --- |  | ------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                                 |                                                     |                                           
|                                                                 |                                                     | Three Months Ended September 30, 2003     
|                                                                 |                                                     | (restated)                                
|                                                                 |                                                     |                                           
|                                                                 |                                                     |                                            |         | Non-         |         |             
|                                                                 |                                                     |                                            |         | Guarantor    |         | Guarantor    |         | Eliminating |         | King        
|                                                                 |                                                     | King                                       |         | Subsidiaries |         | Subsidiaries |         | Entries     |         | Consolidated
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |             
|Revenues:                                                        |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 | Net sales                                           |                                            | $       | 41,615       |         |              | $       | 407,700     |         |              | $   | 793 |     |  | $       | (41,570  | )       |   | $       | 408,538 |        
|                                                                 | Royalty revenue                                     |                                            |         |             |         |              |         | 16,275      |         |              |     |    |     |  |         |         |         |   |         | 16,275  |        
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 |                                                     | Total revenues                             |         |              | 41,615  |              |         |             | 423,975 |              |     |     | 793 |  |         |          | (41,570 | ) |         |         | 424,813 | 
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|Operating costs and expenses:                                    |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 | Costs of revenues                                   |                                            |         | 30,925       |         |              |         | 100,388     |         |              |     | 247 |     |  |         | (41,570  | )       |   |         | 89,990  |        
|                                                                 | Selling, general and administrative                 |                                            |         | 19,199       |         |              |         | 114,310     |         |              |     | 64  |     |  |         |         |         |   |         | 133,573 |        
|                                                                 | Depreciation and amortization                       |                                            |         | 1,822        |         |              |         | 35,030      |         |              |     | 74  |     |  |         |         |         |   |         | 36,926  |        
|                                                                 | Research and development                            |                                            |         | 225          |         |              |         | 8,533       |         |              |     |    |     |  |         |         |         |   |         | 8,758   |        
|                                                                 | Medicaid related charge                             |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 | Transaction costs                                   |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 | Gain on sale of product lines                       |                                            |         | (5           | )       |              |         | (10,307     | )       |              |     |    |     |  |         |         |         |   |         | (10,312 | )      
|                                                                 | Restructuring charges                               |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 | Intangible asset impairment                         |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 |                                                     | Total operating costs and expenses         |         |              | 52,166  |              |         |             | 247,954 |              |     |     | 385 |  |         |          | (41,570 | ) |         |         | 258,935 | 
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|Operating (loss) income                                          |                                                     |                                            | (10,551 | )            |         |              | 176,021 |             |         |              | 408 |     |     |  |        |          |         |   | 165,878 |        
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|Other income (expense):                                          |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 | Interest income                                     |                                            |         | 607          |         |              |         | 430         |         |              |     |    |     |  |         |         |         |   |         | 1,037   |        
|                                                                 | Interest expense                                    |                                            |         | (3,669       | )       |              |         |            |         |              |     |    |     |  |         |         |         |   |         | (3,669  | )      
|                                                                 | Valuation charge  convertible notes
    receivable |                                            |         | 9,338        |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         | 9,338   |        
|                                                                 | Loss on investment in Novavax                       |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 | Other, net                                          |                                            |         | 10           |         |              |         | (46         | )       |              |     |    |     |  |         |         |         |   |         | (36     | )      
|                                                                 | Equity in loss of subsidiaries                      |                                            |         |             |         |              |         |            |         |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 | Equity in earnings of subsidiaries                  |                                            |         | 116,576      |         |              |         |            |         |              |     |     |     |  |         | (116,576 | )       |   |         |         |        
|                                                                 | Intercompany reclassification(1)                    |                                            |         |             |         |              |         | (74,481     | )       |              |     |     |     |  |         | 74,481   |         |   |         |         |        
|                                                                 | Intercompany interest (expense) income              |                                            |         | 5,298        |         |              |         | (5,298      | )       |              |     |    |     |  |         |         |         |   |         |        |        
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 |                                                     | Total other (expense) income               |         |              | 128,160 |              |         |             | (79,395 | )            |     |     |    |  |         |          | (42,095 | ) |         |         | 6,670   | 
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|(Loss) income from continuing operations before
    income taxes |                                                     |                                            | 117,609 |              |         |              | 96,626  |             |         |              | 408 |     |     |  | (42,095 | )        |         |   | 172,548 |        
|Income tax (benefit) expense                                     |                                                     |                                            | 11,244  |              |         |              | 51,683  |             |         |              | 143 |     |     |  |        |          |         |   | 63,070  |        
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|(Loss) income from continuing operations                         |                                                     |                                            | 106,365 |              |         |              | 44,943  |             |         |              | 265 |     |     |  | (42,095 | )        |         |   | 109,478 |        
|Discontinued operations:                                         |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 | Loss from discontinued operations                   |                                            |         |             |         |              |         | (5,021      | )       |              |     |    |     |  |         |         |         |   |         | (5,021  | )      
|                                                                 | Income tax benefit                                  |                                            |         |             |         |              |         | (1,908      | )       |              |     |    |     |  |         |         |         |   |         | (1,908  | )      
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 |                                                     | Loss (income) from discontinued operations |         |              |        |              |         |             | 3,113   |              |     |     |    |  |         |          |        |   |         |         | 3,113   | 
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        
|                                                                 |                                                     | Net (loss) income                          |         | $            | 106,365 |              |         | $           | 41,830  |              |     | $   | 265 |  |         | $        | (42,095 | ) |         | $       | 106,365 | 
|                                                                 |                                                     |                                            |         |              |         |              |         |             |         |              |     |     |     |  |         |          |         |   |         |        



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Intercompany reclassification caused by the
    formation of two new legal entities.

31



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |          |           |  
|---------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | -------- | ------------ | -------- | ------------ | -------- | ----------- | --------- | ------------ | ---- | ----- | ----- | - | ------- | -------- | -------- | - | ------- | -------- | --------- | -
|                                                                 |                                                     |                                      
|                                                                 |                                                     | Nine Months Ended September 30, 2004 
|                                                                 |                                                     |                                      
|                                                                 |                                                     |                                       |          | Non-         |          |             
|                                                                 |                                                     |                                       |          | Guarantor    |          | Guarantor    |          | Eliminating |           | King        
|                                                                 |                                                     | King                                  |          | Subsidiaries |          | Subsidiaries |          | Entries     |           | Consolidated
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |             
|Revenues:                                                        |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 | Net sales                                           |                                       | $        | 405,319      |          |              | $        | 901,428     |           |              | $    | 1,310 |       |   | $       | (404,440 | )        |   | $       | 903,617  |          
|                                                                 | Royalty revenue                                     |                                       |          |             |          |              |          | 58,128      |           |              |      |      |       |   |         |         |          |   |         | 58,128   |          
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 |                                                     | Total revenues                        |          |              | 405,319  |              |          |             | 959,556   |              |      |       | 1,310 |   |         |          | (404,440 | ) |         |          | 961,745   |  
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|Operating costs and expenses:                                    |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 | Costs of revenues                                   |                                       |          | 99,102       |          |              |          | 570,997     |           |              |      | 428   |       |   |         | (404,440 | )        |   |         | 266,087  |          
|                                                                 | Selling, general and administrative                 |                                       |          | 132,454      |          |              |          | 238,286     |           |              |      | 1,044 |       |   |         |         |          |   |         | 371,784  |          
|                                                                 | Depreciation and amortization                       |                                       |          | 12,997       |          |              |          | 103,304     |           |              |      | 326   |       |   |         |         |          |   |         | 116,627  |          
|                                                                 | Research and development                            |                                       |          | 375          |          |              |          | 66,550      |           |              |      |      |       |   |         |         |          |   |         | 66,925   |          
|                                                                 | Medicaid related charge                             |                                       |          | 65,000       |          |              |          |            |           |              |      |      |       |   |         |         |          |   |         | 65,000   |          
|                                                                 | Transaction costs                                   |                                       |          | 5,913        |          |              |          |            |           |              |      |      |       |   |         |         |          |   |         | 5,913    |          
|                                                                 | Gain on sale of product lines                       |                                       |          | (4,022       | )        |              |          | (5,502      | )         |              |      |      |       |   |         |         |          |   |         | (9,524   | )        
|                                                                 | Restructuring charges                               |                                       |          | 7,611        |          |              |          | 3,217       |           |              |      |      |       |   |         |         |          |   |         | 10,828   |          
|                                                                 | Intangible asset impairment                         |                                       |          | 4,400        |          |              |          | 127,857     |           |              |      |      |       |   |         |         |          |   |         | 132,257  |          
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 |                                                     | Total operating costs and expenses    |          |              | 323,830  |              |          |             | 1,104,709 |              |      |       | 1,798 |   |         |          | (404,440 | ) |         |          | 1,025,897 |  
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|Operating (loss) income                                          |                                                     |                                       | 81,489   |              |          |              | (145,153 | )           |           |              | (488 | )     |       |   |        |          |          |   | (64,152 | )       
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|Other income (expense):                                          |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 | Interest income                                     |                                       |          | 2,691        |          |              |          | 568         |           |              |      |      |       |   |         |         |          |   |         | 3,259    |          
|                                                                 | Interest expense                                    |                                       |          | (9,425       | )        |              |          | (93         | )         |              |      |      |       |   |         |         |          |   |         | (9,518   | )        
|                                                                 | Valuation charge  convertible notes
    receivable |                                       |          | (2,887       | )        |              |          |            |           |              |      |      |       |   |         |         |          |   |         | (2,887   | )        
|                                                                 | Loss on investment in Novavax                       |                                       |          | (6,520       | )        |              |          |            |           |              |      |      |       |   |         |         |          |   |         | (6,520   | )        
|                                                                 | Other, net                                          |                                       |          | (709         | )        |              |          | 603         |           |              |      | (69   | )     |   |         |         |          |   |         | (175     | )        
|                                                                 | Equity in earnings of subsidiaries                  |                                       |          |             |          |              |          |            |           |              |      |      |       |   |         |         |          |   |         |         |          
|                                                                 | Equity in loss of subsidiaries                      |                                       |          | (184,371     | )        |              |          |            |           |              |      |      |       |   |         | 184,371  |          |   |         |         |          
|                                                                 | Intercompany interest (expense) income              |                                       |          | (24,895      | )        |              |          | 24,895      |           |              |      |      |       |   |         |         |          |   |         |         |          
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 |                                                     | Total other (expense) income          |          |              | (226,116 | )            |          |             | 25,973    |              |      |       | (69   | ) |         |          | 184,371  |   |         |          | (15,841   | )
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|(Loss) income from continuing operations before
    income taxes |                                                     |                                       | (144,627 | )            |          |              | (119,180 | )           |           |              | (557 | )     |       |   | 184,371 |          |          |   | (79,993 | )       
|Income tax (benefit) expense                                     |                                                     |                                       | 30,300   |              |          |              | (44,477  | )           |           |              | (195 | )     |       |   |        |          |          |   | (14,372 | )       
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|(Loss) income from continuing operations                         |                                                     |                                       | (174,927 | )            |          |              | (74,703  | )           |           |              | (362 | )     |       |   | 184,371 |          |          |   | (65,621 | )       
|Discontinued operations:                                         |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 | Loss from discontinued operations                   |                                       |          | (139         | )        |              |          | (172,171    | )         |              |      |      |       |   |         |         |          |   |         | (172,310 | )        
|                                                                 | Income tax benefit                                  |                                       |          | (50          | )        |              |          | (62,865     | )         |              |      |      |       |   |         |         |          |   |         | (62,915  | )        
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 |                                                     | Net loss from discontinued operations |          |              | (89      | )            |          |             | (109,306  | )            |      |       |      |   |         |          |         |   |         |          | (109,395  | )
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         
|                                                                 |                                                     | Net (loss) income                     |          | $            | (175,016 | )            |          | $           | (184,009  | )            |      | $     | (362  | ) |         | $        | 184,371  |   |         | $        | (175,016  | )
|                                                                 |                                                     |                                       |          |              |          |              |          |             |           |              |      |       |       |   |         |          |          |   |         |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |           |           |  
|---------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | ------ | ------------ | ------- | ------------ | ------ | ----------- | --------- | ------------ | ----- | ----- | ----- |  | ------- | -------- | -------- | - | ------- | --------- | --------- | -
|                                                                 |                                                     |                                      
|                                                                 |                                                     | Nine Months Ended September 30, 2003 
|                                                                 |                                                     | (restated)                           
|                                                                 |                                                     |                                      
|                                                                 |                                                     |                                       |        | Non-         |         |             
|                                                                 |                                                     |                                       |        | Guarantor    |         | Guarantor    |        | Eliminating |           | King        
|                                                                 |                                                     | King                                  |        | Subsidiaries |         | Subsidiaries |        | Entries     |           | Consolidated
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |             
|Revenues:                                                        |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 | Net sales                                           |                                       | $      | 142,436      |         |              | $      | 1,076,073   |           |              | $     | 2,588 |       |  | $       | (142,168 | )        |   | $       | 1,078,929 |          
|                                                                 | Royalty revenue                                     |                                       |        |             |         |              |        | 47,875      |           |              |       |      |       |  |         |         |          |   |         | 47,875    |          
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 |                                                     | Total revenues                        |        |              | 142,436 |              |        |             | 1,123,948 |              |       |       | 2,588 |  |         |          | (142,168 | ) |         |           | 1,126,804 |  
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|Operating costs and expenses:                                    |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 | Costs of revenues                                   |                                       |        | 66,096       |         |              |        | 336,386     |           |              |       | 729   |       |  |         | (142,168 | )        |   |         | 261,043   |          
|                                                                 | Selling, general and administrative                 |                                       |        | 43,977       |         |              |        | 323,196     |           |              |       | 145   |       |  |         |         |          |   |         | 367,318   |          
|                                                                 | Depreciation and amortization                       |                                       |        | 5,781        |         |              |        | 69,197      |           |              |       | 222   |       |  |         |         |          |   |         | 75,200    |          
|                                                                 | Research and development                            |                                       |        | 675          |         |              |        | 221,812     |           |              |       |      |       |  |         |         |          |   |         | 222,487   |          
|                                                                 | Medicaid related charge                             |                                       |        |             |         |              |        |            |           |              |       |      |       |  |         |         |          |   |         |          |          
|                                                                 | Transaction costs                                   |                                       |        |             |         |              |        |            |           |              |       |      |       |  |         |         |          |   |         |          |          
|                                                                 | Gain on sale of product lines                       |                                       |        | (5           | )       |              |        | (10,307     | )         |              |       |      |       |  |         |         |          |   |         | (10,312   | )        
|                                                                 | Restructuring charges                               |                                       |        |             |         |              |        |            |           |              |       |      |       |  |         |         |          |   |         |          |          
|                                                                 | Intangible asset impairment                         |                                       |        |             |         |              |        | 110,970     |           |              |       |      |       |  |         |         |          |   |         | 110,970   |          
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 |                                                     | Total operating costs and expenses    |        |              | 116,524 |              |        |             | 1,051,254 |              |       |       | 1,096 |  |         |          | (142,168 | ) |         |           | 1,026,706 |  
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|Operating (loss) income                                          |                                                     |                                       | 25,912 |              |         |              | 72,694 |             |           |              | 1,492 |       |       |  |        |          |          |   | 100,098 |          
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|Other income (expense):                                          |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 | Interest income                                     |                                       |        | 5,139        |         |              |        | 591         |           |              |       |      |       |  |         |         |          |   |         | 5,730     |          
|                                                                 | Interest expense                                    |                                       |        | (10,136      | )       |              |        | (2          | )         |              |       |      |       |  |         |         |          |   |         | (10,138   | )        
|                                                                 | Valuation charge  convertible notes
    receivable |                                       |        | 24,952       |         |              |        |            |           |              |       |      |       |  |         |         |          |   |         | 24,952    |          
|                                                                 | Loss on investment in Novavax                       |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |           |          
|                                                                 | Other, net                                          |                                       |        | (58          | )       |              |        | (76         | )         |              |       |      |       |  |         |         |          |   |         | (134      | )        
|                                                                 | Equity in earnings of subsidiaries                  |                                       |        | 33,861       |         |              |        |            |           |              |       |      |       |  |         | (33,861  | )        |   |         |          |          
|                                                                 | Equity in loss of subsidiaries                      |                                       |        |             |         |              |        |             |           |              |       |      |       |  |         |         |          |   |         |          |          
|                                                                 | Intercompany interest (expense) income              |                                       |        | 11,591       |         |              |        | (11,591     | )         |              |       |      |       |  |         |         |          |   |         |          |          
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 |                                                     | Total other (expense) income          |        |              | 65,349  |              |        |             | (11,078   | )            |       |       |      |  |         |          | (33,861  | ) |         |           | 20,410    |  
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|(Loss) income from continuing operations before
    income taxes |                                                     |                                       | 91,261 |              |         |              | 61,616 |             |           |              | 1,492 |       |       |  | (33,861 | )        |          |   | 120,508 |          
|Income tax (benefit) expense                                     |                                                     |                                       | 28,621 |              |         |              | 24,741 |             |           |              | 522   |       |       |  |        |          |          |   | 53,884  |          
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|(Loss) income from continuing operations                         |                                                     |                                       | 62,640 |              |         |              | 36,875 |             |           |              | 970   |       |       |  | (33,861 | )        |          |   | 66,624  |          
|Discontinued operations:                                         |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 | Loss from discontinued operations                   |                                       |        |             |         |              |        | (6,373      | )         |              |       |      |       |  |         |         |          |   |         | (6,373    | )        
|                                                                 | Income tax benefit                                  |                                       |        |             |         |              |        | (2,389      | )         |              |       |      |       |  |         |         |          |   |         | (2,389    | )        
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 |                                                     | Net loss from discontinued operations |        |              |        |              |        |             | (3,984    | )            |       |       |      |  |         |          |         |   |         |           | (3,984    | )
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          
|                                                                 |                                                     | Net (loss) income                     |        | $            | 62,640  |              |        | $           | 32,891    |              |       | $     | 970   |  |         | $        | (33,861  | ) |         | $         | 62,640    |  
|                                                                 |                                                     |                                       |        |              |         |              |        |             |           |              |       |       |       |  |         |          |          |   |         |          

