##### Table of Contents



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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    June 30, 2006ORo

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

54-1684963(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)501 Fifth Street, Bristol,
    TN

37620(Address of principal executive
    offices)

(Zip
    Code)   (423) 989-8000 (Registrants telephone
    number, including area code)
  þ o
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ




---



##### 



TABLE OF
    CONTENTS
  
  PageReferencePart I 
    Financial InformationItem 1.

Financial
    Statements


3Condensed
    Consolidated Balance Sheets


3Condensed
    Consolidated Statements of Operations


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


5Condensed
    Consolidated Statements of Cash Flows


6Notes to Condensed
    Consolidated Financial Statements


7Item 2.

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


33Item 3.

Quantitative and
    Qualitative Disclosures about Market Risk


78Item 4.

Controls and
    Procedures


78Part II 
    Other InformationItem 1.

Legal
    Proceedings


79Item 1A.

Risk
    Factors


79Item 4.

Submission of
    Matters to a Vote of Security Holders


79Item 6.

Exhibits


80Signatures


81EX-3.1 SECOND AMENDED AND RESTATED CHARTEREX-10.1 PROMOTION AGREEMENT 06/27/06EX-10.2 FORM OF RESTRICTED UNIT CERTIFICATE AND RESTRICTED UNIT GRANT AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO   2




---



##### Table of Contents



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


December 31,2006


2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
23,881


$
30,014Investments in debt securities


778,628



494,663Restricted cash






130,400Accounts receivable, net of
    allowance for doubtful accounts of $11,312 and $12,280,
    respectively


262,956



223,581Inventories


206,076



228,063Deferred income tax assets


75,695



81,777Prepaid expenses and other current
    assets


88,002



59,291Total current assets


1,435,238



1,247,789Property, plant and equipment, net


302,513



302,474Intangible assets, net


947,015



967,194Goodwill


121,152



121,152Marketable securities


11,351



18,502Deferred income tax assets


270,118



231,032Other assets (includes restricted
    cash of $15,655 and $14,129, respectively)


92,374



77,099Total assets

$
3,179,761


$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
70,040


$
84,539Accrued expenses


483,935



519,620Income taxes payable


55,834



22,301Current portion of long-term debt


4,257



345,000Total current liabilities


614,066



971,460Long-term debt


400,000



Other liabilities


19,128



20,360Total liabilities


1,033,194



991,820Commitments and contingencies
    (Note 9)Shareholders equity


2,146,567



1,973,422Total liabilities and
    shareholders equity

$
3,179,761


$
2,965,242    3




---



##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Revenues:Net sales

$
478,560


$
443,361


$
943,159


$
793,931Royalty revenue


21,085



19,578



40,721



37,633Total revenues


499,645



462,939



983,880



831,564Operating costs and expenses:Cost of revenues, exclusive of
    depreciation, amortization and impairments shown below


107,048



91,204



199,452



163,420Selling, general and
    administrative, exclusive of co-promotion fees


107,126



101,423



212,180



194,273Mylan transaction costs






155







3,432Co-promotion fees


47,032



57,587



112,321



92,242Total selling, general and
    administrative expense


154,158



159,165



324,501



289,947Research and development


34,630



17,500



64,512



28,972Research and development-in
    process upon acquisition










85,000



Total research and development


34,630



17,500



149,512



28,972Depreciation and amortization


38,547



39,920



72,912



81,346Intangible asset impairment


279



126,923



279



126,923Restructuring charges
    (Note 13)


(8
)


(17
)


(8
)


2,006Gain on sale of products






(591
)






(1,438
)Total operating costs and expenses


334,654



434,104



746,648



691,176Operating income


164,991



28,835



237,232



140,388Other income (expense):Interest income


8,393



3,933



14,353



6,210Interest expense


(3,047
)


(3,039
)


(6,031
)


(5,740
)Loss on investment






(369
)






(7,222
)(Loss) gain on early
    extinguishment of debt


(313
)






709



Other, net


(204
)


(1,047
)


(714
)


(1,296
)Total other income (expense)


4,829



(522
)


8,317



(8,048
)Income from continuing operations
    before income taxes


169,820



28,313



245,549



132,340Income tax expense


59,017



7,271



83,911



44,193Income from continuing operations


110,803



21,042



161,638



88,147Discontinued operations
    (Note 17):Income (loss) from discontinued
    operations


157



(849
)


(90
)


3,833Income tax expense (benefit)


57



(304
)


(32
)


1,428Total income (loss) from
    discontinued operations, net


100



(545
)


(58
)


2,405Net income

$
110,903


$
20,497


$
161,580


$
90,552Income per common share:Basic:Income from continuing operations

$
0.46


$
0.08


$
0.67


$
0.36Total income (loss) from
    discontinued operations














0.01Net income

$
0.46


$
0.08


$
0.67


$
0.37Diluted:Income from continuing operations

$
0.46


$
0.08


$
0.67


$
0.36Total income (loss) from
    discontinued operations














0.01Net income

$
0.46


$
0.08


$
0.67


$
0.37    4




---



##### Table of Contents



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


Unearned


Retained


ComprehensiveShares


Amount


Compensation


Earnings


Income (Loss)


TotalBalance at December 31, 2004


241,706,583


$
1,210,647


$



$
637,120


$
1,023


$
1,848,790Comprehensive income:Net Income














90,552







90,552Net unrealized loss on marketable
    securities, net of tax of $702


















(1,249
)


(1,249
)Foreign currency translation


















(83
)


(83
)Total comprehensive income






















89,220Stock option activity


28,850



87















87Balance at June 30, 2005


241,735,433


$
1,210,734


$



$
727,672


$
(309
)

$
1,938,097Balance at December 31, 2005


242,493,416


$
1,222,246


$
(8,764
)

$
754,953


$
4,987


$
1,973,422Adoption of Statement of Financial
    Accounting Standard 123(R)






(8,764
)


8,764











Comprehensive income:Net income














161,580







161,580Net unrealized loss on marketable
    securities, net of tax of $2,857


















(5,305
)


(5,305
)Foreign currency translation


















83



83Total comprehensive income






















156,358Stock-based compensation expense






9,714















9,714Exercise of stock options


409,023



6,698















6,698Issuance of restricted stock awards


188,745



















Tax benefit from exercise of stock
    options






375















375Balance at June 30, 2006


243,091,184


$
1,230,269


$



$
916,533


$
(235
)

$
2,146,567    5




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
 (In thousands)
 (Unaudited)
  Six Months EndedJune 30,2006


2005Cash flows provided by operating
    activities

$
170,444


$
316,768Cash flows from investing
    activities:Transfers from (to) restricted cash


128,874



(73,449
)Purchases of investments in debt
    securities


(2,042,954
)


(1,397,193
)Proceeds from maturities and sales
    of investments in debt securities


1,758,989



1,008,173Purchases of property, plant and
    equipment


(20,403
)


(19,927
)Proceeds from sale of property and
    equipment






1Purchases of product rights


(24,085
)


Arrow International Limited
    collaboration agreement


(35,000
)


Net cash used in investing
    activities (2005 Revised  see Note 14)


(234,579
)


(482,395
)Cash flows from financing
    activities:Proceeds from exercise of stock
    options, net


6,698



87Excess tax benefits from
    stock-based compensation


397



Proceeds from issuance of
    long-term debt


400,000



Payments on long-term debt


(338,434
)


Debt issuance costs


(10,659
)


Net cash provided by financing
    activities


58,002



87Decrease in cash and cash
    equivalents


(6,133
)


(165,540
)Cash and cash equivalents,
    beginning of period (2005 Revised  see Note 14)


30,014



192,656Cash and cash equivalents, end of
    period (2005 Revised  see Note 14)

$
23,881


$
27,116    6




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2006 and 2005
 (Unaudited)
 (In thousands, except share and per share data)
  1.
    General  Form 10-Q Rule 10-01 Regulation S-X Form 10-K
    2.
    Stock-Based
    Compensation     7




---



##### Table of Contents



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


Six Months EndedJune 30, 2005


June 30, 2005Net income:As reported

$
20,497


$
90,552Less: pro forma compensation costs
    for options granted


(1,516
)


(2,867
)Pro forma

$
18,981


$
87,685Basic income per share:As reported

$
0.08


$
0.37Pro forma

$
0.08


$
0.36Diluted income per share:As reported

$
0.08


$
0.37Pro forma

$
0.08


$
0.36     Restricted Stock Awards, Restricted Stock Units and
    Long-Term Performance Unit Awards
           8




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         WeightedAverageGrant-DateShares


Fair ValueRestricted Stock
    Awards:Nonvested balance at
    December 31, 2005


687,775


$
15.55Granted


200,075



19.21Vested


(33,333
)