32



---



##### 



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands, except per share
data)


|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |         |  
|------------------------------------------------------- | -------------------------------------------- | ------------------------------------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | - | ----- | ----- | - | - | ------- | ------- | -
|                                                        |                                              |                                     
|                                                        |                                              | Nine Months Ended September 30, 2004
|                                                        |                                              |                                     
|                                                        |                                              |                                      |         | Non-         |   |             
|                                                        |                                              |                                      |         | Guarantor    |   | Guarantor    |         | King        
|                                                        |                                              | King                                 |         | Subsidiaries |   | Subsidiaries |         | Consolidated
|                                                        |                                              |                                      |         |              |   |              |         |             
|Cash flows from operating activities                    |                                              | $                                    | 58,772  |              |   | $            | 100,453 |              |   | $ | (932  | )     |   | $ | 158,293 |        
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Cash flows from investing activities:                   |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|                                                        | Transfer from restricted cash                |                                      |         | 1,115        |   |              |         | (771         | ) |   |       |      |   |   |         | 344     |  
|                                                        | Purchases of marketable securities           |                                      |         |              |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Proceeds from sale of marketable securities  |                                      |         |              |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Proceeds from loans receivable               |                                      |         |             |   |              |         |              |   |   |       |      |   |   |         |         |  
|                                                        | Purchases of property, plant and equipment   |                                      |         | (10,032      | ) |              |         | (31,882      | ) |   |       | (2    | ) |   |         | (41,916 | )
|                                                        | Proceeds from sale of products               |                                      |         | 27,336       |   |              |         | 52           |   |   |       |      |   |   |         | 27,388  |  
|                                                        | Proceeds from sale of assets                 |                                      |         | 171          |   |              |         | (56          | ) |   |       |      |   |   |         | 115     |  
|                                                        | Acquisition of Primary Care from Elan        |                                      |         |             |   |              |         | (36,000      | ) |   |       |      |   |   |         | (36,000 | )
|                                                        | Investment in Meridian                       |                                      |         |             |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Collaboration agreement                      |                                      |         | (20,000      | ) |              |         |             |   |   |       |      |   |   |         | (20,000 | )
|                                                        | Purchases of product rights                  |                                      |         |             |   |              |         | (50          | ) |   |       | (950  | ) |   |         | (1,000  | )
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Net cash used in investing activities                   |                                              |                                      | (1,410  | )            |   |              | (68,707 | )            |   |   | (952  | )     |   |   | (71,069 | )      
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Cash flows from financing activities:                   |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|                                                        | Proceeds from exercise of stock options, net |                                      |         | 4,220        |   |              |         |             |   |   |       |      |   |   |         | 4,220   |  
|                                                        | Payments on other long-term debt             |                                      |         | (97          | ) |              |         |             |   |   |       |      |   |   |         | (97     | )
|                                                        | Proceeds from revolving credit facility      |                                      |         |             |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Payments on revolving credit facility        |                                      |         |             |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Debt issuance costs                          |                                      |         |             |   |              |         |             |   |   |       |      |   |   |         |        |  
|                                                        | Intercompany                                 |                                      |         | 28,843       |   |              |         | (30,010      | ) |   |       | 1,167 |   |   |         |        |  
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Net cash provided by (used in) financing
    activities |                                              |                                      | 32,966  |              |   |              | (30,010 | )            |   |   | 1,167 |       |   |   | 4,123   |        
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Net cash provided by discontinued operations            |                                              |                                      | 3,206   |              |   |              | 7,545   |              |   |   |      |       |   |   | 10,751  |        
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Increase (decrease) in cash and cash equivalents        |                                              |                                      | 93,534  |              |   |              | 9,281   |              |   |   | (717  | )     |   |   | 102,098 |        
|Cash and cash equivalents, beginning of period          |                                              |                                      | 140,617 |              |   |              | 3,641   |              |   |   | 1,795 |       |   |   | 146,053 |        
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        
|Cash and cash equivalents, end of period                |                                              | $                                    | 234,151 |              |   | $            | 12,922  |              |   | $ | 1,078 |       |   | $ | 248,151 |        
|                                                        |                                              |                                      |         |              |   |              |         |              |   |   |       |       |   |   |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |          |  
|------------------------------------------------------- | -------------------------------------------- | ------------------------------------ | -------- | ------------ | - | ------------ | -------- | ------------ | - | - | - | - |  | - | -------- | -------- | -
|                                                        |                                              |                                     
|                                                        |                                              | Nine Months Ended September 30, 2003
|                                                        |                                              | (restated)                          
|                                                        |                                              |                                     
|                                                        |                                              |                                      |          | Non-         |   |             
|                                                        |                                              |                                      |          | Guarantor    |   | Guarantor    |          | King        
|                                                        |                                              | King                                 |          | Subsidiaries |   | Subsidiaries |          | Consolidated
|                                                        |                                              |                                      |          |              |   |              |          |             
|Cash flows from operating activities                    |                                              | $                                    | 16,443   |              |   | $            | 349,627  |              |   | $ |  |   |  | $ | 366,070  |         
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Cash flows from investing activities:                   |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|                                                        | Transfer from restricted cash                |                                      |          | (48,083      | ) |              |          |             |   |   |   |  |  |   |          | (48,083  | )
|                                                        | Purchases of marketable securities           |                                      |          | (25,903      | ) |              |          |             |   |   |   |  |  |   |          | (25,903  | )
|                                                        | Proceeds from sale of marketable securities  |                                      |          | 253,097      |   |              |          |             |   |   |   |  |  |   |          | 253,097  |  
|                                                        | Proceeds from loans receivable               |                                      |          |             |   |              |          | 8,668        |   |   |   |  |  |   |          | 8,668    |  
|                                                        | Purchases of property, plant and equipment   |                                      |          | (6,044       | ) |              |          | (27,486      | ) |   |   |  |  |   |          | (33,530  | )
|                                                        | Proceeds from sale of products               |                                      |          | 13,310       |   |              |          |              |   |   |   |   |  |   |          | 13,310   |  
|                                                        | Proceeds from sale of assets                 |                                      |          | 12           |   |              |          | 249          |   |   |   |  |  |   |          | 261      |  
|                                                        | Acquisition of Primary Care from Elan        |                                      |          |             |   |              |          | (761,745     | ) |   |   |  |  |   |          | (761,745 | )
|                                                        | Investment in Meridian                       |                                      |          | (253,908     | ) |              |          | 15,410       |   |   |   |  |  |   |          | (238,498 | )
|                                                        | Collaboration agreement                      |                                      |          |             |   |              |          |             |   |   |   |  |  |   |          |         |  
|                                                        | Purchases of product rights                  |                                      |          | (9,000       | ) |              |          |             |   |   |   |  |  |   |          | (9,000   | )
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Net cash used in investing activities                   |                                              |                                      | (76,519  | )            |   |              | (764,904 | )            |   |   |  |   |  |   | (841,423 | )       
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Cash flows from financing activities:                   |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|                                                        | Proceeds from exercise of stock options, net |                                      |          | 3,555        |   |              |          |             |   |   |   |  |  |   |          | 3,555    |  
|                                                        | Payments on other long-term debt             |                                      |          | (124         | ) |              |          |             |   |   |   |  |  |   |          | (124     | )
|                                                        | Proceeds from revolving credit facility      |                                      |          | 125,000      |   |              |          |             |   |   |   |  |  |   |          | 125,000  |  
|                                                        | Payments on revolving credit facility        |                                      |          | (125,000     | ) |              |          |              |   |   |   |   |  |   |          | (125,000 | )
|                                                        | Debt issuance costs                          |                                      |          | (214         | ) |              |          |             |   |   |   |  |  |   |          | (214     | )
|                                                        | Intercompany                                 |                                      |          | (420,378     | ) |              |          | 420,378      |   |   |   |  |  |   |          |         |  
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Net cash provided by (used in) financing
    activities |                                              |                                      | (417,161 | )            |   |              | 420,378  |              |   |   |  |   |  |   | 3,217    |         
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Net cash provided by discontinued operations            |                                              |                                      |         |              |   |              | 2,415    |              |   |   |  |   |  |   | 2,415    |         
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Increase (decrease) in cash and cash equivalents        |                                              |                                      | (477,237 | )            |   |              | 7,516    |              |   |   |  |   |  |   | (469,721 | )       
|Cash and cash equivalents, beginning of period          |                                              |                                      | 594,385  |              |   |              | (6,160   | )            |   |   |  |   |  |   | 588,225  |         
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         
|Cash and cash equivalents, end of period                |                                              | $                                    | 117,148  |              |   | $            | 1,356    |              |   | $ |  |   |  | $ | 118,504  |         
|                                                        |                                              |                                      |          |              |   |              |          |              |   |   |   |   |  |   |          |         

33



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##### 





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

The following discussion contains certain
forward-looking statements that reflect managements
current views of future events and operations. This discussion
should be read in conjunction with the following:
(a) Risk Factors set out in our Annual Report
on Form 10-K for the year ended December 31, 2004,
which is being filed contemporaneously with the filing of this
Quarterly Report on Form 10-Q; (b) our consolidated
financial statements for the year ended December 31, 2003,
as restated, 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 for the
quarter ended September 30, 2004 and related notes which
are included in this report on Form 10-Q. Please see the
sections entitled Risk Factors in our 2004
Form 10-K and A Warning About Forward-Looking
Statements in this report for a discussion of the
uncertainties, risks and assumptions associated with these
statements.

I. OVERVIEW

Introduction

We are a vertically integrated pharmaceutical
company that develops, manufactures, markets and sells branded
prescription pharmaceutical products. We seek to capitalize on
opportunities in the pharmaceutical industry through the
development, including through in-licensing arrangements and
acquisitions, of novel branded prescription pharmaceutical
products in attractive markets and the strategic acquisition of
branded products that can benefit from focused promotion and
marketing and product life-cycle management.