15.56Forfeited


(11,330
)


19.68Nonvested balance at June 30,
    2006


843,187


$
16.41Restricted Stock
    Units:Nonvested balance at
    December 31, 2005





$
Granted


40,250



17.39Vested






Forfeited


(5,750
)


17.39Nonvested balance at June 30,
    2006


34,500


$
17.39Long-Term Performance Unit
    Awards (one year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


937,906



19.68Vested






Forfeited


(9,111
)


19.68Nonvested balance at June 30,
    2006


928,795


$
19.68Long-Term Performance Unit
    Awards (three year performance cycle):Nonvested balance at
    December 31, 2005





$
Granted


212,654



29.93Vested






Forfeited


(1,982
)


29.93Nonvested balance at June 30,
    2006


210,672


$
29.93    9




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock Options
      Three Months


Three Months


Six Months


Six MonthsEnded June 30,


Ended June 30,


Ended June 30,


Ended June 30,2006


2005


2006


2005Expected volatility


50.5
%


46.0
%


52.4
%


46.0
%Expected term (in years)


6



4



6



4Risk-free interest rate


4.87
%


3.82
%


4.64
%


3.83
%Expected dividend yield


0.00
%


0.00
%


0.00
%


0.00
%       WeightedAverageWeighted


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding options,
    December 31, 2005,


7,073,966


$
18.83



7.65


$
8,106Granted


362,965



19.27Exercised


(410,648
)


16.33Expired


(271,271
)


25.14Forfeited


(105,241
)


15.99Outstanding options, June 30,
    2006


6,649,771


$
18.80



7.37


$
7,988Exercisable, June 30, 2006


4,176,705


$
20.44



6.53


$
4,631  10




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         2006


2005Total intrinsic value of stock
    options exercised

$
858


$
36Total fair value of stock awards
    vested

$
536


$
     3.
    Earnings
    Per Share    Three Months Ended June 30,


Six Months Ended June 30,2006


2005


2006


2005Basic income per common share:Weighted average common shares


242,208,955



241,732,077



242,115,699



241,727,910Diluted income per common share:Weighted average common shares


242,208,955



241,732,077



242,115,699



241,727,910Effect of stock options


298,864



51,403



330,135



65,154Effect of dilutive share awards


246,878







222,173



Weighted average common shares


242,754,697



241,783,480



242,668,007



241,793,064   3 4 1 4
  3 4
 11




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Inventories    June 30,


December 31,2006


2005Raw materials

$
119,430


$
150,979Work-in-process


22,420



14,955Finished goods (including $4,598
    and $6,728 of sample inventory, respectively)


92,111



91,695233,961



257,629Inventory valuation allowance


(27,885
)


(29,566
)Total inventories

$
206,076


$
228,063   5.
    Property,
    Plant and Equipment  ®
    6.
    Acquisitions  ® ®
    Intangible assets

$
23,941Inventory


618Fixed assets


3$
24,562  12




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     ®
      ®
  7.
    Intangible
    Assets and Goodwill    June 30, 2006


December 31, 2005Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
1,198,636


$
333,723


$
1,174,028


$
296,801Patents


269,034



187,450



261,277



171,976Other intangibles


9,459



8,941



9,459



8,793Total intangible assets

$
1,477,129


$
530,114


$
1,444,764


$
477,570     ® ® ®
 13




---



##### Table of Contents



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


MeridianSegment


Segment


TotalGoodwill

$
12,742


$
108,410


$
121,152   8.
    Long-Term
    Debt    June 30,


December 31,2006


2005Convertible senior notes(a)

$
400,000


$
Convertible debentures(b)


4,257



345,000Senior secured revolving credit
    facility(c)






Total long-term debt


404,257



345,000Less current portion


4,257



345,000Long-term portion

$
400,000


$
     (a)
    
    During the first quarter of 2006, the Company issued $400,000 of
    11/4% Convertible
    Senior Notes due April 1, 2026 (Notes). The
    Notes are unsecured obligations and are guaranteed by each of
    the Companys domestic subsidiaries on a joint and several
    basis. The Notes accrue interest at an initial rate of
    11/4%.
    Beginning with the six-month interest period that commences on
    April 1, 2013, the Company will pay additional interest
    during any six-month interest period if the average trading
    price of the Notes during the five consecutive trading days
    ending on the second trading day immediately preceding the first
    day of such six-month period equals 120% or more of the
    principal amount of the Notes. Interest is payable on
    April 1 and October 1 of each year, beginning
    October 1, 2006.On or after April 5, 2013, the Company may redeem for cash
    some or all of the Notes at any time at a price equal to 100% of
    the principal amount of the Notes to be redeemed, plus any
    accrued and unpaid interest, and liquidated damages, if any, to
    but excluding the date fixed for redemption. Holders may require
    the Company to purchase for cash some or all of their Notes on
    April 1, 2013, April 1, 2016 and April 1, 2021,
    or upon the occurrence of a fundamental change (such as a change
    of control or a termination of trading), at 100% of the
    principal amount of the Notes to be purchased, plus any accrued
    and unpaid interest, and liquidated damages, if any, to but
    excluding the purchase date.Prior to April 1, 2012, the Notes are convertible under the
    following circumstances: if the price of the Companys common stock
    reaches a specified threshold during specified periods, if the Notes have been called for redemption, or if specified corporate transactions or other
    specified events occur. 14




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   The Notes are convertible at any time on and after April 1,
    2012, until the close of business on the business day
    immediately preceding maturity. Subject to certain exceptions,
    the Company will deliver cash and shares of the Companys
    common stock, as follows: (i) an amount in cash equal to
    the lesser of (a) the principal amount of Notes surrendered
    for conversion and (b) the product of the conversion rate
    and the average price of the Companys common stock (the
    conversion value), and (ii) if the conversion
    value is greater than the principal amount, a specified amount
    in cash or shares of the Companys common stock, at the
    Companys election. The initial conversion price is
    approximately $20.83 per share of common stock. If certain
    corporate transactions occur on or prior to April 1, 2013,
    the Company will increase the conversion rate in certain
    circumstances.The Company has reserved 23,732,724 shares of common stock
    in the event the Notes are converted into shares of the
    Companys common stock.In connection with the issuance of the Notes, the Company
    incurred approximately $10,659 of deferred financing costs that
    are being amortized over seven years.(b)
    
    During the fourth quarter of 2001, the Company issued $345,000
    of
    23/4% Convertible
    Debentures due November  15, 2021
    (Debentures). On March 29, 2006, the Company
    repurchased $165,000 of the Debentures prior to maturity for
    $163,350, resulting in a gain of $1,650. In addition, the
    Company wrote off deferred financing costs of $628 relating to
    the repurchased Debentures. On June 2, 2006, the Company
    completed a tender offer, repurchasing $175,743 of the
    Debentures at a purchase price of $175,084, resulting in a gain
    of $659. In addition, the Company wrote off deferred financing
    costs of $972 relating to the repurchased Debentures. On
    May 15, 2006, the interest rate on the Debentures was reset
    to 3.5%.(c)
    
    On April 23, 2002, the Company established a $400,000 five
    year Senior Secured Revolving Credit Facility which matures in
    April 2007.  9.
    Contingencies  Fen/Phen
    Litigation
  In re and/or
  ®
 15




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   ®
      Thimerosal
    / Childrens Vaccine Related Litigation
       16




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Hormone
    Replacement Therapy
  In
    re:
  Average
    Wholesale Price Litigation
  In re:
     17




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Settlement
    of Governmental Pricing Investigation
              SEC
    Investigation
     18




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Securities
    Litigation
  and/or
         19




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         Other
    Legal Proceedings
  ® ® Approved Drug Products With Therapeutic
    Equivalence Evaluations method-of-use ®
    ® ®
 20




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ® ®
  ® ® method-of-use ®
  ®
  ®
 21




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ® ®
    ® ® ® ® ® ®
  ® ® ®
   22




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Other
    Contingencies
  ® ® ® and/or
  10.
    Accounting
    Developments      Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  11.
    Income
    Taxes   23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     12.
    Segment
    Information  ®
   24




---



##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Total revenues:Branded pharmaceuticals

$
419,118


$
400,310


$
836,738


$
722,079Meridian Medical Technologies


53,883



35,418



95,167



58,632Royalties


21,085



19,578



40,721



37,633Contract manufacturing and other


149,909



129,847



271,191



249,212Eliminations


(144,350
)


(122,214
)


(259,937
)


(235,992
)Consolidated total net revenues

$
499,645


$
462,939


$
983,880


$
831,564Segment profit:Branded pharmaceuticals

$
343,415


$
335,682


$
695,644


$
607,794Meridian Medical Technologies


30,127



18,164



52,164



30,477Royalties


18,529



17,140



35,795



32,946Contract manufacturing and other


526



749



825



(3,073
)Other operating costs and expense


(227,606
)