Strategic Developments

PT-141

On August 12, 2004, we entered into a
collaborative agreement with Palatin Technologies, Inc. to
jointly develop and, on obtaining necessary regulatory
approvals, commercialize Palatins PT-141 for the treatment
of male and female sexual dysfunction. Pursuant to the terms of
the agreement, Palatin has granted King a co-exclusive license
with Palatin to PT-141 in North America and an exclusive right
to collaborate in the licensing or sublicensing of PT-141 with
Palatin outside North America.

PT-141 is the first compound in a new drug class
called melanocortin receptor agonists under development to treat
sexual dysfunction. This new chemical entity is being evaluated
in Phase II clinical trials studying the efficacy and
safety profile of varying doses of this novel compound in men
experiencing erectile dysfunction, which we refer to as
ED, and women experiencing female sexual
dysfunction, which we refer to as FSD.

Although the current ED market is primarily
served by PDE-5 inhibitors which target the vascular system, a
substantial unmet medical need for alternative sexual
dysfunction therapies exists. Many patients are contraindicated
for, or non-responsive to, PDE-5 inhibitors. For example, PDE-5
inhibitors are contraindicated in patients taking nitrates,
which are prescribed primarily for the treatment of
cardiovascular disease. Current clinical data indicates that
PT-141 should not have any drug interactions with nitrates. We
paid Palatin approximately $20.0 million on entering into the
collaborative agreement, which included a $5.0 million equity
investment in Palatin. Additionally, we may pay potential
milestone payments to Palatin of up to $100.0 million for
achieving certain ED and FSD development and regulatory approval
targets. After regulatory approval and commercialization of
PT-141, we may also pay potential milestone payments to Palatin
of up to $130.0 million upon achieving specified annual
North American net sales thresholds.

Entry of Generic Competition for
Levoxyl®

On August 14, 1997, the U.S. Food and
Drug Administration, which we refer to as the FDA,
announced in the Federal Register (62 FR 43535) that orally
administered levothyroxine sodium drug products are new drugs.
The notice stated that manufacturers who wish to continue to
market these products must submit applications as required by
the FDC Act by August 14, 2000. On April 26, 2000, the
FDA issued a second Federal Register notice extending the
deadline for filing these applications until August 14,
2001. On

34



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##### 



May 25, 2001, the FDA approved our New Drug
Application, which we refer to in this report as an
NDA, for Levoxyl®, our levothyroxine sodium
product.


During 2001 and 2002, we filed with the
U.S. Patent and Trademark Office in excess of 40
applications for U.S. patents concerning our FDA-approved
product Levoxyl®. The first U.S. patent on
Levoxyl®, the 581 patent, a utility patent with
composition of matter claims, listed in the FDAs Orange
Book, was issued on April 29, 2003 and extends through
February 15, 2022. We cannot assure you that any or all of
the other patent applications currently under review will issue.

We filed a Citizen Petition with the FDA on
March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any Abbreviated New Drug
Application, which we refer to as ANDA, or
supplemental Abbreviated New Drug Application, which we refer to
as sANDA, for levothyroxine sodium drug products
until adequate standards for establishing bioequivalence for
levothyroxine sodium drug products are adopted in accordance
with FDA procedures. A manufacturer of another major
levothyroxine sodium product and professional endocrinology
societies submitted similar and/or related comments to the FDA.

Mylan and KV Pharmaceutical Company each filed an
ANDA with the FDA seeking permission to market a generic version
of Levoxyl®. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. We have filed separate
suits against Mylan and KV alleging infringement of the
581 patent.

On June 23, 2004, the FDA denied our Citizen
Petition and approved supplemental New Drug Applications, which
we refer to as an sNDA, filed by Alara
Pharmaceuticals, Inc. and Jerome Stevens Pharmaceutical, Inc.
under § 355(b)(2) of the Federal Food, Drug and Cosmetic
Act, 21 U.S.C. § 355 et seq.seeking to market
their currently approved products (Levo-T® and
Unithroid®, respectively) as bioequivalent and
therapeutically equivalent (i.e., AB-Rated)
to Kings Levoxyl®. Neither Alara nor Jerome submitted
a patent certification (under 21 U.S.C. §355(b)(2)(A))
against our 581 patent, despite its listing in the Orange
Book as applicable to Levoxyl®. In response, we filed an
action in the U.S. District Court for the District of
Columbia against the FDA seeking preliminary and permanent
injunctive relief in the form of an order directing the FDA to
withdraw its approval of the two sNDAs. Alara intervened in the
action. In an order dated July 8, 2004, however, the Court
denied our request for a temporary restraining order and a
preliminary injunction on the basis that we could not
demonstrate a likelihood of success on the merits of our claim.
In view of the Courts Order, the parties stipulated to a
dismissal of the lawsuit.

On July 14, 2004, the FDA approved an sANDA
filed by Mylan under 21 U.S.C. § 355(j), seeking to
market Mylans currently approved levothyroxine sodium
tablets as AB-Rated to Levoxyl®. As with Alara and Jerome
Stevens, the FDA did not require Mylan to certify against our
581 patent because Unithroid®, not Levoxyl®, is
the listed drug referred to in Mylans original ANDA. In
view of the FDAs decision to designate other levothyroxine
sodium products as AB-Rated to Levoxyl® and in further view
of the merger with Mylan that was pending at that time, the KV
suit was dismissed pursuant to our application for dismissal,
and the Mylan suit was suspended.

Levothyroxine sodium is a drug recognized to have
a narrow toxic to therapeutic ratio with significant clinical
consequences of excessive or inadequate treatment. The American
Thyroid Association, The Endocrine Society, and the American
Association of Clinical Endocrinologists have all raised
concerns regarding patients being switched among a number of
levothyroxine sodium preparations. Accordingly, these
organizations have advised physicians caring for patients on
levothyroxine sodium therapy to encourage their patients to ask
to remain on their current levothyroxine sodium preparation.
Nevertheless, sales of Levoxyl® were materially adversely
affected in the third quarter of 2004 and will most likely
continue to decline in future periods.

Wholesale Inventory Reductions

In order to facilitate improved management of
wholesale inventory levels of all of our branded pharmaceutical
products, we entered into inventory management agreements with
each of our three key

35



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##### 



wholesale customers in April 2004. As we
previously disclosed, during the six months ended June 30,
2004 net sales of some of our branded pharmaceutical products
were significantly adversely affected as we effectively reduced
wholesale inventory levels of our branded pharmaceutical
products. As of September 30, 2004, the wholesale inventory
levels of four of our key branded pharmaceutical products,
Altace®, Skelaxin®, Sonata® and Levoxyl®,
based on data obtained through our inventory management
agreements with our three largest customers and IMS America
prescription data, were on average at a level of approximately
2.0 months of end-user demand. We believe this level of
approximately 2.0 months of end-user demand represents
gross sales of approximately $350.0 million. During the
fourth quarter of 2004 we began working to amend our inventory
management agreements with the objective of further reducing the
inventory of our products held by our three largest customers.
As a result, the average wholesale level of our products was
reduced during the fourth quarter of 2004. We anticipate that
wholesale inventory reductions for our products should be
substantially complete by the end of the first quarter of 2005.
This should result in a higher level of net sales generated by
our key products in future periods.


Restatement of Previously Issued Financial
Statements

We have restated our previously issued financial
statements for the years 2002 and 2003, including interim
periods in 2003, and the first two quarters of 2004, primarily
to reflect the correction of methodological errors related to
our reserve for product returns. We have also revised our
preliminary results for the quarter and nine months ended
September 30, 2004, which were released on October 28,
2004.

After experiencing an unusually high level of
product returns during late 2003 and the first three quarters of
2004, we decided to conduct a thorough evaluation of our returns
reserve before formally closing the third quarter of 2004.
Accordingly, on October 28, 2004, we publicly announced
that we were conducting such a review and that our preliminary
financial results for the third quarter of 2004 were subject to
change as a result of the review. We subsequently delayed the
filing of our Quarterly Report on Form 10-Q for the third
quarter of 2004, which we are filing contemporaneously with our
Annual Report on Form 10-K for the year ended December 31,
2004.

In connection with our now-completed review, we
have concluded that the recent large returns were primarily the
result of our entry into inventory management agreements, which
we refer to as IMAs, with our largest wholesalers,
together with several product specific developments. However, we
also determined that our methodology for reserving for product
returns from the first quarter of 2000 through the second
quarter of 2004 contained errors, with the result that estimated
product returns were not recorded in the period required under
generally accepted accounting principles, which we refer to as
GAAP. Also in connection with our review, we
concluded that certain other previously recorded immaterial
items should have been recognized in earlier periods.

The errors described above resulted from policies
adopted in good faith and after discussion with our independent
auditors. These errors are unrelated to the ongoing
investigations of us by the U.S. Securities and Exchange
Commission, which we refer to as SEC, and the Office
of the Inspector General, which we refer to as OIG,
of the Department of Health and Human Services.

All amounts referenced in this Quarterly Report
for 2002 and 2003, including interim periods in 2003, and the
first two quarters of 2004 reflect the relevant amounts on a
restated basis. We will not amend our Annual Reports on
Form 10-K for the years ended December 31, 2002 or
2003, or our Quarterly Reports on Form 10-Q for quarterly
periods from January 1, 2002 through June 30, 2004.
The previously issued financial statements for the years ended
2002 and 2003, including interim periods in 2003, and the first
two quarters of 2004 should no longer be relied upon.



| |                                                
| | -----------------------------------------------
| | Returns reserve and other restatement
    items

Returns reserve.GAAP requires that we reserve for expected product returns when
recognizing sales to wholesalers and other customers, who have
the right to return products for specified periods. From the
first quarter of 2000 through the second quarter of 2002, we
used the replacement cost method to value our reserve for
product returns. Under that method, our reserve for future
product returns was valued at the cost to

36



---



##### 



manufacture replacement product. We discontinued
use of the replacement cost method effective July 1, 2002,
and began valuing our returns reserve at the sales value of
returned products. In connection with the recent review of our
returns reserve, management has concluded that use of the
replacement cost method constituted an error. From the third
quarter of 2002 through the second quarter of 2004, we accrued
for product returns based in part on our estimate of inventory
in the wholesale and retail distribution channels. Management
has concluded that this methodology also contained an error,
because it did not take into account the shelf life of our
products in the wholesale distribution channels. As a result of
these conclusions, we have adopted revised policies and
procedures for establishing reserves for product returns. The
revised methodology is described in Note 3.


Previously disclosed immaterial Medicaid
errors.The restatement has not
resulted in any change in the amounts of previously reported
errors in respect of Medicaid and other governmental pricing
programs. The restatement has, however, changed how the
immaterial Medicaid errors are reflected in the 2002 financial
statements. We have previously disclosed immaterial Medicaid
errors that had arisen during 1998 through 2001 and recorded
those amounts in the fourth quarter of 2002. As described below,
as part of the restatement, all immaterial errors, including
those Medicaid errors, which arose prior to 2002 and that were
previously recorded as charges in 2002 have been removed as
charges from the 2002 income statement. The aggregate amount of
those immaterial errors has instead been recorded as part of the
adjustment to the opening balance (January 1, 2002) of
retained earnings in the restated 2002 financial statements.

Other immaterial
items.In the course of our returns
review, we determined that in some instances our estimates of
inventory in the distribution channel did not properly reflect
relevant data in our possession, and that we thereby
inadvertently under-accrued for estimated future chargeback
amounts. Chargebacks are credits issued to wholesalers (who
purchase at published wholesale prices) when they resell our
products to a customer entitled to a discount pursuant to the
customers agreement with us. The wholesaler allows its
customer to purchase at the discounted price, and then the
wholesaler recovers the amount of the discount from us via a
chargeback.

Following our determination that we would restate
our financial statements for 2002, 2003 and the first two
quarters of 2004, we also determined that we would correct for
other known miscellaneous immaterial errors made in the
application of GAAP that arose during those periods. Our
restated financial statements reflect each of these items in the
period in which it actually arose.

Use of estimates in restatement items.Investors should be aware that the
amounts being restated are largely estimates, including most
importantly estimates of future product returns. GAAP requires
that we reserve for expected product returns when recognizing
sales to wholesalers and other customers, who have the right to
return products for specified periods. Because we identified
flaws in the methodology we had used to generate our prior
estimates of expected product returns, for purposes of the
restatement we have prepared new estimates by retroactively
applying our revised methodology commencing January 1,
2000. We believe that the new estimates are reasonable and
appropriate for inclusion in the restated financial statements.
Nevertheless, estimates require considerable judgment and are
subject to inherent imprecision. Our new estimates may or may
not be the same as those that we actually would have generated
during earlier periods if we had in fact been using our revised
methodology during those periods.