(342,900
)


(547,196
)


(527,756
)Other income (expense)


4,829



(522
)


8,317



(8,048
)Income from continuing operations
    before tax

$
169,820


$
28,313


$
245,549


$
132,340   As of


As ofJune 30,


December 31,2006


2005Total assets:Branded pharmaceuticals

$
2,833,323


$
2,654,782Meridian Medical Technologies


301,176



261,956Royalties


24,700



20,444Contract manufacturing and other


20,562



26,840Other






1,220Consolidated total assets

$
3,179,761


$
2,965,242  25




---



##### Table of Contents



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


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Total revenues:Cardiovascular/metabolic

$
201,138


$
201,793


$
405,006


$
336,311Neuroscience


121,390



106,111



241,283



197,506Hospital/acute care


83,395



77,447



164,411



163,295Other


13,195



14,959



26,038



24,967Consolidated branded
    pharmaceutical revenues

$
419,118


$
400,310


$
836,738


$
722,079   13.
    Restructuring
    Activities      Accrued











Accrued











AccruedBalance at


Income








Balance at


Income








Balance atDecember 31,


Statement








March 31,


Statement








June 30,2005


Impact


Payments


Non-Cash


2006


Impact


Payments


Non-Cash


2006Employee separation payments

$
1,509


$



$
980


$



$
529


$
(8
)

$



$



$
521       14.
    Investments
    in Debt Securities   26




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   15.
    Marketable
    Securities    16.
    Change in
    Estimate    ® ®
  17.
    Discontinued
    Operations  ® ®
  ® ® ® ®
    Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005Total revenues

$
157


$
(849
)

$
(93
)

$
3,834Operating income (loss)


157



(849
)


(90
)


3,833Net income (loss)

$
100


$
(545
)

$
(58
)

$
2,405  27




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     18.
    Subsequent
    Event  ® ® co-promotion Co-Promotion ® ®
  
    For 2006, 15% of
    Altace®
    net sales up to $165,000, 42.5% of
    Altace®
    net sales in excess of $165,000 and less than or equal to
    $465,000, and 52.5% of
    Altace®
    net sales that are in excess of $465,000 and less than or equal
    to $585,000. The fee in 2006 will not exceed $215,250.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178,500.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134,000.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84,500.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5,000.  ®
  ®
  19.
    Guarantor
    Financial Statements   28




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   GUARANTOR
    SUBSIDIARIES
  CONDENSED CONSOLIDATING BALANCE SHEETS
 (In thousands)
  June 30, 2006


December 31, 2005Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
12,865


$
7,601


$
3,415


$



$
23,881


$
26,802


$
1,071


$
2,141


$



$
30,014Investments in debt securities


778,628















778,628



494,663















494,663Restricted cash






















130,400















130,400Accounts receivable, net


36



261,262



1,658







262,956



1,221



221,854



506







223,581Inventories


168,675



37,327



74







206,076



195,421



31,877



765







228,063Deferred income tax assets


14,824



60,871











75,695



21,524



60,253











81,777Prepaid expenses and other current
    assets


77,448



10,554











88,002



50,724



8,566



1







59,291Total current assets


1,052,476



377,615



5,147







1,435,238



920,755



323,621



3,413







1,247,789Property, plant and equipment, net


108,922



193,591











302,513



108,712



193,762











302,474Intangible assets, net






943,929



3,086







947,015



44



963,944



3,206







967,194Goodwill






121,152











121,152







121,152











121,152Marketable securities


11,351















11,351



18,502















18,502Deferred income tax assets


(1,293
)


270,348



1,063







270,118



(9,483
)


239,452



1,063







231,032Other assets


41,229



51,145











92,374



30,225



46,874











77,099Investments in subsidiaries


2,465,828











(2,465,828
)






2,299,835











(2,299,835
)


Total assets

$
3,678,513


$
1,957,780


$
9,296


$
(2,465,828
)

$
3,179,761


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
46,722


$
23,243


$
75


$



$
70,040


$
60,700


$
23,762


$
77


$



$
84,539Accrued expenses


76,754



407,181











483,935



151,125



368,491



4







519,620Income taxes payable


59,316



(3,361
)


(121
)






55,834



24,123



(1,701
)


(121
)






22,301Current portion of long-term debt


4,257















4,257



345,000















345,000Total current liabilities


187,049



427,063



(46
)






614,066



580,948



390,552



(40
)






971,460Long-term debt


400,000















400,000



















Other liabilities


14,844



4,284











19,128



17,371



2,989











20,360Intercompany payable (receivable)


930,053



(942,276
)


12,223











796,849



(808,256
)


11,407







Total liabilities


1,531,946



(510,929
)


12,177







1,033,194



1,395,168



(414,715
)


11,367







991,820Shareholders equity


2,146,567



2,468,709



(2,881
)


(2,465,828
)


2,146,567



1,973,422



2,303,520



(3,685
)


(2,299,835
)


1,973,422Total liabilities and
    shareholders equity

$
3,678,513


$
1,957,780


$
9,296


$
(2,465,828
)

$
3,179,761


$
3,368,590


$
1,888,805


$
7,682


$
(2,299,835
)

$
2,965,242  29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   GUARANTOR
    SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 (Unaudited)
  Three Months Ended June 30, 2006


Three Months Ended June 30, 2005Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
112,993


$
478,659


$
(146
)

$
(112,946
)

$
478,560


$
102,090


$
442,992


$
144


$
(101,865
)

$
443,361Royalty revenue






21,085











21,085







19,578











19,578Total revenues


112,993



499,744



(146
)


(112,946
)


499,645



102,090



462,570



144



(101,865
)


462,939Operating costs and expenses:Cost of revenues


46,088



173,820



86



(112,946
)


107,048



32,855



160,128



86



(101,865
)


91,204Selling, general and administrative


53,789



100,730



(361
)






154,158



52,859



106,120



31







159,010Mylan transaction costs






















155















155Research and development


2,048



32,582











34,630



131



17,369











17,500Depreciation and amortization


6,759



31,728



60







38,547



3,922



35,832



166







39,920Intangible asset impairment






279











279







126,923











126,923Restructuring charges






(8
)










(8
)


163



(180
)










(17
)Gain on sale of intangible assets


























(591
)










(591
)Total operating costs and expenses


108,684



339,131



(215
)


(112,946
)


334,654



90,085



445,601



283



(101,865
)


434,104Operating income (loss)


4,309



160,613



69







164,991



12,005



16,969



(139
)






28,835Other income (expense):Interest income


8,363



30











8,393



3,680



253











3,933Interest expense


(2,907
)


(140
)










(3,047
)


(3,036
)


(3
)










(3,039
)Loss on investment






















(369
)














(369
)Loss on early extinguishment of debt


(313
)














(313
)


















Other, net


(173
)


(245
)


214







(204
)


(105
)


(721
)


(221
)






(1,047
)Equity in earnings (loss) of
    subsidiaries


114,690











(114,690
)






23,432











(23,432
)


Intercompany interest (expense)
    income


(15,044
)


15,216



(172
)










(16,797
)


16,948



(151
)






Total other income (expense)


104,616



14,861



42



(114,690
)


4,829



6,805



16,477



(372
)


(23,432
)


(522
)Income (loss) from continuing
    operations before income taxes


108,925



175,474



111



(114,690
)


169,820



18,810



33,446



(511
)


(23,432
)


28,313Income tax (benefit) expense


(1,978
)


60,956



39







59,017



(1,687
)


9,137



(179
)






7,271Income (loss) from continuing
    operations


110,903



114,518



72



(114,690
)


110,803



20,497



24,309



(332
)


(23,432
)


21,042Discontinued operations:Income (loss) from discontinued
    operations






157











157







(849
)










(849
)Income tax expense (benefit)






57











57







(304
)










(304
)Total income (loss) from
    discontinued operations, net






100











100







(545
)










(545
)Net income (loss)

$
110,903


$
114,618


$
72


$
(114,690
)

$
110,903


$
20,497


$
23,764


$
(332
)

$
(23,432
)

$
20,497  30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   GUARANTOR
    SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands)
    (Unaudited)
  Six Months Ended June 30, 2006


Six Months Ended June 30, 2005Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


ConsolidatedRevenues:Net sales

$
210,825


$
941,327


$
1,411


$
(210,404
)

$
943,159


$
196,408


$
792,251


$
584


$
(195,312
)

$
793,931Royalty revenue






40,721











40,721







37,633











37,633Total revenues


210,825



982,048



1,411



(210,404
)