37



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##### 





| |                                  
| | ---------------------------------
| | Restated Income Statement Amounts

The table below sets forth the effect of the
adjustments for the three months ended September 30, 2003:

|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |         |         |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------- | ------- | ---------- | ----- | -------- | ----- | - | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|                                                                 |                                                                                     |                                                      |         | Returns |         | Other      |       |         
|                                                                 |                                                                                     | As Originally                                        |         | Reserve |         | Immaterial |       | As      
|                                                                 |                                                                                     | Reported                                             |         | Errors  |         | Items      |       | Restated
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |         
|Revenues:                                                        |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Net sales                                                                           |                                                      | $       | 406,862 |         |            | $     | 4,389    |       |   | $      | (2,713 | )      |   | $       | 408,538 |        
|                                                                 | Royalty revenue                                                                     |                                                      |         | 16,275  |         |            |       | 0        |       |   |        | 0      |        |   |         | 16,275  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total revenues                                       |         |         | 423,137 |            |       |          | 4,389 |   |        |        | (2,713 | ) |         |         | 424,813 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Operating costs and expenses:                                    |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below                         |                                                      |         | 89,845  |         |            |       | 143      |       |   |        | 2      |        |   |         | 89,990  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees             |                                                      |         | 87,082  |         |            |       | 0        |       |   |        | (250   | )      |   |         | 86,832  |        
|                                                                 | Co-promotion fees                                                                   |                                                      |         | 46,109  |         |            |       | 239      |       |   |        | 393    |        |   |         | 46,741  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total selling, general and administrative expense    |         |         | 133,191 |            |       |          | 239   |   |        |        | 143    |   |         |         | 133,573 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Research and development                                                            |                                                      |         | 8,758   |         |            |       | 0        |       |   |        | 0      |        |   |         | 8,758   |        
|                                                                 | Depreciation and amortization                                                       |                                                      |         | 36,926  |         |            |       | 0        |       |   |        | 0      |        |   |         | 36,926  |        
|                                                                 | (Gain) loss on sale of products                                                     |                                                      |         | (10,312 | )       |            |       | 0        |       |   |        | 0      |        |   |         | (10,312 | )      
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total operating costs and expenses                   |         |         | 258,408 |            |       |          | 382   |   |        |        | 145    |   |         |         | 258,935 |  
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Operating income (loss)                                                             |                                                      |         | 164,729 |         |            |       | 4,007    |       |   |        | (2,858 | )      |   |         | 165,878 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Total other (expense) income                                     |                                                                                     |                                                      | 6,670   |         |         |            | 0     |          |       |   | 0      |        |        |   | 6,670   |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Income (loss) from continuing operations
    before income taxes |                                                                                     |                                                      | 171,399 |         |         |            | 4,007 |          |       |   | (2,858 | )      |        |   | 172,548 |        
|Income tax expense (benefit)                                     |                                                                                     |                                                      | 62,630  |         |         |            | 1,534 |          |       |   | (1,094 | )      |        |   | 63,070  |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Income (loss) from continuing operations                         |                                                                                     |                                                      | 108,769 |         |         |            | 2,473 |          |       |   | (1,764 | )      |        |   | 109,478 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Discontinued operations:                                         |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 | Income (loss) from discontinued operations,
    including expected loss on disposal |                                                      |         | (4,323  | )       |            |       | (717     | )     |   |        | 19     |        |   |         | (5,021  | )      
|                                                                 | Income tax expense (benefit)                                                        |                                                      |         | (1,641  | )       |            |       | (274     | )     |   |        | 7      |        |   |         | (1,908  | )      
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|                                                                 |                                                                                     | Total income (loss) from discontinued
    operations |         |         | (2,682  | )          |       |          | (443  | ) |        |        | 12     |   |         |         | (3,113  | )
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Net income (loss)                                                |                                                                                     | $                                                    | 106,087 |         |         | $          | 2,030 |          |       | $ | (1,752 | )      |        | $ | 106,365 |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Basic income (loss) per common share                             |                                                                                     | $                                                    | 0.44    |         |         | $          | 0.01  |          |       | $ | (0.01  | )      |        | $ | 0.44    |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        
|Diluted income (loss) per common share                           |                                                                                     | $                                                    | 0.44    |         |         | $          | 0.01  |          |       | $ | (0.01  | )      |        | $ | 0.44    |        
|                                                                 |                                                                                     |                                                      |         |         |         |            |       |          |       |   |        |        |        |   |         |        

38



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##### 



The table below sets forth the effect of the
adjustments for the nine months ended September 30, 2003:

|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |           |           |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------- | ------- | --------- | --------- | ---------- | ------ | ----------- | ---- | - | ---- | ----- | ---- | - | ------- | --------- | --------- | -
|                                                                 |                                                                                     | As                                                |         | Returns   |           | Other      |        |            
|                                                                 |                                                                                     | Originally                                        |         | Reserve   |           | Immaterial |        |            
|                                                                 |                                                                                     | Reported                                          |         | Errors    |           | Items      |        | As Restated
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |            
|Revenues:                                                        |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Net sales                                                                           |                                                   | $       | 1,080,698 |           |            | $      | (940        | )    |   | $    | (829  | )    |   | $       | 1,078,929 |          
|                                                                 | Royalty revenue                                                                     |                                                   |         | 47,875    |           |            |        | 0           |      |   |      | 0     |      |   |         | 47,875    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total revenues                                    |         |           | 1,128,573 |            |        |             | (940 | ) |      |       | (829 | ) |         |           | 1,126,804 |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Operating costs and expenses:                                    |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below                         |                                                   |         | 260,930   |           |            |        | 89          |      |   |      | 24    |      |   |         | 261,043   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees             |                                                   |         | 204,146   |           |            |        | 0           |      |   |      | (750  | )    |   |         | 203,396   |          
|                                                                 | Co-promotion fees                                                                   |                                                   |         | 163,050   |           |            |        | 154         |      |   |      | 718   |      |   |         | 163,922   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total selling, general and administrative expense |         |           | 367,196   |            |        |             | 154  |   |      |       | (32  | ) |         |           | 367,318   |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Research and development                                                            |                                                   |         | 29,487    |           |            |        | 0           |      |   |      | 0     |      |   |         | 29,487    |          
|                                                                 | Research and development-in process upon
    acquisition                            |                                                   |         | 193,000   |           |            |        | 0           |      |   |      | 0     |      |   |         | 193,000   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total research and development                    |         |           | 222,487   |            |        |             | 0    |   |      |       | 0    |   |         |           | 222,487   |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Depreciation and amortization                                                       |                                                   |         | 75,200    |           |            |        | 0           |      |   |      | 0     |      |   |         | 75,200    |          
|                                                                 | Intangible asset impairment                                                         |                                                   |         | 110,970   |           |            |        | 0           |      |   |      | 0     |      |   |         | 110,970   |          
|                                                                 | (Gain) loss on sale of products                                                     |                                                   |         | (10,312   | )         |            |        | 0           |      |   |      | 0     |      |   |         | (10,312   | )        
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total operating costs and expenses                |         |           | 1,026,471 |            |        |             | 243  |   |      |       | (8   | ) |         |           | 1,026,706 |  
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Operating income (loss)                                                             |                                                   |         | 102,102   |           |            |        | (1,183      | )    |   |      | (821  | )    |   |         | 100,098   |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Total other (expense) income                                     |                                                                                     |                                                   | 20,410  |           |           |            | 0      |             |      |   | 0    |       |      |   | 20,410  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Income (loss) from continuing operations before
    income taxes |                                                                                     |                                                   | 122,512 |           |           |            | (1,183 | )           |      |   | (821 | )     |      |   | 120,508 |          
|Income tax expense (benefit)                                     |                                                                                     |                                                   | 54,653  |           |           |            | (454   | )           |      |   | (315 | )     |      |   | 53,884  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Income (loss) from continuing operations                         |                                                                                     |                                                   | 67,859  |           |           |            | (729   | )           |      |   | (506 | )     |      |   | 66,624  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Discontinued operations:                                         |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 | Income (loss) from discontinued operations,
    including expected loss on disposal |                                                   |         | (6,367    | )         |            |        | (1,091      | )    |   |      | 1,085 |      |   |         | (6,373    | )        
|                                                                 | Income tax expense (benefit)                                                        |                                                   |         | (2,387    | )         |            |        | (417        | )    |   |      | 415   |      |   |         | (2,389    | )        
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|                                                                 |                                                                                     | Total income (loss) from discontinued operations  |         |           | (3,980    | )          |        |             | (674 | ) |      |       | 670  |   |         |           | (3,984    | )
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Net income (loss)                                                |                                                                                     | $                                                 | 63,879  |           |           | $          | (1,403 | )           |      | $ | 164  |       |      | $ | 62,640  |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Basic income (loss) per common share                             |                                                                                     | $                                                 | 0.27    |           |           | $          | (0.01  | )           |      | $ | 0.00 |       |      | $ | 0.26    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          
|Diluted income (loss) per common share                           |                                                                                     | $                                                 | 0.26    |           |           | $          | 0.00   |             |      | $ | 0.00 |       |      | $ | 0.26    |          
|                                                                 |                                                                                     |                                                   |         |           |           |            |        |             |      |   |      |       |      |   |         |          

39



---



##### 



Restated Balance Sheet Amounts

The table below sets forth the effect of the
adjustments on the balance sheet as of December 31, 2003:

|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ---------- | - | ----------- | ------- | - | ----- | ------ | ------ | - | --------- | --------- | --------- | 
|                                          |                                           | 2003                                       |           | Returns   |           | Other      |   |            
|                                          |                                           | As Originally                              |           | Reserve   |           | Immaterial |   | 2003       
|                                          |                                           | Reported                                   |           | Errors    |           | Items      |   | As Restated
|                                          |                                           |                                            |           |           |           |            |   |            
|Assets                                    |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current Assets:                           |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Cash and cash equivalents                 |                                            | $         | 146,053   |           |            |   |             |         |   |       |        |        |   | $         | 146,053   |          
|                                          | Restricted cash                           |                                            |           | 133,969   |           |            |   |             |         |   |       |        |        |   |           | 133,969   |          
|                                          | Accounts receivable, net                  |                                            |           | 246,417   |           |            |   |             |         |   |       |        |        |   |           | 246,417   |          
|                                          | Inventories                               |                                            |           | 260,886   |           |            |   |             |         |   |       |        |        |   |           | 260,886   |          
|                                          | Deferred income tax assets                |                                            |           | 124,930   |           |            | $ | 19,864      |         |   | $     | 3,685  |        |   |           | 148,479   |          
|                                          | Prepaid expenses and other current assets |                                            |           | 30,036    |           |            |   |             |         |   |       |        |        |   |           | 30,036    |          
|                                          | Assets related to discontinued operations |                                            |           | 4,012     |           |            |   |             |         |   |       |        |        |   |           | 4,012     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current assets                       |           |           | 946,303   |            |   |             | 19,864  |   |       |        | 3,685  |   |           |           | 969,852   | 
|Property, plant and equipment, net        |                                           |                                            | 257,659   |           |           |            |   |             |         |   |       |        |        |   | 257,659   |          
|Goodwill                                  |                                           |                                            | 121,355   |           |           |            |   |             |         |   |       |        |        |   | 121,355   |          
|Intangible assets, net                    |                                           |                                            | 1,552,492 |           |           |            |   |             |         |   |       |        |        |   | 1,552,492 |          
|Other assets                              |                                           |                                            | 76,117    |           |           |            |   |             |         |   | 400   |        |        |   | 76,517    |          
|Deferred income tax assets                |                                           |                                            | 19,307    |           |           |            |   |             |         |   | (153  | )      |        |   | 19,154    |          
|Assets related to discontinued operations |                                           |                                            | 204,501   |           |           |            |   |             |         |   |       |        |        |   | 204,501   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total assets                               |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                         
|Liabilities and Shareholders
    Equity  |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Current liabilities:                      |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Accounts payable                          |                                            | $         | 83,078    |           |            |   |             |         |   | $     | (1,430 | )      |   | $         | 81,648    |          
|                                          | Accrued expenses                          |                                            |           | 506,033   |           |            | $ | 51,864      |         |   |       | 8,807  |        |   |           | 566,704   |          
|                                          | Income taxes payable                      |                                            |           | 79,641    |           |            |   |             |         |   |       |        |        |   |           | 79,641    |          
|                                          | Current portion of long term debt         |                                            |           | 97        |           |            |   |             |         |   |       |        |        |   |           | 97        |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total current liabilities                  |           |           | 668,849   |            |   |             | 51,864  |   |       |        | 7,377  |   |           |           | 728,090   | 
|Long-term debt                            |                                           |                                            | 345,000   |           |           |            |   |             |         |   |       |        |        |   | 345,000   |          
|Other liabilities                         |                                           |                                            | 121,705   |           |           |            |   |             |         |   | 2,244 |        |        |   | 123,949   |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities                          |           |           | 1,135,554 |            |   |             | 51,864  |   |       |        | 9,621  |   |           |           | 1,197,039 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|Shareholders equity:                     |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          | Preferred stock                           |                                            |           |          |           |            |   |             |         |   |       |        |        |   |           |          |          
|                                          | Common stock                              |                                            |           | 1,205,970 |           |            |   |             |         |   |       |        |        |   |           | 1,205,970 |          
|                                          | Retained earnings                         |                                            |           | 835,097   |           |            |   | (32,000     | )       |   |       | (5,689 | )      |   |           | 797,408   |          
|                                          | Accumulated other comprehensive income    |                                            |           | 1,113     |           |            |   |             |         |   |       |        |        |   |           | 1,113     |          
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total shareholders equity                 |           |           | 2,042,180 |            |   |             | (32,000 | ) |       |        | (5,689 | ) |           |           | 2,004,491 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          
|                                          |                                           | Total liabilities and shareholders equity |           | $         | 3,177,734 |            |   | $           | 19,864  |   |       | $      | 3,932  |   |           | $         | 3,201,530 | 
|                                          |                                           |                                            |           |           |           |            |   |             |         |   |       |        |        |   |           |          

Subsequent Events Effecting Preliminary
Results for the Three and Nine Months Ended September 30,
2004

GAAP requires us to include in our results for
the third quarter of 2004 adjustments for the effect of some
events that have arisen subsequent to September 30, 2004
through the date of the filing of these financial statements.
These subsequent events and their effect on the third quarter
ending September 30, 2004 are discussed below.

40



---



##### 



Impairment of intangible
assets.We recorded additional
intangible asset impairment charges totaling $97.3 million,
primarily due to a material change in estimate of future cash
flows from the development of a modified release formulation of
Sonata® and a decline in demand for some of the products
associated with our Rochester, Michigan facility, as discussed
more fully below. In its meeting on March 15, 2005, the
Audit Committee of our Board of Directors agreed with management
that these impairment charges are required to be recorded in the
third quarter.