983,880



196,408



829,884



584



(195,312
)


831,564Operating costs and expenses:Cost of revenues


83,443



325,602



811



(210,404
)


199,452



72,025



286,391



316



(195,312
)


163,420Selling, general and administrative


102,875



222,391



(765
)






324,501



91,938



194,450



127







286,515Mylan transaction costs






















3,432















3,432Research and development


2,921



146,591











149,512



292



28,680











28,972Depreciation and amortization


10,769



62,023



120







72,912



7,809



73,205



332







81,346Intangible asset impairment






279











279







126,923











126,923Restructuring charges






(8
)










(8
)


322



1,684











2,006Gain on sale of products


























(1,438
)










(1,438
)Total operating costs and expenses


200,008



756,878



166



(210,404
)


746,648



175,818



709,895



775



(195,312
)


691,176Operating income


10,817



225,170



1,245







237,232



20,590



119,989



(191
)






140,388Other income (expense):Interest income


14,216



137











14,353



5,722



488











6,210Interest expense


(5,888
)


(143
)










(6,031
)


(5,722
)


(18
)










(5,740
)Loss on investment






















(7,222
)














(7,222
)Gain on early extinguishment of debt


709















709



















Other, net


(230
)


(779
)


295







(714
)


(182
)


(753
)


(361
)






(1,296
)Equity in earnings of subsidiaries


165,908











(165,908
)






103,089











(103,089
)


Intercompany interest  (expense)
    income


(25,693
)


25,997



(304
)










(28,990
)


29,290



(300
)






Total other income (expenses)


149,022



25,212



(9
)


(165,908
)


8,317



66,695



29,007



(661
)


(103,089
)


(8,048
)Income (loss) from continuing
    operations before income taxes


159,839



250,382



1,236



(165,908
)


245,549



87,285



148,996



(852
)


(103,089
)


132,340Income tax (benefit) expense


(1,741
)


85,219



433







83,911



(3,267
)


47,758



(298
)






44,193Income from continuing operations


161,580



165,163



803



(165,908
)


161,638



90,552



101,238



(554
)


(103,089
)


88,147Discontinued operations:(Loss) income from discontinued
    operations






(90
)










(90
)






3,833











3,833Income tax (benefit) expense






(32
)










(32
)






1,428











1,428Total (loss) income from
    discontinued operations






(58
)










(58
)






2,405











2,405Net income (loss)

$
161,580


$
165,105


$
803


$
(165,908
)

$
161,580


$
90,552


$
103,643


$
(554
)

$
(103,089
)

$
90,552  31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   GUARANTOR
    SUBSIDIARIES
  CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
  Six Months Ended June 30, 2006


Six Months Ended June 30, 2005Non











NonGuarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


ConsolidatedCash flows provided by operating
    activities

$
(43,349
)

$
213,334


$
459


$
170,444


$
27,223


$
288,952


$
593


$
316,768Cash flows from investing
    activities:Transfers from (to) restricted cash


128,874











128,874



(75,031
)


1,582







(73,449
)Purchases of investments in debt
    securities


(2,042,954
)










(2,042,954
)


(1,397,193
)










(1,397,193
)Proceeds from maturities and sales
    of investments in debt securities


1,758,989











1,758,989



1,008,173











1,008,173Purchases of property, plant and
    equipment


(11,022
)


(9,381
)






(20,403
)


(2,911
)


(17,016
)






(19,927
)Proceeds from sale of property and
    equipment


















1











1Purchases of product rights






(24,085
)






(24,085
)














Arrow International Limited
    collaboration agreement






(35,000
)






(35,000
)














Net cash used in investing
    activities


(166,113
)


(68,466
)






(234,579
)


(466,961
)


(15,434
)






(482,395
)Cash flows from financing
    activities:Proceeds from exercise of stock
    options, net


6,698











6,698



87











87Excess tax benefit from stock-based
    compensation


397











397















Proceeds from issuance of long-term
    debt


400,000











400,000















Payments on long-term debt


(338,434
)










(338,434
)














Debt issuance costs


(10,659
)










(10,659
)














Intercompany


137,523



(138,338
)


815







295,321



(295,714
)


393



Net cash provided by (used in)
    financing activities


195,525



(138,338
)


815



58,002



295,408



(295,714
)


393



87(Decrease) increase in cash and
    cash equivalents


(13,937
)


6,530



1,274



(6,133
)


(144,330
)


(22,196
)


986



(165,540
)Cash and cash equivalents,
    beginning of period


26,802



1,071



2,141



30,014



164,451



27,035



1,170



192,656Cash and cash equivalents, end of
    period

$
12,865


$
7,601


$
3,415


$
23,881


$
20,121


$
4,839


$
2,156


$
27,116  32




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion contains certain forward-looking
    statements that reflect managements current views of
    future events and operations. This discussion should be read in
    conjunction with the following: (a) Risk
    Factors set out below and in our Annual Report on
    Form 10-K
    for the year ended December 31, 2005, which are
    supplemented by the discussion which follows; (b) our
    audited consolidated financial statements and related notes
    which are included in our Annual Report on
    Form 10-K
    for the year ended December 31, 2005; and (c) our
    unaudited consolidated financial statements and related notes
    which are included in this report on
    Form 10-Q.
    Please see the sections entitled Risk Factors and
    A Warning About Forward-Looking Statements for a
    discussion of the uncertainties, risks and assumptions
    associated with these statements.
  OVERVIEW
  Our
    Business
       33




---



##### Table of Contents



RESULTS
    OF OPERATIONS




Three
    and Six Months Ended June 30, 2006 and 2005








|                                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|-------------------------------- |  | -------------------- | ------- |  | ------------------ | - | ------- | ---- |  | - | ------- |  |  | - | ------- | -
|                                 |  | For the Three Months |         |  | For the Six Months |  
|                                 |  | Ended June 30,       |         |  | Ended June 30,     |  
|                                 |  | 2006                 |         |  | 2005               |   |         | 2006 |  |   | 2005    | 
|                                 |  | (In thousands)       |         |  | (In thousands)     |  
|                                
|Total Revenues                   |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Branded pharmaceuticals          |  | $                    | 419,118 |  |                    | $ | 400,310 |      |  | $ | 836,738 |  |  | $ | 722,079 |  
|Meridian Medical Technologies    |  |                      | 53,883  |  |                    |   | 35,418  |      |  |   | 95,167  |  |  |   | 58,632  |  
|Royalties                        |  |                      | 21,085  |  |                    |   | 19,578  |      |  |   | 40,721  |  |  |   | 37,633  |  
|Contract manufacturing and other |  |                      | 5,559   |  |                    |   | 7,633   |      |  |   | 11,254  |  |  |   | 13,220  |  
|                                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Total revenues                   |  | $                    | 499,645 |  |                    | $ | 462,939 |      |  | $ | 983,880 |  |  | $ | 831,564 |  
|Cost of Revenues                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Branded pharmaceuticals          |  | $                    | 75,703  |  |                    | $ | 64,628  |      |  | $ | 141,094 |  |  | $ | 114,285 |  
|Meridian Medical Technologies    |  |                      | 23,756  |  |                    |   | 17,254  |      |  |   | 43,003  |  |  |   | 28,155  |  
|Royalties                        |  |                      | 2,556   |  |                    |   | 2,438   |      |  |   | 4,926   |  |  |   | 4,687   |  
|Contract manufacturing and other |  |                      | 5,033   |  |                    |   | 6,884   |      |  |   | 10,429  |  |  |   | 16,293  |  
|                                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Total cost of revenues           |  | $                    | 107,048 |  |                    | $ | 91,204  |      |  | $ | 199,452 |  |  | $ | 163,420 |  
|Gross Profit                     |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Branded pharmaceuticals          |  | $                    | 343,415 |  |                    | $ | 335,682 |      |  | $ | 695,644 |  |  | $ | 607,794 |  
|Meridian Medical Technologies    |  |                      | 30,127  |  |                    |   | 18,164  |      |  |   | 52,164  |  |  |   | 30,477  |  
|Royalties                        |  |                      | 18,529  |  |                    |   | 17,140  |      |  |   | 35,795  |  |  |   | 32,946  |  
|Contract manufacturing and other |  |                      | 526     |  |                    |   | 749     |      |  |   | 825     |  |  |   | (3,073  | )
|                                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  
|Total gross profit               |  | $                    | 392,597 |  |                    | $ | 371,735 |      |  | $ | 784,428 |  |  | $ | 668,144 |  
|                                 |  |                      |         |  |                    |   |         |      |  |   |         |  |  |   |         |  