Pursuant to an agreement between Elan and us,
Elan commenced a Phase II clinical trial program for the purpose
of developing a modified release formulation of Sonata®,
which we refer to as Sonata® MR, in March 2004.
However, the Phase II clinical trial results received during the
third quarter of 2004 showed that the Sonata® MR
formulations that Elan developed did not meet contractually
required specifications. After several months of review,
subsequent to September 30, 2004, we concluded that it was
not possible for Elan to develop a Sonata® MR formulation
meeting the contractually required specifications. Accordingly,
we decided to discontinue the Sonata® MR clinical program
and intend to terminate the agreement with Elan. Although we
believe we are entitled to terminate the agreement, we can
provide no assurance that we will effectively terminate the
agreement and, if we do, under what terms. The agreement
currently requires us to pay up to an additional
$60.0 million if Elan achieves certain milestones in
connection with the development of a reformulated version of
Sonata® and $15.0 million as a milestone payment if
annual net sales of a reformulated version of Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of Sonata®. During
the third quarter of 2004, the company recorded on intangible
asset impairment charge of $64.7 million related to
Sonata® MR based on the fair value of the expected cash
flows related to the intangible assets as of September 30,
2004.

The Rochester, Michigan facility manufactures
several products for us, including Aplisol® and
Coly-Mycin®. The products that are manufactured at this
facility are considered one asset group and evaluated for
impairment together. We reviewed the Rochester intangible assets
for impairment under SFAS No. 144. Based on the
review, we determined that the Rochester intangible assets were
impaired and recorded an impairment charge of approximately
$17.5 million during the third quarter of 2004. The
Rochester intangible assets are part of the branded
pharmaceutical segment.

Accruals for rebates, returns and
chargebacks.We recorded additional
charges for rebates, returns and chargebacks in the amount of
$16.2 million. We establish accruals for rebates, returns,
and chargebacks based in part on estimates of actual rebate,
return and chargeback amounts that are only reported to us in
later periods. These estimates require judgment, and actual
claims for rebates, returns and chargebacks can be different
from the estimates. In particular, our reserve for product
returns during the third quarter of 2004 was adjusted because a
major wholesale customer informed us that the customer had
incorrectly omitted information it was contractually obligated
to provide to us under its inventory management agreements. The
omitted information regarded inventory of Altace® that the
customer was likely to return, and as a result, we received an
unanticipated product return. With the exception of this
unanticipated return, our level of product returns since the
conclusion of the third quarter of 2004 has remained within our
expected rate.

The additional charges for rebates, returns and
chargebacks described above are partially offset by a
corresponding reduction in the co-promotion fee of
$13.2 million we are required to pay to our co-promotion
partner under the co-promotion agreement with respect to
Altace®. The co-promotion fee is generally equal to a
specified portion of our net sales for Altace®. We estimate
the total annual co-promotion payments based on sales
projections for the year and accrue a portion of those payment
obligations each quarter. Accordingly, the unexpected
Altace® return described above together with other routine
adjustments to our co-promotion fee estimates during the course
of the year as we received more data regarding actual results
effectively reduced our accrual for the co-promotion fee during
the third quarter of 2004 to a level that was lower than we
anticipated previously.

Other subsequent event
adjustments.We recorded additional
miscellaneous adjustments during the third quarter of 2004 for
subsequent events totaling $12.7 million. These include an
adjustment to the carrying value of the shares of Novavax, Inc.
common stock we hold to reflect our determination that the
decline in the

41



---



##### 



fair value of the Novavax shares as of
September 30, 2004 was other than temporary, a write-off
for excess purchase commitments primarily related to
Lorabid®, and other immaterial adjustments.


Other Updates and Developments



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

Cobalt Pharmaceuticals, Inc. filed an ANDA with
the FDA seeking permission to market a generic version of
Altace®. The following U.S. patents are listed for
Altace® in the FDAs Approved Drug Products with
Therapeutic Equivalence Evaluations, which is known as the
Orange Book: U.S. Patent Nos. 4,587,258, the
258 patent, and 5,061,722, the 722 patent,
two composition of matter patents related to Altace®, and
U.S. Patent No. 5,403,856, the 856 patent, a
method-of-use patent related to Altace®, with expiration
dates of January 2005, October 2008, and April 2012,
respectively. Under the Hatch-Waxman Act, any generic
manufacturer may file an ANDA with Paragraph IV
certification challenging the validity or infringement of a
patent listed in the FDAs Orange Book four years after the
pioneer company obtains approval of its NDA. Cobalt has filed a
Paragraph IV certification alleging invalidity of the
722 patent, and we filed suit on March 14, 2003
in the District Court for the District of Massachusetts to
enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003.
Should the court find in favor of a Cobalt summary judgment
motion on the 722 patent, however, we would not
receive the full benefit of that 30 month stay. Subsequent
to filing our original complaint, we amended our complaint to
add an allegation of infringement of the 856 patent. The
856 patent covers one of Altace®s three
indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of non-infringement of the 856 patent.
The courts decision does not affect Cobalts
infringement of the 722 patent. We intend to vigorously
enforce our rights under the 722 and
856 patents.



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

Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Company have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of Skelaxin® 800 mg
tablets. United States Patent Nos. 6,407,128, the
128 patent, and 6,683,102, the 102 patent
two method-of-use patents relating to Skelaxin®, are listed
in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 and 102 patents. Mutual
has filed a Paragraph IV certification alleging
noninfringement and invalidity of the 102 patent. We filed
a patent infringement suit against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
CorePharma on March 7, 2003 in the District Court for the
District of New Jersey (subsequently transferred to the District
Court for the Eastern District of New York); and Mutual on
March 12, 2004 in the District Court for the Eastern
District of Pennsylvania concerning their proposed 400 mg
products. Additionally, we filed a separate suit against Eon
Labs on December 17, 2004 in the District Court for the
Eastern District of New York, concerning its proposed 800 mg
product. Pursuant to the Hatch-Waxman Act, the filing of the
suit against CorePharma provides us with an automatic stay of
FDA approval of CorePharmas ANDA for 30 months from
no earlier than January 24, 2003. Also pursuant to the
Hatch-Waxman Act, the filing of the suits against Eon Labs
provides us with an automatic stay of FDA approval of Eon
Labs ANDA for its proposed 400 mg and 800 mg products for
30 months from no earlier than November 18, 2002, and
November 3, 2004, respectively. We intend to vigorously
enforce our rights under the 128 and 102
patents to the full extent of the law.

On March 9, 2004, we received a copy of a
letter from the FDA to all ANDA applicants for Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004 and on
July 21, 2004), requesting the FDA to rescind that letter,
require generic applicants to

42



---



##### 



submit Paragraph IV certifications for the
128 patent, and prohibit the removal of information
corresponding to the use listed in the Orange Book. King
concurrently filed a Petition for Stay of Action requesting the
FDA to stay approval of any generic metaxalone products until
the FDA has fully evaluated our Citizen Petition.


On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. Discussions with the FDA concerning
appropriate labeling are ongoing. CorePharma, Mutual and we have
filed responses and supplements to the pending Citizen Petition.

If our Citizen Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected.



| |             
| | ------------
| | Mylan Merger

On July 26, 2004, we entered into a merger
agreement with Mylan Laboratories Inc. and a wholly-owned
subsidiary of Mylan, pursuant to which Mylan agreed to acquire
King in a stock-for-stock transaction. On February 27,
2005, we announced that we and Mylan had mutually agreed to
terminate that agreement. As of March 1, 2005 both we and
Mylan would have had a right to terminate the merger agreement
and, following discussions, the companies were not able to agree
on terms for a revised transaction.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our Rochester Facility and Intangible Assets
    Related to Some Non-Key Products

Our Rochester facility manufactures products for
us and various third-party manufacturers. As of
December 31, 2003, the net carrying value of the property,
plant, and equipment at the Rochester facility was
$82.2 million. Overall production volume at this facility
has declined. We currently have plans to transfer to this
facility the manufacture of some of our branded prescription
pharmaceutical products that are currently manufactured for us
by third parties. This should increase production and overall
profitability at our Rochester facility. Management currently
believes that these long-term assets are not impaired based on
estimated undiscounted future cash flows. However, if production
volumes continue to decline and/or if we are not successful in
transferring additional production to the facility, we may have
to write-off a portion of the property, plant and equipment
associated with the facility.

Demand for some of our non-key products,
including but not limited to Intal®, Tilade® and
Corzide®, declined over the past year at a rate which
triggered a review of the intangible assets associated with
these products. The net intangible assets reviewed for possible
impairment totals approximately $191.0 million. We believe
that these intangible assets are not currently impaired based on
estimated undiscounted cash flows associated with these assets.
However, if demand for the products associated with these
intangible assets declines below current expectations, we may
have to write off a portion or all of these intangible assets.



| |                        
| | -----------------------
| | Womens Health Products

Ongoing research, referred to as the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it created negatively affected the entire combination
hormone therapy and the oral estrogen therapy markets including
some of our products. Prescriptions for some of our other
womens health products have also continued to decline over
the past few years primarily due to the availability of
generics. During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture many of our womens health products. On
November 22, 2004, we sold all of our rights in
Prefest® for approximately $15.0 million. On
December 23, 2004, we sold all of our rights in
Nordette® for approximately $12.0 million.

43



---



##### 



As an extension of our strategic decision to
divest many of our womens health products, in July 2004 we
terminated our co-promotion and license agreements with Novavax
regarding EstrasorbTM. As part of the transaction,
Novavax reacquired all rights to EstrasorbTM as well
as all rights to other womens health products that Novavax
may successfully develop utilizing its micellar nanoparticle
technology. Additionally, Novavax repurchased all of its
convertible notes which we held, acquired a portion of our
womens health field sales force, and received
approximately $8.0 million from us to provide support for
marketing and promotion. In return, Novavax paid us
$22.0 million and issued us approximately 3.8 million
shares of Novavax common stock. This transaction resulted in a
net gain in the amount of approximately $4.0 million during
the third quarter of 2004. As a result of this transaction, we
own approximately 4.1 million shares of Novavax common
stock, representing approximately 10% of the outstanding common
stock of Novavax. These shares are currently restricted and we
are required to hold these shares until July 2005.



| |                                        
| | ---------------------------------------
| | General Review of Financial
    Results

The following summarizes net revenues by
reportable segment (in thousands):

|                                 |       |                            |         |                           |  |      |         |            |  |   |         |         |  |   |         |           | 
|-------------------------------- | ----- | -------------------------- | ------- | ------------------------- |  | ---- | ------- | ---------- |  | - | ------- | ------- |  | - | ------- | --------- | 
|                                 |       |                            |         |                          
|                                 |       | For the Three Months Ended |         | For the Nine Months Ended
|                                 |       | September 30,              |         | September 30,            
|                                 |       |                            |         |                          
|                                 |       |                            |         | 2003                      |  |      |         | 2003      
|                                 |       | 2004                       |         | (restated)                |  | 2004 |         | (restated)
|                                 |       |                            |         |                           |  |      |         |           
|Branded pharmaceuticals          |       | $                          | 334,839 |                           |  | $    | 364,501 |            |  | $ | 788,912 |         |  | $ | 960,988 |          
|Meridian Medical Technologies    |       |                            | 33,934  |                           |  |      | 38,379  |            |  |   | 96,115  |         |  |   | 98,317  |          
|Royalties                        |       |                            | 20,252  |                           |  |      | 16,275  |            |  |   | 58,128  |         |  |   | 47,875  |          
|Contract manufacturing and other |       |                            | 5,659   |                           |  |      | 5,658   |            |  |   | 18,590  |         |  |   | 19,624  |          
|                                 |       |                            |         |                           |  |      |         |            |  |   |         |         |  |   |         |          
|                                 | Total |                            | $       | 394,684                   |  |      | $       | 424,813    |  |   | $       | 961,745 |  |   | $       | 1,126,804 | 
|                                 |       |                            |         |                           |  |      |         |            |  |   |         |         |  |   |         |          

II. RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 and
2003



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

Total net revenues decreased $30.1 million,
or 7.1%, to $394.7 million in 2004 from $424.8 million
in 2003 primarily due to lower net sales from our branded
pharmaceuticals segment during 2004.

Net sales from branded pharmaceutical products
decreased $29.7 million, or 8.1%, to $334.8 million in
2004 from $364.5 million in 2003. This decrease was
primarily the result of lower unit sales volume, partially
offset by price increases, due to some wholesale inventory
reductions of our products, plus lower prescription demand for
some of our branded pharmaceutical products during 2004. A
significant portion of the reduced prescription demand for some
of our products, such as Levoxyl®, is due to the entry of
generic competition. For a discussion of Levoxyl® and other
product developments, please see the Entry of Generic
Competition for Levoxyl® section above. We expect net
sales from branded pharmaceutical products will be lower during
the fourth quarter of 2004 and the first quarter of 2005 due to
additional reductions in wholesale inventory levels of some of
our products. For a discussion regarding our wholesale inventory
reductions, please see the Wholesale Inventory
Reductions section above.

Revenues from Meridian Medical Technologies
decreased $4.5 million, or 11.7%, to $33.9 million in
2004 from $38.4 million in 2003 primarily due to lower
commercial sales resulting mostly from quarter-to-quarter
distribution variances rather than changes in demand, partially
offset by increased government sales.

Revenues from royalties are derived primarily
from payments we receive based on sales of Adenoscan®.
Revenue from royalties increased $4.0 million, or 24.5%, to
$20.3 million in 2004 from $16.3 million in 2003
primarily due to an increase in sales of Adenoscan®. While
we anticipate continued growth from royalty revenues, we are not
responsible for the marketing of Adenoscan® and are not
able to predict whether growth will continue at the rate
experienced in the third quarter of 2004, or at all.

Net revenues from contract manufacturing and
other were $5.7 million in 2004 and 2003.

44



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##### 





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

Total operating costs and expenses increased
$147.4 million, or 56.9%, to $406.3 million in 2004
from $258.9 million in 2003. The increase was primarily due
to a substantially higher net charge associated with special
items included in total operating costs and expenses during 2004
compared to 2003. These and other variables which affected total
operating costs and expenses during 2004 and 2003 are discussed
in more detail below. Special items are those particular income
or expense items that our management believes are not related to
our ongoing, underlying business, are non-recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and one-time inventory valuation adjustment
charges; charges resulting from the early extinguishment of
debt; asset impairment charges; expenses of drug recalls;
litigation settlements; revenues and expenses associated with
discontinued operations; and gains and losses resulting from the
divestiture of assets. We believe the identification of special
items enhances an analysis of our ongoing, underlying business
and of our financial results when comparing those results to
that of a previous or subsequent like period. However, it should
be noted that the determination of whether to classify an item
as a special item involves judgments by us.