|                        |  |                      |         |  |                    |   |         |      |  |   |           |   |  |   |           | 
|----------------------- |  | -------------------- | ------- |  | ------------------ | - | ------- | ---- |  | - | --------- | - |  | - | --------- | 
|                        |  | For the Three Months |         |  | For the Six Months |  
|                        |  | Ended June 30,       |         |  | Ended June 30,     |  
|                        |  | 2006                 |         |  | 2005               |   |         | 2006 |  |   | 2005      |  
|                        |  | (In thousands)       |         |  | (In thousands)     |  
|                       
|Gross Sales             |  | $                    | 616,569 |  |                    | $ | 597,991 |      |  | $ | 1,224,429 |   |  | $ | 1,064,357 | 
|Commercial Rebates      |  |                      | 40,766  |  |                    |   | 46,797  |      |  |   | 97,044    |   |  |   | 81,515    | 
|Medicaid Rebates        |  |                      | 9,600   |  |                    |   | 35,499  |      |  |   | 18,312    |   |  |   | 55,804    | 
|Medicare Part D Rebates |  |                      | 14,702  |  |                    |   |        |      |  |   | 25,870    |   |  |   |          | 
|Chargebacks             |  |                      | 22,857  |  |                    |   | 21,179  |      |  |   | 52,247    |   |  |   | 39,737    | 
|Returns                 |  |                      | 8,244   |  |                    |   | 10,167  |      |  |   | 7,542     |   |  |   | 5,729     | 
|Trade Discounts/Other   |  |                      | 20,598  |  |                    |   | 22,259  |      |  |   | 39,627    |   |  |   | 46,174    | 
|                        |  |                      |         |  |                    |   |         |      |  |   |           |   |  |   |           | 
|                        |  |                      | 499,802 |  |                    |   | 462,090 |      |  |   | 983,787   |   |  |   | 835,398   | 
|Discontinued Operations |  |                      | 157     |  |                    |   | (849    | )    |  |   | (93       | ) |  |   | 3,834     | 
|                        |  |                      |         |  |                    |   |         |      |  |   |           |   |  |   |           | 
|Net Sales               |  | $                    | 499,645 |  |                    | $ | 462,939 |      |  | $ | 983,880   |   |  | $ | 831,564   | 
|                        |  |                      |         |  |                    |   |         |      |  |   |           |   |  |   |           | 







34



---



##### Table of Contents



®
    Accrual
    for Rebates, including Administrative Fees (in
    thousands):
  2006


2005Balance at January 1, net of
    prepaid amounts

$
126,240


$
179,062Current provision related to sales
    made in current period


79,690



62,504Current provision related to sales
    made in prior periods


(3,532
)


(7,481
)Rebates paid


(115,999
)


(83,196
)Balance at March 31, net of
    prepaid amounts

$
86,399


$
150,889Current provision related to sales
    made in current period


69,912



79,696Current provision related to sales
    made in prior periods


(4,844
)


2,600Rebates paid


(82,158
)


(80,423
)Balance at June 30, net of
    prepaid amounts

$
69,309


$
152,762            35




---



##### Table of Contents



Accrual
    for Returns (in thousands):
  2006


2005Balance at January 1

$
50,902


$
122,863Current provision


(702
)


(4,438
)Actual returns


(7,692
)


(45,394
)Ending balance at March 31

$
42,508


$
73,031Current provision


8,244



10,167Actual returns


(4,410
)


(15,009
)Ending balance at June 30

$
46,342


$
68,189     ® ®
  Accrual
    for Chargebacks (in thousands):
  2006


2005Balance at January 1

$
13,153


$
27,953Current provision


29,390



18,558Actual chargebacks


(25,972
)


(22,048
)Ending balance at March 31

$
16,571


$
24,463Current provision


22,857



21,179Actual chargebacks


(25,402
)


(31,741
)Ending balance at June 30

$
14,026


$
13,901  36




---



##### Table of Contents



Branded
    Pharmaceuticals




|                                |  |                      |         |  |               |   |         |                    |  |   |                |   |  |      |       |   |      |   |         |   |  |   |         |  |  |   |         |   |  |  |       |  
|------------------------------- |  | -------------------- | ------- |  | ------------- | - | ------- | ------------------ |  | - | -------------- | - |  | ---- | ----- | - | ---- | - | ------- | - |  | - | ------- |  |  | - | ------- | - |  |  | ----- | -
|                                |  | For the Three Months |         |  | Change        |   |         | For the Six Months |  |   | Change         |  
|                                |  | Ended June 30,       |         |  | 2006 vs. 2005 |   |         | Ended June 30,     |  |   | 2006 vs. 2005  |  
|                                |  | 2006                 |         |  | 2005          |   |         | $                  |  |   | %              |   |  | 2006 |       |   | 2005 |   |         | $ |  |   | %       | 
|                                |  | (In thousands)       |         |  |               |   |         |                    |  |   | (In thousands) |   |  |      |       |   |      |  
|                               
|Branded Pharmaceutical revenue: |  |                      |         |  |               |   |         |                    |  |   |                |   |  |      |       |   |      |   |         |   |  |   |         |  |  |   |         |   |  |  |       |  
|Altace®                         |  | $                    | 153,842 |  |               | $ | 144,206 |                    |  | $ | 9,636          |   |  |      | 6.7   | % |      | $ | 312,690 |   |  | $ | 229,903 |  |  | $ | 82,787  |   |  |  | 36.0  | %
|Skelaxin®                       |  |                      | 97,478  |  |               |   | 86,838  |                    |  |   | 10,640         |   |  |      | 12.3  |   |      |   | 196,104 |   |  |   | 158,726 |  |  |   | 37,378  |   |  |  | 23.5  |  
|Thrombin-JMI®                   |  |                      | 61,907  |  |               |   | 52,926  |                    |  |   | 8,981          |   |  |      | 17.0  |   |      |   | 120,104 |   |  |   | 116,192 |  |  |   | 3,912   |   |  |  | 3.4   |  
|Levoxyl®                        |  |                      | 29,127  |  |               |   | 41,322  |                    |  |   | (12,195        | ) |  |      | (29.5 | ) |      |   | 60,082  |   |  |   | 81,293  |  |  |   | (21,211 | ) |  |  | (26.1 | )
|Sonata®                         |  |                      | 23,912  |  |               |   | 19,273  |                    |  |   | 4,639          |   |  |      | 24.1  |   |      |   | 45,178  |   |  |   | 38,780  |  |  |   | 6,398   |   |  |  | 16.5  |  
|Other                           |  |                      | 52,852  |  |               |   | 55,745  |                    |  |   | (2,893         | ) |  |      | (5.2  | ) |      |   | 102,580 |   |  |   | 97,185  |  |  |   | 5,395   |   |  |  | 5.6   |  
|                                |  |                      |         |  |               |   |         |                    |  |   |                |   |  |      |       |   |      |   |         |   |  |   |         |  |  |   |         |   |  |  |       |  
|Total revenue                   |  |                      | 419,118 |  |               |   | 400,310 |                    |  |   | 18,808         |   |  |      | 4.7   |   |      |   | 836,738 |   |  |   | 722,079 |  |  |   | 114,659 |   |  |  | 15.9  |  
|Cost of Revenues                |  |                      | 75,703  |  |               |   | 64,628  |                    |  |   | 11,075         |   |  |      | 17.1  |   |      |   | 141,094 |   |  |   | 114,285 |  |  |   | 26,809  |   |  |  | 23.5  |  
|                                |  |                      |         |  |               |   |         |                    |  |   |                |   |  |      |       |   |      |   |         |   |  |   |         |  |  |   |         |   |  |  |       |  
|Gross Profit                    |  | $                    | 343,415 |  |               | $ | 335,682 |                    |  | $ | 7,733          |   |  |      | 2.3   | % |      | $ | 695,644 |   |  | $ | 607,794 |  |  | $ | 87,850  |   |  |  | 14.5  | %
|                                |  |                      |         |  |               |   |         |                    |  |   |                |   |  |      |       |   |      |   |         |   |  |   |         |  |  |   |         |   |  |  |       |  