Cost of revenues equaled $97.4 million in
2004 compared to $90.0 million in 2003. Special items
affecting cost of revenues included a charge of
$8.9 million in 2004 which primarily related to the write
off of excess purchase commitments for Procanbid® and
Lorabid®. As a percentage of total revenues, cost of
revenues increased to 24.7% in 2004 from 21.2% in 2003 primarily
due to lower net sales of our branded pharmaceutical products,
which on average have lower cost of revenues as a percentage of
revenues, and the write-off of excess purchase commitments for
Procanbid® and Lorabid®.

Cost of revenues from branded pharmaceutical
products equaled $73.5 million in 2004 and
$65.5 million in 2003. During 2004, costs of revenues from
branded pharmaceutical products included a special item that
resulted in a charge of $8.9 million due to the write-off
of excess purchase commitments for Procanbid® and
Lorabid®.

Cost of revenues from Meridian Medical
Technologies equaled $15.9 million in 2004 compared to
$16.1 million in 2003.

Cost of revenues from royalties equaled
$2.7 million and $2.5 million in 2004 and 2003,
respectively.

Cost of revenues associated with contract
manufacturing and other was $5.3 million in 2004 compared
to $5.9 million in 2003.

Total selling, general and administrative
expenses increased $6.3 million, or 4.7%, to
$139.9 million in 2004 from $133.6 million in 2003.
This increase was primarily attributable to increased operating
expenses primarily associated with the expansion of our field
sales force and increased marketing expenses associated with
marketing campaigns for some of our products which together were
partially offset by a decrease in our co-promotion fee paid
under our co-promotion agreement relating to Altace® due to
lower sales of Altace® in 2004 compared to 2003 for the
reasons discussed above. Selling, general and administrative
expenses included special items resulting in charges of
$3.5 million and $7.9 million, respectively, in the
third quarter of 2004 and 2003 for professional fees that were
primarily related to the ongoing investigations of our company
by the SEC and the Office of Inspector General of the Department
of Health and Human Services. Until we fully resolve these
investigations, we expect to continue to incur legal and
professional fees that could materially affect our cash flows
and results of operations. Selling, general and administrative
expenses in the third quarter of 2004 also include
$2.8 million for merger related costs associated with our
agreement to merge with Mylan, which has since been terminated.

As a percentage of total revenues, total selling,
general, and administrative expenses increased to 35.4% in 2004
compared to 31.5% in 2003. The increase was primarily due to
lower net sales of branded pharmaceutical products during 2004
and increased operating expenses primarily associated with the
expansion of our field sales force and increased marketing
expenses associated with marketing campaigns for some of our
products, the combined effect of which was partially offset by a
decrease in our co-promotion fee paid under our co-promotion
agreement relating to Altace® due to lower sales of
Altace® in 2004 compared to 2003.

45



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##### 



Depreciation and amortization expense equaled
$38.8 million in 2004 and $36.9 million in 2003. For
more information regarding estimated future amortization
expense, please see Note 9 to our condensed consolidated
financial statements included in this report.

Total research and development expense increased
$24.6 million, to $33.4 million in 2004 from
$8.8 million in 2003. This increase was due to an increase
in expenses associated with ongoing research and development
programs that have successfully progressed to later stages of
clinical development and a special item resulting in a charge of
$17.1 million for in-process research and development
associated with our entry into a strategic alliance with Palatin
in 2004.

In addition to the special items related to cost
of revenues, selling, general and administrative expense and
research and development described above, we incurred other
special items affecting operating costs and expenses during 2004
and 2003 resulting in a net charge totaling $96.8 million
and income in the amount of $10.3 million, respectively. These
other special items include the following:



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an intangible asset impairment charge totaling
    $97.3 million during 2004 primarily due to our decision to
    discontinue the Sonata® MR development program as discussed
    above;                                
|
| |  | a restructuring charge of $4.7 million
    during 2004 primarily associated with our decision to
    discontinue some relatively insignificant products associated
    with our Meridian Medical Technologies business;
|
| |  | income in the amount of $5.2 million during
    2004 primarily due to a gain on the sale of all of our rights to
    EstrasorbTM and all convertible notes of Novavax that
    we previously held; and                  
|
| |  | income in the amount of $10.3 million during 2003
    due to a gain on sale of our animal health products.                                                                                                              



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

Due to the factors discussed above, we had an
operating loss of $11.7 million during 2004 compared to
operating income of $165.9 million in 2003.



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

Interest income equaled $1.1 million in 2004
and $1.0 million in 2003.

Interest expense totaled $3.1 million in
2004 compared to $3.7 million in 2003.

Special items affecting other income
(expense) include a charge in the amount of $6.5 million
during 2004 to reflect our determination that the decline in the
fair value of our equity interest in Novavax was other than
temporary as of September 30, 2004 and income of
$9.3 million during 2003 to reflect a decrease in the
valuation allowance for the convertible notes of Novavax. In the
event the stock price of Novavax continues to decline, our
financial statements for the first quarter of 2005 could be
adversely affected. As discussed above, Novavax repurchased the
convertible notes from us in July 2004.



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

During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture some of our womens health products, including
Prefest® and Nordette® which we sold in the fourth
quarter of 2004. These product rights had identifiable cash
flows that were largely independent of the cash flows of other
groups of assets and liabilities and are classified as
discontinued operations in the accompanying financial
statements. Accordingly, all net sales, cost of revenues,
selling, general and administrative costs and amortization
associated with Prefest® and Nordette® are included in
discontinued operations in 2004 and 2003.

Special items during 2004 and 2003 include a loss
from discontinued operations in the amount of $7.0 million
and $5.0 million, or $4.4 million and
$3.1 million net of tax expense, respectively.

46



---



##### 





| |                             
| | ----------------------------
| | Income Tax (Benefit) Expense

During the third quarter of 2004 our income tax
benefit equaled $17.2 million as compared to income tax
expense of $63.1 million in 2003. The tax benefit in 2004
was primarily due to changes in estimated pre-tax income for the
year ending December 31, 2004 and higher estimates of
charitable donations for the year.



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

Due to the factors discussed above, we had a net
loss of $8.0 million during 2004 compared to net income of
$106.4 million in 2003.

Nine Months Ended September 30, 2004 and
2003



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

Total net revenue decreased $165.1 million,
or 14.6%, to $961.7 million in 2004 from
$1,126.8 million in 2003, primarily due to lower net sales
from our branded pharmaceuticals segment during 2004.

Net sales from branded pharmaceutical products
decreased $172.1 million, or 17.9%, to $788.9 million
in 2004 from $961.0 million in 2003. This decrease was
primarily the result of lower sales volume, partially offset by
price increases. Our lower sales volume was primarily due to
significant wholesale inventory reductions plus lower
prescription demand for some of our branded pharmaceutical
products during 2004. For a discussion regarding our wholesale
inventory reductions, please see the Other
Developments section above.

Revenues from Meridian Medical Technologies
equaled $96.1 million in 2004 and $98.3 million in
2003.

Revenues from royalties are primarily derived
from payments we receive based on sales of Adenoscan®.
Revenue from royalties increased $10.2 million, or 21.3%,
to $58.1 million in 2004 from $47.9 million in 2003
primarily due to an increase in sales of Adenoscan®. While
we anticipate continued growth from royalty revenues, we are not
responsible for the marketing of Adenoscan® and are not
able to predict whether growth will continue, if at all, at the
rate experienced in the first nine months of 2004.

Net revenues from contract manufacturing and
other were $18.6 million in 2004 compared to
$19.6 million in 2003.



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

Total operating costs and expenses decreased
$0.8 million, or 0.1%, to $1,025.9 million in 2004
from $1,026.7 million in 2003. Total operating costs and
expenses during 2004 and 2003 were relatively flat primarily due
to a $73.0 million reduction in the net charge associated
with special items included in total operating costs and
expenses during 2004 compared to 2003. Other variables which
affected total operating costs and expenses during 2004 and 2003
are discussed in more detail below.

Cost of revenues equaled $266.1 million in
2004 compared to $261.0 million in 2003. Cost of revenues
includes special items resulting in charges of
$13.5 million during 2004 and $6.5 million during 2003
which are discussed below.

Cost of revenues from branded pharmaceutical
products increased $6.0 million, or 3.3%, to
$190.0 million in 2004 from $184.0 million in 2003.
This increase was primarily due to an increase in special items
affecting cost of revenues during 2004 as compared to 2003.
These special items are as follows:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As a result of declining prescriptions, we
    recorded an $8.9 million charge during 2004 primarily related to
    our purchase commitments for Lorabid® that are in excess of
    expected demand.
|
| |  | We incurred charges in the amount of
    $4.6 million in 2004 and $4.3 million in 2003
    primarily related to the voluntary recalls of certain lots of
    Levoxyl®.                              

Cost of revenues from Meridian Medical
Technologies decreased $8.2 million, or 15.5%, to
$44.6 million in 2004 from $52.8 million in 2003
partially due to the mix of products sold in the respective
periods and a

47



---



##### 



special item consisting of a one-time inventory
valuation adjustment associated with our acquisition of Meridian
on January 8, 2003 that resulted in a charge of
$2.2 million during 2003.


Cost of revenues from royalties equaled
$8.4 million and $8.0 million in 2004 and 2003,
respectively.

Cost of revenues associated with contract
manufacturing and other increased $6.7 million, or 40.9%,
to $23.1 million in 2004 from $16.4 million in 2003
primarily due to changes in utilization rates at our
manufacturing facilities resulting in an increase of overhead
allocated to contract manufacturing.

Total selling, general and administrative
expenses increased $75.4 million, or 20.5%, to
$442.7 million in 2004 from $367.3 million in 2003.
This increase was primarily attributable to operating expenses
associated with the expansion of our sales force and increased
marketing expenses associated with marketing campaigns for some
of our products which together were substantially offset by
decreases in co-promotion fees paid under our co-promotion
agreement relating to Altace® due to lower sales of
Altace® during 2004, as compared to 2003, for the reasons
discussed above. Selling, general and administrative expenses
include special items of $14.2 million and
$22.2 million, respectively, in 2004 and 2003 for
professional fees that were primarily related to the ongoing
investigations of our company by the SEC and the OIG. Until we
fully resolve these investigations, we expect to continue to
incur legal and professional fees that could be material to our
cash flows and results of operations. Selling, general and
administrative expenses in 2004 also include $5.9 million
for merger related costs associated with our agreement to merge
with Mylan, which has since been terminated.

As a percentage of total revenues, total selling,
general, and administrative expenses increased to 46.0% in 2004
compared to 32.6% in 2003. The increased percentage in 2004 was
primarily due to lower net sales of branded pharmaceutical
products during 2004 for the reasons discussed above in the
section entitled Wholesale Inventory Reduction. The
increase was also due to increased operating expenses primarily
associated with the expansion of our field sales force and
increased marketing expenses associated with marketing campaigns
for some of our products which were substantially offset by
decreases in co-promotion fees paid under our Co-Promotion
Agreement relating to Altace® due to lower sales of
Altace® during 2004, as compared to 2003.

Depreciation and amortization expense increased
$41.4 million, or 55.1%, to $116.6 million in 2004
from $75.2 million in 2003. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Sonata® and
Skelaxin® on June 12, 2003. For more information
regarding estimated future amortization expense, please see
Note 8 to our condensed consolidated financial statements
included in this report.

Total research and development expense decreased
$155.6 million, to $66.9 million in 2004 from
$222.5 million in 2003. This decrease was primarily due to
special items that resulted in a charge of $193.0 million
during 2003 for acquired in-process research and development
associated with our acquisition of Sonata® and
Skelaxin® on June 12, 2003 and our acquisition of
Meridian on January 8, 2003, offset by a special item
during 2004 resulting in a charge of $17.1 million for
in-process research and development associated with our entry
into a strategic alliance with Palatin and an increase during
2004 in expenses associated with ongoing research and
development programs that have progressed to later stages of
clinical development.

In addition to the special items related to cost
of revenues of branded pharmaceutical products, selling, general
and administrative, and research and development described
above, we incurred other special items affecting operating costs
and expenses resulting in a net charge totaling
$204.5 million during 2004 and $100.7 during 2003. These
other special items included the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge in the
    first nine months of 2004 of $132.3 million, which is
    primarily related to our decision to discontinue the
    Sonata® MR development program and a greater than expected
    decline in prescriptions for Florinef® and Tapazole®
    due to availability of generics for these products. These
    special items were 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 estimated fair value of
    such assets. During January 2003, we were notified of the
    approval by the FDA of a second generic

48



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fludrocortisone acetate, USP, a product that
    represents additional competition for our Florinef®
    (fludrocortisone acetate, USP) product. We recorded an
    impairment charge in the amount of $111.0 million during
    2003 reflecting the reduction in the fair value of the
    Florinef® intangible assets. The additional intangible
    asset impairment charge pertaining to Florinef® recorded in
    2004 reflects a further reduction in the fair value of the
    intangible assets associated with this product due to a decline
    in prescriptions for the product that is in excess of our
    original estimate. We determined the fair value of the
    intangible assets associated with Florinef® and
    Tapazole® based on our estimated discounted cash flows for
    these products.
|
| |  | In 2004, we accrued $65.0 million for estimated
    settlement costs as an operating expense to cover interest,
    costs, fines, penalties and all other amounts in addition to the
    $65.4 million that we previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    For additional information, please see the sections entitled
    Governmental Investigations and Securities
    Litigation and Liquidity and Capital Resources.                                                                                                                                                                                                                                                                                                                         
|
| |  | Restructuring charges in the amount of
    $10.8 million in the first nine months of 2004 as a result
    of separation agreements with several of our executives, the
    relocation of our sales and marketing operations from Bristol,
    Tennessee to Princeton, New Jersey and our decision to
    discontinue some relatively insignificant products associated
    with Meridian Medical Technologies business.                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Income of $9.5 million in 2004 primarily due
    to a gain on the sale of our Anusol-HC® and
    Proctocort® product lines, and a gain on the termination of
    our co-promotion and license agreements with Novavax regarding
    EstrasorbTM and the repurchase by Novavax of all of
    its convertible notes which we held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Income in the amount of $10.3 million in
    2003 due to a gain on the sale of our animal health products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | A charge of $5.9 million in 2004 for merger
    related costs associated with our recently terminated merger
    agreement with Mylan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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

Due to the factors discussed above, we had an
operating loss of $64.2 million during 2004 compared to
operating income of $100.1 million in 2003.