® ® ® ® ® ® ® ®




Sales of
    Key Products




Altace®




® ®




® ® ®




®




Skelaxin®




®


37



---



##### Table of Contents







® ®




® ® ®




Thrombin-JMI®




® ®




®




Levoxyl®




® ®




® ®




® ® ®




Sonata®




® ®


38



---



##### Table of Contents



® ®




®




Other












Cost of
    Revenues




®




®












Meridian
    Medical Technologies




|                                          |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |      |   |      |   |        |   |  |   |        |  |  |   |        |  |  |  |      |  
|----------------------------------------- |  | -------------------- | ------ |  | ------------- | - | ------ | ------------------ |  | - | -------------- |  |  | ---- | ---- | - | ---- | - | ------ | - |  | - | ------ |  |  | - | ------ |  |  |  | ---- | -
|                                          |  | For the Three Months |        |  | Change        |   |        | For the Six Months |  |   | Change         | 
|                                          |  | Ended June 30,       |        |  | 2006 vs. 2005 |   |        | Ended June 30,     |  |   | 2006 vs. 2005  | 
|                                          |  | 2006                 |        |  | 2005          |   |        | $                  |  |   | %              |  |  | 2006 |      |   | 2005 |   |        | $ |  |   | %      | 
|                                          |  | (In thousands)       |        |  |               |   |        |                    |  |   | (In thousands) |  |  |      |      |   |      |  
|                                         
|Meridian Medical Technologies
    revenue |  | $                    | 53,883 |  |               | $ | 35,418 |                    |  | $ | 18,465         |  |  |      | 52.1 | % |      | $ | 95,167 |   |  | $ | 58,632 |  |  | $ | 36,535 |  |  |  | 62.3 | %
|Cost of Revenues                          |  |                      | 23,756 |  |               |   | 17,254 |                    |  |   | 6,502          |  |  |      | 37.7 |   |      |   | 43,003 |   |  |   | 28,155 |  |  |   | 14,848 |  |  |  | 52.7 |  
|                                          |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |      |   |      |   |        |   |  |   |        |  |  |   |        |  |  |  |      |  
|Gross Profit                              |  | $                    | 30,127 |  |               | $ | 18,164 |                    |  | $ | 11,963         |  |  |      | 65.9 | % |      | $ | 52,164 |   |  | $ | 30,477 |  |  | $ | 21,687 |  |  |  | 71.2 | %
|                                          |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |      |   |      |   |        |   |  |   |        |  |  |   |        |  |  |  |      |  





® ® ®


39



---



##### Table of Contents



®








Royalties




|                 |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |     |   |      |   |        |   |  |   |        |  |  |   |       |  |  |  |     |  
|---------------- |  | -------------------- | ------ |  | ------------- | - | ------ | ------------------ |  | - | -------------- |  |  | ---- | --- | - | ---- | - | ------ | - |  | - | ------ |  |  | - | ----- |  |  |  | --- | -
|                 |  | For the Three Months |        |  | Change        |   |        | For the Six Months |  |   | Change         | 
|                 |  | Ended June 30,       |        |  | 2006 vs. 2005 |   |        | Ended June 30,     |  |   | 2006 vs. 2005  | 
|                 |  | 2006                 |        |  | 2005          |   |        | $                  |  |   | %              |  |  | 2006 |     |   | 2005 |   |        | $ |  |   | %      | 
|                 |  | (In thousands)       |        |  |               |   |        |                    |  |   | (In thousands) |  |  |      |     |   |      |  
|                
|Royalty revenue  |  | $                    | 21,085 |  |               | $ | 19,578 |                    |  | $ | 1,507          |  |  |      | 7.7 | % |      | $ | 40,721 |   |  | $ | 37,633 |  |  | $ | 3,088 |  |  |  | 8.2 | %
|Cost of Revenues |  |                      | 2,556  |  |               |   | 2,438  |                    |  |   | 118            |  |  |      | 4.8 |   |      |   | 4,926  |   |  |   | 4,687  |  |  |   | 239   |  |  |  | 5.1 |  
|                 |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |     |   |      |   |        |   |  |   |        |  |  |   |       |  |  |  |     |  
|Gross Profit     |  | $                    | 18,529 |  |               | $ | 17,140 |                    |  | $ | 1,389          |  |  |      | 8.1 | % |      | $ | 35,795 |   |  | $ | 32,946 |  |  | $ | 2,849 |  |  |  | 8.6 | %
|                 |  |                      |        |  |               |   |        |                    |  |   |                |  |  |      |     |   |      |   |        |   |  |   |        |  |  |   |       |  |  |  |     |  





® ®




Contract
    Manufacturing




|                               |  |                      |       |  |               |   |       |                    |  |   |                |   |  |      |       |    |      |   |        |   |  |   |        |   |  |   |        |   |  |  |       |   
|------------------------------ |  | -------------------- | ----- |  | ------------- | - | ----- | ------------------ |  | - | -------------- | - |  | ---- | ----- | -- | ---- | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  |  | ----- | --
|                               |  | For the Three Months |       |  | Change        |   |       | For the Six Months |  |   | Change         |  
|                               |  | Ended June 30,       |       |  | 2006 vs. 2005 |   |       | Ended June 30,     |  |   | 2006 vs. 2005  |  
|                               |  | 2006                 |       |  | 2005          |   |       | $                  |  |   | %              |   |  | 2006 |       |    | 2005 |   |        | $ |  |   | %      |  
|                               |  | (In thousands)       |       |  |               |   |       |                    |  |   | (In thousands) |   |  |      |       |    |      |  
|                              
|Contract manufacturing revenue |  | $                    | 5,559 |  |               | $ | 7,633 |                    |  | $ | (2,074         | ) |  |      | (27.2 | )% |      | $ | 11,254 |   |  | $ | 13,220 |   |  | $ | (1,966 | ) |  |  | (14.9 | )%
|Cost of Revenues               |  |                      | 5,033 |  |               |   | 6,884 |                    |  |   | (1,851         | ) |  |      | (26.9 | )  |      |   | 10,429 |   |  |   | 16,293 |   |  |   | (5,864 | ) |  |  | (36.0 | ) 
|                               |  |                      |       |  |               |   |       |                    |  |   |                |   |  |      |       |    |      |   |        |   |  |   |        |   |  |   |        |   |  |  |       |   
|Gross Profit                   |  | $                    | 526   |  |               | $ | 749   |                    |  | $ | (223           | ) |  |      | (29.8 | )% |      | $ | 825    |   |  | $ | (3,073 | ) |  | $ | 3,898  |   |  |  |      |   
|                               |  |                      |       |  |               |   |       |                    |  |   |                |   |  |      |       |    |      |   |        |   |  |   |        |   |  |   |        |   |  |  |       |   











40



---



##### Table of Contents



Operating
    Costs and Expenses
  For the Three Months


Change


For the Six Months


ChangeEnded June 30,


2006 vs. 2005


Ended June 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








(In thousands)Total gross profit

$
392,597


$
371,735


$
20,862



5.6
%

$
784,428


$
668,144


$
116,284



17.4
%Selling, general and administrative


154,158



159,165



(5,007
)


(3.1
)


324,501



289,947



34,554



11.9Research and development


34,630



17,500



17,130



97.9



149,512



28,972



120,540



>100.0Depreciation and amortization


38,547



39,920



(1,373
)


(3.4
)


72,912



81,346



(8,434
)


(10.4
)Intangible asset impairment


279



126,923



(126,644
)


(99.8
)


279



126,923



(126,644
)


(99.8
)Restructuring charges


(8
)


(17
)


9



52.9



(8
)


2,006



(2,014
)


>100.0Gain on sale of products






(591
)


591



(100.0
)






(1,438
)


1,438



(100.0
)Operating income

$
164,991


$
28,835


$
136,156



>100.0


$
237,232


$
140,388


$
96,844



69.0
%   Selling,
    General and Administrative Expenses
  For the Three Months


Change


For the Six Months


ChangeEnded June 30,


2006 vs. 2005


Ended June 30,


2006 vs. 20052006


2005


$


%


2006


2005


$


%(In thousands)








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

$
107,126


$
101,423


$
5,703



5.6
%

$
212,180


$
194,273


$
17,907



9.2
%Mylan transaction costs






155



(155
)


(100.0
)






3,432



(3,432
)


(100.0
)Co-promotion fees


47,032



57,587



(10,555
)


(18.3
)


112,321



92,242



20,079



21.8Total selling, general and
    administrative

$
154,158


$
159,165


$
(5,007
)


(3.1
)%

$
324,501


$
289,947


$
34,554



11.9
%   ®
  ® ® ®
   41




---



##### Table of Contents




    Charges of $1.5 million and $4.5 million in the second
    quarter of 2006 and the first six months of 2006, respectively,
    and charges of $5.2 and $8.9 million in the second quarter
    of 2005 and the first six months of 2005, respectively,
    primarily due to professional fees related to the now completed
    investigation of our company by the Office of Inspector General
    of the United States Department of Health and Human Services,
    the partially completed investigation by the
    U.S. Securities and Exchange Commission, and private
    plaintiff securities litigation. For additional information,
    please see Settlement of Governmental Pricing
    Investigation, SEC Investigation and
    Securities Litigation included in Note 9,
    Contingencies, in Item 1, Financial
    Statements.
    A charge in the amount of $0.2 million and
    $3.4 million in the second quarter and the first six months
    of 2005, respectively, for professional fees and expenses
    related to the terminated merger agreement with Mylan
    Laboratories, Inc.     Research
    and Development Expense
  For the Three Months