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

Interest income decreased $2.4 million to
$3.3 million in 2004 from $5.7 million in 2003
primarily due to reduced cash balances in 2004.

Interest expense was $9.5 million in 2004
compared to $10.1 million in 2003.

Special items affecting other income
(expense) include a charge in the amount of
$2.9 million during 2004 to reflect an increase in the
valuation allowance for the convertible notes receivable from
Novavax; a charge in the amount of $6.5 million during 2004 to
reflect our determination that the decline in fair value of our
equity interest in Novavax was other than temporary as of
September 30, 2004 compared to income in the amount of
$25.0 million during 2003 to reflect a decrease in the
valuation allowance. In the event the stock price of Novavax
continues to decline, our financial statements for the first
quarter of 2005 could be adversely affected. As discussed above,
Novavax repurchased its convertible notes from us in July 2004.



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

During the first quarter of 2004, our Board of
Directors approved managements decision to market for
divestiture some of our womens health products, including
Prefest® and Nordette® which we sold in the fourth
quarter of 2004. These product rights had identifiable cash
flows that are largely independent of the cash flows of other
groups of assets and liabilities are classified as discontinued
operations in the accompanying financial statements.
Accordingly, all net sales, cost of revenues, selling, general
and administrative costs and amortization associated with
Prefest® and Nordette® are included in discontinued
operations in 2004 and 2003.

49



---



##### 



Special items include a loss from discontinued
operations in the amount of $172.3 million during 2004, or
$109.4 million net of tax benefit, primarily due to an
intangible asset write-down to reduce the carrying value of the
intangible assets associated with these products during the
first quarter of 2004 to their estimated fair value less
anticipated costs to sell. We determined the fair value of these
intangible assets based on managements discounted cash
flow projections for the products. Prefest® and
Nordette® are included in our branded pharmaceuticals
segment. Special items during 2003 include a loss from
discontinued operations in the amount of $6.4 million, or
$4.0 million net of tax benefit.



| |                             
| | ----------------------------
| | Income Tax (Benefit) Expense

For the nine months ended September 30,
2004, we had an income tax benefit of $14.4 million, which
excludes any tax benefit related to the Medicaid related charge
discussed above and includes the establishment of a valuation
allowance against state deferred tax assets. For the nine months
ended September 30, 2003 we had income tax expense of
$53.9 million which reflects a $128.8 million tax
benefit due to the establishment of a valuation allowance
against state deferred tax assets and the write-off of acquired
in-process research and development.



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

Due to the factors discussed above, we had a net
loss equaling $175.0 million during 2004 compared to net
income of $62.6 million in 2003.

Liquidity and Capital Resources

We believe that existing balances of cash, cash
equivalents and marketable securities, cash generated from
operations, our existing revolving credit facility and funds
available to us under our universal shelf registration are
sufficient to finance our current operations and working capital
requirements on both a short term and long term basis. However,
in the event we make significant future acquisitions or change
our capital structure, we may be required to raise funds through
additional borrowings or the issuance of additional debt or
equity securities.

As additional consideration for Synercid®,
an injectable antibiotic acquired on December 30, 2002, we
agreed to potential milestone payments. We will pay
Sanofi-Aventis a milestone payment of $18.6 million on
December 31, 2005, if there is continued recognition of
Synercid® as an effective treatment for
vancomycin-resistant enterococcus faecium on that date. An
additional $25.0 million milestone is payable to Aventis if
Synercid® should receive FDA approval to treat methicillin
resistant staphylococcus aureus, or we will pay Aventis a
one-time payment of $5.0 million the first time during any
twelve-month period net sales of Synercid® exceed
$60.0 million, and a one-time payment of $20.0 million
the first time during any twelve-month period net sales of
Synercid® exceed $75.0 million.

On June 12, 2003, we acquired the primary
care business of Elan and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, Sonata® and
Skelaxin®. We will pay royalties on the current formulation
of Skelaxin® from the date of closing.

As discussed above, Elan was working to develop
Sonata® MR pursuant to an agreement we had with them. We
decided to discontinue the program to develop Sonata® MR.
Accordingly, we intend to terminate the agreement with Elan.
Although we believe we are entitled to terminate the agreement,
we can provide no assurance that we will effectively terminate
the agreement and, if we do, under what terms. The agreement
currently requires us to pay up to an additional
$60.0 million if Elan achieves certain milestones in
connection with the development of a reformulated version of
Sonata® and $15.0 million as a milestone payment if
annual net sales of a reformulated version of Sonata®
exceed $100.0 million, plus costs associated with the
development of a reformulated version of Sonata®.

As discussed in the PT-141 subsection
of the Strategic Developments section, on
August 13, 2004, we entered into a collaborative agreement
with Palatin to jointly develop and, on obtaining necessary

50



---



##### 



regulatory approvals, commercialize
Palatins PT-141 for the treatment of male and female
sexual dysfunction. In connection with this agreement, we agreed
to pay potential milestone payments to Palatin of up to
$100.0 million achieving certain development and regulatory
approval targets. Following regulatory approval and
commercialization of PT-141, we may also pay potential net sales
milestone payments to Palatin of up to $130.0 million.




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

As previously reported, in March 2003 the SEC
initiated a formal investigation of King relating to, among
other topics, sales of our products to VitaRx and Prison Health
Services, our best price lists, the pricing of our
pharmaceutical products provided to governmental Medicaid
agencies, the accrual and payment of rebates on the product
Altace®, the products Fluogen® and Lorabid®, the
King Benevolent Fund, Inc., our calculations related to Medicaid
rebates, and the Audit Committees internal review of
issues raised by the SEC investigation. As also previously
reported, on November 13, 2003, we received a subpoena
duces tecum from the Office of Inspector General at the
Department of Health and Human Services requesting the
production of documents relating to some of the matters being
investigated by the SEC and to our sales, marketing and other
business practices for Altace®, Aplisol®, and
Levoxyl®. More recently, we have reviewed with the staff of
the SEC the circumstances giving rise to the restatement of
previously issued financial statements as discussed under the
heading Restatement of Previously Issued Financial
Statements in this section.

In connection with our determination that we
underpaid amounts due to Medicaid and other government pricing
programs from 1998 through 2002, we have continued to engage in
discussions with representatives of the SEC, the United States
Attorney for the Eastern District of Pennsylvania, the
Department of Justice, the National Association of Medicaid
Fraud Control Units, the Office of Inspector General of the
Department of Health and Human Services, the Department of
Veterans Affairs, the Centers for Medicare & Medicaid
Services, and the Public Health Service. Our objective in these
discussions has been to achieve a comprehensive settlement
relating to all the matters being investigated by or discussed
with all the governmental authorities.

We have not yet reached any agreements or
understandings with respect to the terms of such a settlement
and may not ever be able to reach such an agreement. However,
based on the status of the discussions to date, we now believe
that it is reasonably likely that we will be able to achieve a
comprehensive settlement with all relevant governmental parties
on the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 in the settlement
    costs as an operating expense during the second quarter of 2004
    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 its 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 as discussed under the heading
    Restatement of Previously Issued Financial
    Statements in this section. 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,                                                                                                                                                                                                                               

51



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

Our ability to achieve a settlement on these or
other terms is subject to substantial uncertainties. Our
discussions to date have been conducted with the staffs of
various agencies and other governmental authorities. We do not
yet have any agreements or understandings with any of them. Even
if we were to reach such an agreement or understanding with
staff personnel, it would be subject to the approval of numerous
more senior representatives of the governmental parties,
including the members of the U.S. Securities and Exchange
Commission, the United States Attorney for the Eastern District
of Pennsylvania, senior officials in the Departments of Justice,
Health and Human Services and Veterans Affairs, and senior
officials in most or all of the States. We expect that our
agreements with the various governmental parties will also
require that those governmental parties reach numerous
agreements among themselves, and that the consummation of our
agreement with each governmental party would be dependent on
consummation of our agreements with other governmental parties.
We also expect that some aspects of a comprehensive settlement
would require court approval.

In light of these uncertainties, we stress that
we may not be able to reach a settlement with the governmental
parties, whether on the terms described above or at all. As a
result, the ultimate amount that we will actually have to pay to
resolve these matters could be materially more than the amount
accrued to date, and the terms could otherwise be materially
less favorable than those described above. Because of these
uncertainties and the complexity of completing a comprehensive
resolution, we are not yet able to estimate with reasonable
confidence the amount of time that will be required to enter
into and consummate comprehensive settlement agreements.

The possible settlement described above would not
apply to the related pending class actions and derivative suits,
or any other claims by private plaintiffs. While we deny any
liability, we are unable to predict the outcome of the class
actions and derivative suits or reasonably estimate the range of
loss, if any.

Subsequent to the announcement of the SEC
investigation described above, beginning in March 2003, 22
purported class action complaints were filed by holders of our
securities against us, our directors, former directors, our
executive officers, former executive officers, a subsidiary, and
a former director of the subsidiary in the United States
District Court for the Eastern District of Tennessee, alleging
violations of the Securities Act of 1933 and/or the Securities
Exchange Act of 1934. These 22 complaints have been consolidated
in the United States District Court for the Eastern District of
Tennessee. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern District of
Tennessee, where these two cases were consolidated with the
other class actions. Plaintiffs in these actions unsuccessfully
moved to remand these two cases back to Tennessee state court.
These two actions therefore remain part of the consolidated
action. The district court has appointed lead plaintiffs in the
consolidated action, and those lead plaintiffs filed a
consolidated amended complaint on October 21, 2003 alleging
that we, through some of our executive officers, former
executive officers, directors, and former directors, made false
or misleading statements concerning our business, financial
condition, and results of operations during periods beginning
February 16, 1999 and continuing until March 10, 2003.
Plaintiffs in the consolidated action have also named the
underwriters of our November 2001 public offering as defendants.
We and other defendants filed motions to dismiss the
consolidated amended complaint.

On August 12, 2004, the United States
District Court for the Eastern District of Tennessee ruled on
defendants motions to dismiss. The Court dismissed all
claims as to Jones Pharma, Inc., a predecessor to one of our
wholly owned subsidiaries, King Research and Development, Inc.,
and as to defendants Dennis Jones and Henry Richards. The Court
also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, we and the other remaining defendants
filed answers to plaintiffs consolidated amended
complaint. Discovery and other proceedings in the case are
continuing, and no trial date has been set.

52



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Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. On October 26, 2004, all of
the defendants named in this action filed a partial answer to
the amended consolidated derivative and class action complaint.
Discovery in this action has commenced. No trial date has been
set.

Another purported class action complaint was
filed on August 16, 2004 in Tennessee state court against
us and the members of our board of directors. This new case
largely asserts substantially the same claims and seeks the same
relief as the class action claim that was recently added to the
state derivative action described above. Defendants in that
action filed a motion to dismiss on November 30, 2004; that
motion is pending and no hearing date has been set.

Additionally, a class action complaint was filed
in the United States District Court for the Eastern District of
Tennessee under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that we
and certain of our executive officers, former executive
officers, directors, former directors and an employee violated
fiduciary duties that they allegedly owed our 401(k) Retirement
Savings Plans participants and beneficiaries under ERISA.
The allegations underlying this action are similar in many
respects to those in the class action litigation described
above. The defendants filed a motion to dismiss the ERISA action
on March 5, 2004. The District Court Judge referred the
motion to a Magistrate Judge for a report and recommendation. On
December 8, 2004, the Magistrate Judge held a hearing on
this motion, and, on December 10, 2004, he recommended that
the District Court Judge dismiss the action. The District Court
Judge accepted the recommendation and dismissed the case on
February 4, 2005.

We intend to defend all of these lawsuits
vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed in
excess of those described above, or if we were not to prevail in
the pending litigation, neither of which we can predict or
reasonably estimate at this time, our business, financial
condition, results of operations and cash flows could be
materially adversely affected. Responding to the governmental
investigations, resolving the amounts owed to governmental
agencies in connection with the underpayments and defending us
in the pending litigation has resulted, and is expected to
continue to result, in a significant diversion of
managements attention and resources and the payment of
additional professional fees.



| |                                         
| | ----------------------------------------
| | Nine Months Ended September 30,
    2004

We generated net cash from continuing operations
of $158.3 million for the nine months ended
September 30, 2004. Our net cash provided from operations
was primarily the result of a $65.6 million net loss from
continuing operations, adjusted for non-cash depreciation and
amortization from continuing operations of $116.6 million,
intangible asset impairment charges from continuing operation of
$132.3 million, a change in deferred taxes of
$40.4 million and changes in working capital. Changes in
working capital include an increase in inventory of
$15.8 million, an increase in accrued expenses of
$28.8 million, a decrease in accounts payable of
$22.2 million, a decrease in income taxes payable of
$59.3 million, an increase in accounts receivable of
$3.2 million, and an increase in prepaid expenses of
$16.3 million.

Investing activities reduced cash flow by
$71.1 million primarily due to milestone payments related
to the acquisition of the primary care business of Elan of
$36.0 million and the purchase of property, plant and
equipment of $41.9 million, and the collaboration agreement
with Palatin of $20.0 million.

Financing activities contributed
$4.1 million to cash flow due to the exercise of employee
stock options.

Discontinued operations provided
$10.8 million in cash flows. This was primarily the result
of a $109.4 loss from discontinued operations, adjusted for
non-cash depreciation and amortization of $4.4 million, a
change in taxes of $62.9 million, an intangible asset
impairment charge of $175.0 million and changes in working
capital.