Change


For the Six Months


ChangeEnded June 30,


2006 vs. 2005


Ended June 30,


2006 vs. 20052006


2005


$


2006


2005


$(In thousands)








(In thousands)Research and development

$
34,630


$
17,500


$
17,130


$
64,512


$
28,972


$
35,540Research and
    development  in process upon acquisition














85,000







85,000Total research and development

$
34,630


$
17,500


$
17,130


$
149,512


$
28,972


$
120,540     ®
 42




---



##### Table of Contents



Depreciation
    and Amortization Expense
  ®
  ® ® ® and/or
  ® ® ® ® ® ®
  ®
    Other
    Operating Expenses
    
    Intangible asset impairment charges of $0.3 million in the
    second quarter of 2006 and the first six months of 2006 and
    $126.9 million in the second quarter of 2005 and the first
    six months of 2005. The intangible asset impairment charge in
    the second quarter of 2005 was related to
    Sonata®.
    As previously disclosed, a new competitor to
    Sonata®
    entered the market in April 2005. In the second quarter of 2005,
    the prescriptions for
    Sonata®
    did not meet our expectations. As a result, we lowered our
    future sales forecast for
    Sonata®
    which resulted in a decrease in the estimated undiscounted
    future cash flows associated with the carrying value of the
    Sonata®
    intangible assets on our balance sheet so as to reflect the
    estimated fair value of such assets. We determined the fair
    value of the intangible assets associated with
    Sonata®
    based on the estimated discounted future cash flows for this
    product.
    A restructuring charge in the amount of $2.0 million in the
    first six months of 2005 primarily due to our decision to
    discontinue some relatively insignificant products associated
    with our Meridian Medical Technologies segment.
    Gains of $0.6 million and $1.4 million in second
    quarter of 2005 and in the first six months of 2005,
    respectively, primarily due to the sale of some of our assets. 43




---



##### Table of Contents



Non-Operating
    Items
  For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2006


2005


2006


2005(In thousands)


(In thousands)Interest income

$
8,393


$
3,933


$
14,353


$
6,210Interest expense


(3,047
)


(3,039
)


(6,031
)


(5,740
)Loss on investment






(369
)






(7,222
)(Loss) gain on early
    extinguishment of debt


(313
)






709



Other, net


(204
)


(1,047
)


(714
)


(1,296
)Total other income (expense)


4,829



(522
)


8,317



(8,048
)Income tax expense


59,017



7,271



83,911



44,193Discontinued operations


100



(545
)


(58
)


2,405   Other
    Income (Expense)
      
    A charge of $0.4 million in the second quarter of 2005 and
    $7.2 million in the first six months of 2005 related to our
    investment in Novavax, Inc. We sold our investment in Novavax,
    Inc. during the third quarter of 2005.
    Loss of $0.3 million during the second quarter of 2006 and
    income of $0.7 million during the first six months of 2006
    resulting from the early retirement of our
    23/4% Convertible
    Debentures due November 15, 2021.  Income
    Tax Expense
      Discontinued
    Operations
  ® ® ® ®
  LIQUIDITY
    AND CAPITAL RESOURCES
  General
   44




---



##### Table of Contents



® Co-Promotion ® ® ®
  
    For 2006, 15% of
    Altace®
    net sales up to $165.0 million, 42.5% of
    Altace®
    net sales in excess of $165.0 million and less than or
    equal to $465.0 million, and 52.5% of
    Altace®
    net sales that are in excess of $465.0 million and less
    than or equal to $585.0 million. The fee in 2006 will not
    exceed $215.3 million.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5.0 million.  ®
  tm tm tm tm tm tm
  ® ®
  ®
   45




---



##### Table of Contents



®
  ®
  tm tm moderate-to-severe tm tm tm
    ® ® ® ® ® ® ® ® ®
  Settlement
    of Governmental Pricing Investigation
   46




---



##### Table of Contents



Form 8-K
  SEC
    Investigation
      Securities
    Litigation
  and/or
 47




---



##### Table of Contents



48




---



##### Table of Contents



Patent
    Challenges
  ® ® ® ® ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For the Six MonthsEnded June 30,2006

2005(In thousands)Net cash provided by operating
    activities

$
170,444


$
316,768           For the Six MonthsEnded June 30,2006


2005(In thousands)Accounts receivable, net of
    allowance

$
(39,011
)

$
(15,044
)Inventories


21,987



51,417Prepaid expenses and other current
    assets


(29,202
)


1,107Accounts payable


(14,837
)


(29,268
)Accrued expenses and other
    liabilities


(83,988
)


(33,033
)Income taxes payable


33,962



56,153Deferred revenue


(4,546
)


(4,546
)Other assets


(14,562
)


(1,306
)Deferred taxes


(30,169
)


(13,418
)Total changes in operating assets
    and liabilities and deferred taxes

$
(160,366
)

$
12,062  49




---



##### Table of Contents



Investing
    Activities
  For the Six MonthsEnded June 30,2006

2005(In thousands)Net cash used in investing
    activities

$
(234,579
)

$
(482,395
)   ®
      Financing
    Activities
  2006

2005(In thousands)Net cash provided by financing
    activities

$
58,002


$
87   1 4 3 4
  Certain
    Indebtedness and Other Matters
  1 4 1 4
    3 4
 50




---



##### Table of Contents



Form S-3 and/or
  Impact
    of Inflation
    RECENTLY
    ISSUED ACCOUNTING STANDARDS
  10-K
 51




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  CRITICAL
    ACCOUNTING POLICIES AND ESTIMATES
              
    Intangible assets, goodwill, and other long-lived
    assets.  When we acquire product rights in
    conjunction with either business or asset acquisitions, we
    allocate an appropriate portion of the purchase price to
    intangible assets, goodwill and other long-lived assets. The
    purchase price is allocated to product rights and trademarks,
    patents, acquired research and development, if any, and other
    intangibles using the assistance of valuation experts. We
    estimate the useful lives of the assets by factoring in the
    characteristics of the products such as: patent protection,
    competition from products prescribed for similar indications,
    estimated future introductions of competing products, and other
    issues. The factors that drive the estimate of the life of the
    asset are inherently uncertain. However, patents have specific
    legal lives over which they are amortized. Conversely,
    trademarks and product rights have no specific legal lives.
    Trademarks and product rights will continue to be an asset to us
    after the expiration of the patent, as their economic value is
    not tied exclusively to the patent. We believe that by
    establishing separate lives for the patent versus the trademark
    and product rights, we are in essence using an accelerated
    method of amortization for the product as a whole. This results
    in greater amortization in earlier years when the product is
    under patent protection, as we are amortizing both the patent
    and the trademark and product rights, and less amortization when
    the product faces potential 52