53



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

As of September 30, 2004, we had
$345.0 million of long-term debt (including current
portion) outstanding, up to $388.4 million available under
our revolving credit facility, and $616.0 million available
under our universal shelf registration.

On September 20, 2001, we registered a
$1.3 billion universal shelf registration statement on
Form S-3 with the SEC. This universal shelf registration
statement allows us to sell any combination of debt and/or
equity securities in one or more offerings up to a total of
$1.3 billion. During November 2001, we issued
$345.0 million of 2 3/4% Convertible Debentures due
November 15, 2021 in a private placement. Holders may
require us to repurchase for cash all or part of these
debentures on November 15, 2006, November 15, 2011 or
November 15, 2016 at a price equal to 100% of the principal
amount of the debentures plus accrued interest up to but not
including the date of repurchase.

On April 23, 2002, we established a
$400.0 million five year senior secured revolving credit
facility. The facility has been collateralized in general by all
real estate with a value of $5.0 million or more and all of
our personal property and that of our significant subsidiaries.
Our obligations under the senior secured revolving credit
facility are unconditionally guaranteed on a senior basis by
most of our subsidiaries. The senior secured revolving credit
facility accrues interest at our option, at either (a) the
base rate, which is based on the greater of (1) the prime
rate or (2) the federal funds rate plus one-half of 1%,
plus an applicable spread ranging from 0.0% to 0.75% (based on a
leverage ratio) or (b) the applicable LIBOR rate plus an
applicable spread ranging from 1.0% to 1.75% (based on a
leverage ratio). In addition, the lenders under the senior
secured revolving credit facility are entitled to customary
facility fees based on (a) unused commitments under the
facility and (b) letters of credit outstanding. We incurred
$5.1 million of deferred financing costs, which are being
amortized over five years, the life of the senior secured
revolving credit facility. This facility requires us to maintain
a minimum net worth of no less than $1.2 billion plus 50%
of our consolidated net income for each fiscal quarter after
April 23, 2002, excluding any fiscal quarter for which
consolidated income is negative; an EBITDA to interest expense
ratio of no less than 3.00 to 1.00; and a funded debt to EBITDA
ratio of no greater than 3.50 to 1.00 prior to April 24,
2004 and of no greater than 3.00 to 1.00 on or after
April 24, 2004. As of September 30, 2004, we have
complied with these covenants. As of September 30, 2004,
there were no outstanding borrowings under this facility, and
$11.6 million outstanding for letters of credit under this
facility.



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

Capital expenditures, including capital lease
obligations, were $41.1 million and $33.5 million for
the nine months ended September 30, 2004 and 2003,
respectively. The principal capital expenditures during the nine
months ended September 30, 2004 included property and
equipment purchases, building improvements for facility upgrades
and costs associated with improving our production capabilities,
and costs associated with moving production of some of our
pharmaceutical products to our facilities in St. Louis,
Bristol and Rochester.



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

In December 2004, the FASB issued SFAS
No. 123(R), (Share-based Payment) that requires us to
expense costs related to share-based payment transactions with
employees. SFAS No. 123(R) becomes mandatorily effective on
July 1, 2005. We are in the process of evaluating the
impact of this standard.

In November 2004, the FASB issued SFAS
No. 151, (Inventory Costs), an amendment of ARB
No. 43. SFAS No. 151 requires certain abnormal
expenditures to be recognized as expenses in the current period.
It also requires that the amount of fixed production overhead
allocated to inventory be based on the normal capacity of the
production facilities. The standard is effective for the fiscal
year beginning January 1, 2006. We are currently evaluating
the effect that SFAS No. 151 will have on our financial
reporting.



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

We have chosen accounting policies that we
believe are appropriate to accurately and fairly report our
operating results and financial position, and apply those
accounting policies in a consistent manner.

54



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##### 



The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.

Significant estimates for which it is reasonably
possible that a material change in estimate could occur in the
near term include forecasted future cash flows used in testing
for impairments of intangible and tangible assets and loss
accruals for excess inventory and fixed purchase commitments
under our supply contracts. Forecasted future cash flows in
particular require considerable judgment and are subject to
inherent imprecision. In the case of impairment testing, changes
in estimates of forecasted future cash flows could result in an
immediate material impairment charge and, whether or not they
result in an impairment charge, could result prospectively in a
reduction in the estimated remaining useful life of tangible or
intangible assets, which could be material to the financial
statements.

Other significant estimates include accruals for
Medicaid and other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy and accounting for the Co-Promotion Agreement
with Wyeth.

We are subject to risks and uncertainties that
may cause actual results to differ from the related estimates,
and the Companys estimates may change from time to time in
response to actual developments and new information.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 assignment of lives based on these factors
    necessarily involves considerable judgment. 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.
    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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Further, on an annual
    basis, we review the life of each intangible asset and make
    adjustments as deemed appropriate. 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.

55



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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories.Our
    inventories are valued at the lower of cost or market value. We
    evaluate all of our inventory for short dated, excess quantities
    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 specific identification basis, we
    provide a provision to reflect the lower value of that
    inventory. This methodology recognizes projected inventory
    losses at the time such losses are evident rather than at the
    time goods are actually sold. We maintain supply agreements with
    some of our vendors which contain minimum purchase requirements.
    We estimate future inventory requirements based on current facts
    and trends. Should our minimum purchase requirements under
    supply agreements, our current inventory levels, or purchase
    commitments 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 analyzes these products
    for potential additional supplemental reserves.                                                                                                                                                                                                                                                                                                                                          

56



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| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The following tables summarize the activity in
    our accruals for rebates, returns and chargebacks:

Accrual for
Rebates (in thousands):

|                                                                                        |  |               |         |               |  |   |           |  
|--------------------------------------------------------------------------------------- |  | ------------- | ------- | ------------- |  | - | --------- | -
|                                                                                        |  | Three Months  |         | Nine Months  
|                                                                                        |  | Ended         |         | Ended        
|                                                                                        |  | September 30, |         | September 30,
|                                                                                        |  | 2004          |         | 2004         
|                                                                                        |  |               |         |              
|Beginning balance, net of prepaid amounts                                               |  | $             | 212,613 |               |  | $ | 213,893   |  
|Current provision related to sales made in
    current period                           |  |               | 73,104  |               |  |   | 236,841   |  
|Current provision related to sales made in prior
    periods due to change in estimates |  |               | 6,093   |               |  |   | (1,397    | )
|Actual rebates                                                                          |  |               | (95,884 | )             |  |   | (253,411) |  
|                                                                                        |  |               |         |               |  |   |           |  
|Ending balance, net of prepaid amounts                                                  |  | $             | 195,926 |               |  | $ | 195,926   |  
|                                                                                        |  |               |         |               |  |   |           |  

Accrual for
Returns (in thousands):

|                        |  |               |         |               |  |   |          |  
|----------------------- |  | ------------- | ------- | ------------- |  | - | -------- | -
|                        |  | Three Months  |         | Nine Months  
|                        |  | Ended         |         | Ended        
|                        |  | September 30, |         | September 30,
|                        |  | 2004          |         | 2004         
|                        |  |               |         |              
|Beginning balance*      |  | $             | 99,847  |               |  | $ | 82,477   |  
|Current provision       |  |               | 26,762  |               |  |   | 112,724  |  
|Supplemental provision* |  |               | 27,556  |               |  |   | 27,556   |  
|Actual returns          |  |               | (50,347 | )             |  |   | (118,939 | )
|                        |  |               |         |               |  |   |          |  
|Ending balance          |  | $             | 103,818 |               |  | $ | 103,818  |  
|                        |  |               |         |               |  |   |          |  

Accrual for
Chargebacks (in thousands):

|                   |  |               |         |               |  |   |         |  
|------------------ |  | ------------- | ------- | ------------- |  | - | ------- | -
|                   |  | Three Months  |         | Nine Months  
|                   |  | Ended         |         | Ended        
|                   |  | September 30, |         | September 30,
|                   |  | 2004          |         | 2004         
|                   |  |               |         |              
|Beginning balance* |  | $             | 32,622  |               |  | $ | 25,349  |  
|Current provision  |  |               | 18,572  |               |  |   | 90,333  |  
|Actual chargebacks |  |               | (26,147 | )             |  |   | (90,635 | )
|                   |  |               |         |               |  |   |         |  
|Ending balance     |  | $             | 25,047  |               |  | $ | 25,047  |  
|                   |  |               |         |               |  |   |         |  



---



| |   |         
| | - | --------
| | * | restated



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

This report includes forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements relate to analyses and other
information which are based on forecasts

57



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##### 



of future results and estimates of amounts not
yet determinable. These statements also relate to our future
prospects, developments and business strategies.


These forward-looking statements are identified
by their use of terms and phrases, such as
anticipate, believe, could,
estimate, expect, intend,
may, plan, predict,
project, will and other similar terms
and phrases, including references to assumptions. These
statements are contained in the Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors sections, as well
as other sections of this report.

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



| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated
    net sales and prescription trends for our branded pharmaceutical
    products, particularly Altace®, Skelaxin®,
    Levoxyl®, Thrombin-JMI® and Sonata®;                                                                                                
|
| |  | 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;                                                                                                                                                                         
|
| |  | the adequacy of our liquidity and capital
    resources;                                                                                                                                                                                                                                                   
|
| |  | the development and approval of a diazepam-filled
    auto-injector, a new inhaler for Intal® using the
    alternative propellant HFA and an Altace®-chlorthalidone
    combination product;                                                                                                              
|
| |  | our continued 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 development of product line extensions;                                                                                                                                                                                                                                                                
|
| |  | 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 OIG
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report;
|
| |  | the ongoing implementation of our new information
    technology system; and                                                                                                                                                                                                                               
|
| |  | expectations regarding our financial condition
    and liquidity as well as future cash flows and earnings.                                                                                                                                                                                                

These forward-looking statements involve known
and unknown risks, uncertainties and other factors that may
cause actual results to be materially different from those
contemplated by our forward-looking statements. These known and
unknown risks, uncertainties and other factors are described in
detail in the Risk Factors section in our 2004 Form
10-K and in other sections of this report.

Item 3.     Quantitative
and Qualitative Disclosure about Market Risk

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

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##### 



As of September 30, 2004, there were no
significant changes in our qualitative or quantitative market
risk since the prior reporting period.

We have marketable securities which are carried
at fair value based on current market quotes. Gains and losses
on securities are based on the specific identification method.

The fair market value of long-term fixed interest
rate debt is subject to interest rate risk. Generally, the fair
market value of fixed interest rate debt will increase as
interest rates rise and decrease as interest rates fall. In
addition, the fair value of our convertible debentures are
affected by our stock price.

Item 4.     Controls
and Procedures 

Internal Control
over Financial Reporting as of September 30, 2004

Management is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. All internal control systems have
inherent limitations. Therefore, internal control over financial
reporting, no matter how well-designed, may not prevent or
detect misstatements. Also, controls may become inadequate in
future periods because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate.

As described in Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, we have restated our previously
issued financial statements for the years 2002 and 2003,
including interim periods in 2003, and the first two quarters of
2004, primarily to reflect the correction of methodological
errors related to our reserve for product returns. We also
delayed the filing of our Quarterly Report on Form 10-Q for
the third quarter of 2004 pending the completion of the reserves
review.

The Public Company Accounting Oversight
Boards auditing standards provide that a restatement is a
strong indicator of a material weakness. Considering this
guidance, we evaluated the methodological errors that resulted
in the restatement and concluded that the restatement resulted
from a material weakness in our internal control over financial
reporting as of September 30, 2004.

Management has concluded that the material
weakness that existed as of the end of the third quarter of 2004
was remediated during the fourth quarter. Our remedial steps
included the adoption of revised methodologies for estimating
our product returns.

As required by the Sarbanes-Oxley Act of 2002 and
the rules issued thereunder, management will conduct an
evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2004. Our registered
public accounting firm will issue an audit report on
managements assessment of our internal control over
financial reporting.

Changes in
Internal Control

Except as discussed above, there have been no
changes in our internal controls that occurred during the
quarter ended September 30, 2004, that have materially
affected, or are reasonably likely to affect, our internal
control over financial reporting.

Evaluation of
Disclosure Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in the reports we file or submit under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized, and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required financial disclosure.

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##### 



Management, with the participation of the Chief
Executive Officer and Chief Financial Officer, carried out an
evaluation, as required by Rule 13a-15(b) under the
Exchange Act of the effectiveness of the design and operation of
the disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e)) as of September 30, 2004.

Based on this evaluation by management, the Chief
Executive Officer and Chief Financial Officer have concluded
that, as of September 30, 2004, due to the material
weakness as of September 30, 2004 and the delay in filing
our Form 10-Q, our disclosure controls and procedures were
not effective at the reasonable assurance level. It should be
noted that no system of controls can provide complete assurance
of achieving its objectives.

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##### 



PART II  OTHER
INFORMATION

Item 1.     Legal
Proceedings

The information required by this Item is
incorporated by reference to Note 11 to the condensed
consolidated financial statements included elsewhere in this
report.

Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |      |  |  |   |  |                                                                                                                                                                           
| | ---- |  |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 |  |  |  |  | Offer letter to Brian A. Markison dated July 15,
    2004.                                                                                                                
| | 10.2 |  |  |  |  | Collaborative Development and Marketing Agreement
    dated August 12, 2004 by and between Palatin Technologies,
    Inc. and King Pharmaceuticals, Inc.                  
| | 10.3 |  |  |  |  | Separation and Non-Disclosure Agreement dated
    July 13, 2004 by and between King Pharmaceuticals, Inc. and
    Jefferson J. Gregory                                    
| | 10.4 |  |  |  |  | Severance and Non-Disclosure Agreement dated
    May 7, 2004 by and between King Pharmaceuticals, Inc. and
    Kyle P. Macione                                            
| | 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.              

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##### 



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



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

Date: March 16, 2005

| |     |                      
| | --- | ---------------------
| | By: | /s/ BRIAN A. MARKISON

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

Date: March 16, 2005

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

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

62