---



##### Table of Contents



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.        Accumulated


Net BookCost


Amortization


Value(In thousands)BrandedAltace®

$
276,150


$
77,568


$
198,582Other Cardiovascular/metabolic


80,770



41,776



38,994Cardiovascular/metabolic


356,920



119,344



237,576Intal®


106,192



18,669



87,523Other Hospital/acute care


191,114



51,504



139,610Hospital/acute care


297,306



70,173



227,133Skelaxin®


203,015



40,405



162,610Sonata®


23,146



23,146



Neuroscience


226,161



63,551



162,610Other


144,675



57,953



86,722Total Branded


1,025,062



311,021



714,041Meridian Medical
    Technologies


171,104



20,599



150,505Royalties


2,470



2,103



367Contract
    manufacturing










All other










Total trademarks and product rights

$
1,198,636


$
333,723


$
864,913  53




---



##### Table of Contents



Three Months Ended





Three Months EndedJune 30, 2006





June 30, 2005Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®

$



$
3,677



21


$



$
3,225Other Cardiovascular/metabolic






1,823











1,905Cardiovascular/metabolic






5,500











5,130Intal®






1,902



15







1,392Other Hospital/acute care


279



3,402











2,683Hospital/acute care


279



5,304











4,075Skelaxin®






3,887



13.5







3,887Sonata®














126,923



2,993Neuroscience






3,887







126,923



6,880Other






2,060











1,477Total Branded


279



16,751







126,923



17,562Meridian Medical
    Technologies






1,903











1,291Royalties






11











11Contract
    manufacturing


















All other


















Total trademarks and product rights

$
279


$
18,665






$
126,923


$
18,864  54




---



##### Table of Contents



Six Months Ended





Six Months EndedJune 30, 2006





June 30, 2005Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®

$



$
7,355



21


$



$
6,450Other Cardiovascular/metabolic






3,645











3,782Cardiovascular/metabolic






11,000











10,232Intal®






3,805



15







2,753Other Hospital/acute care


279



6,803











4,425Hospital/acute care


279



10,608











7,178Skelaxin®






7,774



13.5







7,774Sonata®














126,923



5,986Neuroscience






7,774







126,923



13,760Other






4,121











3,954Total Branded


279



33,503







126,923



35,124Meridian Medical
    Technologies






3,397











2,582Royalties






21











21Contract
    manufacturing


















All other


















Total trademark and product rights

$
279


$
36,921






$
126,923


$
37,727     Remaining Life at June 30, 2006Trademark &Patent


Product RightsAltace®


2 years 10 months



13 years 6 monthsSkelaxin®






10 years 6 monthsSonata®


6 months



Intal®






11 years 6 months   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. Cost is determined using the
    first-in, first-out (FIFO) method. We include in our inventories
    an allocation of fixed production overhead costs which primarily
    consist of personnel costs and property taxes. We expense a
    portion of our fixed overhead costs associated with any facility
    operating at a level considered to be below normal capacity. We
    evaluate our entire inventory for short dated or slow moving
    product and inventory commitments under supply agreements based
    on projections of future demand and market conditions. For those
    units in inventory that are so identified, we estimate their
    market value or net sales value based on current realization
    trends. If the projected net realizable value is less than cost,
    on a product basis, we make a provision to reflect the lower
    value of that inventory. This methodology recognizes projected
    inventory losses at the time such losses are evident rather than
    at the time goods are actually sold. We maintain supply
    agreements with some of our vendors which contain minimum
    purchase requirements. We estimate future inventory requirements
    based on current facts and trends. Should our minimum purchase
    requirements under supply agreements or our estimated future
    inventory requirements exceed actual inventory quantities that
    we will be able to sell to our customers, we record a charge in
    costs of revenues. 55




---



##### Table of Contents




    Accruals for rebates, returns, and
    chargebacks.  We establish accruals for returns,
    chargebacks and Medicaid, Medicare, and commercial rebates in
    the same period we recognize the related sales. The accruals
    reduce revenues and are included in accrued expenses. At the
    time a rebate or chargeback payment is made or a product return
    is received, which occurs with a delay after the related sale,
    we record a reduction to accrued expenses and, at the end of
    each quarter, adjust accrued expenses for differences between
    estimated and actual payments. Due to estimates and assumptions
    inherent in determining the amount of returns, chargebacks and
    rebates, the actual amount of product returns and claims for
    chargebacks and rebates may be different from our estimates.      
    Revenue recognition.  Revenue is recognized
    when title and risk of loss are transferred to customers,
    collection of sales is reasonably assured, and we have no
    further performance obligations. This is generally at the time
    products are received by the customer. Accruals for estimated
    returns, rebates and chargebacks, determined based on historical
    experience, reduce revenues at the time of sale and are included
    in accrued expenses. Medicaid and certain other governmental
    pricing programs involve particularly difficult interpretations
    of relevant statutes and regulatory guidance, which are complex
    and, in certain respects, ambiguous. Moreover, prevailing
    interpretations of these statutes and guidance can change over
    time. Royalty revenue is recognized based on a percentage of
    sales (namely, contractually agreed-upon royalty rates) reported
    by third parties. 56




---



##### Table of Contents



RISK
    FACTORS
  You should carefully consider the risks described below and
    the other information contained in this report, including our
    unaudited consolidated financial statements and related notes.
    You should also consider the information contained in our annual
    report on
    Form 10-K
    for the year ended December 31, 2005, including our audited
    consolidated financial statements and related notes. The risks
    described below are not the only ones facing our company.
    Additional risks not presently known to us or that we currently
    deem immaterial may also impair our business operations. If any
    of the adverse events described in this Risk Factors
    section or other sections of this report or our annual report on
    Form 10-K
    for the year ended December 31, 2005 actually occurs, our
    business, results of operations and financial condition could be
    materially adversely affected, the trading price, if any, of our
    securities could decline and you might lose all or part of your
    investment.
  Risks
    Related to our Business
  If we
    cannot successfully enforce our rights under the patents
    relating to three of our largest products,
    Altace®,
    Skelaxin®
    and
    Sonata®,
    and the patent relating to
    Adenoscan®,
    or if we are unable to secure or enforce our rights under other
    patents, trademarks, trade secrets or other intellectual
    property, our results of operations could be materially
    adversely affected.
  ® ® Approved Drug Products with Therapeutic
    Equivalence Evaluations composition-of-matter method-of-use ®
    ® ®
 57




---



##### Table of Contents



® ® ®
  ® ® method-of-use ®
  ®
    ®
 58




---



##### Table of Contents



® ® ®
  ® ® ® ® ®
  ® ® ®
        The
    securities and derivative litigation or the continuing SEC
    investigation could have a material adverse effect on our
    business.
  and/or
 59




---



##### Table of Contents



60




---



##### Table of Contents



We
    have entered into agreements with manufacturers
    and/or
    distributors of generic pharmaceutical products with whom we are
    presently engaged, or have previously been engaged in
    litigation, and these agreements could subject us to claims that
    we have violated federal
    and/or state
    anti-trust laws.
  and/or and/or
    We
    cannot assure you that we will be able to comply with the terms
    and conditions of our corporate integrity agreement with the
    Office of Inspector General of the United States Department of
    Health and Human Services.
          We are
    subject to the risk of additional litigation and regulatory
    proceedings or actions in connection with the restatement of
    prior period financial statements.
   61




---



##### Table of Contents



We
    cannot assure you that we will be able to maintain effective
    internal control over financial reporting.
  Form 10-K
      If
    sales of our major products or royalty payments to us decrease,
    our results of operations could be materially adversely
    affected.
  ® ® ® ® ®
  Although
    we have an obligation to indemnify our officers and directors,
    we may not have sufficient insurance coverage available for this
    purpose and may be forced to pay these indemnification costs
    directly. We may not be able to maintain existing levels of
    coverage, which could make it difficult to attract or retain
    qualified directors and officers.
   62




---



##### Table of Contents



We are
    required annually, or on an interim basis as needed, to review
    the carrying value of our intangible assets and goodwill for
    impairment. If events such as generic competition or inability
    to manufacture or obtain sufficient supply of product occur that
    cause the sales of our products to decline, the intangible asset
    value of any declining product could become
    impaired.
    If we
    cannot implement our strategy to grow our business through
    increased sales, acquisitions, development and in-licensing, our
    business or competitive position in the pharmaceutical industry
    may suffer.
      
    Remoxytm,
    an investigational drug for the treatment of severe to chronic
    pain;
    binodenoson, a myocardial pharmacologic stress imaging agent;
    Vanquixtm,
    a diazepam-filled auto-injector;
    bremelanotide, (which we previously referred to as PT-141), an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers;
    T-62, an investigational drug for the treatment of neuropathic
    pain;
    a new inhaler for
    Intal®
    using the alternative propellant hydrofluoroalkane
    (HFA) for which the FDA has issued an approvable
    letter;
    a potential new formulation of metaxalone;
    a novel formulation of ramipril for which an NDA is pending;
    an
    Altace®/diuretic
    combination product; and
    a program to evaluate the safety and efficacy of
    Altace®
    in children.    
    engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products,
    successfully develop, license or commercialize new products on a
    timely basis or at all,
    continue to develop products already in development in a cost
    effective manner, or 63




---



##### Table of Contents




    obtain any FDA approvals necessary to successfully implement the
    strategies described above.      
    develop or license their products more rapidly than we can,
    complete any applicable regulatory approval process sooner than
    we can,
    market or license their products before we can market or license
    our products, or
    offer their newly developed or licensed products at prices lower
    than our prices,    If we
    cannot integrate the business of companies or products we
    acquire, or appropriately and successfully manage and coordinate
    third-party collaborative development activities, our business
    may suffer.
    We do
    not have proprietary protection for most of our branded
    pharmaceutical products, and our sales could suffer from
    competition by generic substitutes.
   64




---



##### Table of Contents



If we
    cannot sell our products in amounts greater than our minimum
    purchase requirements under some of our supply agreements or
    sell our products in accordance with our forecasts, our results
    of operations and cash flows may be adversely
    affected.
  ® ®
    Any
    significant delays or difficulties in the manufacture of, or
    supply of materials for, our products may reduce our profit
    margins and revenues, limit the sales of our products, or harm
    our products reputations.
  ® ® ®
  ® ® ® ® ® ® ®
  ® ® ® ® ®
 65




---



##### Table of Contents



®
        If
    third-party developers of some of our new product candidates and
    reformulated products fail to devote sufficient time and
    resources to our concerns, or if their performance is
    substandard or otherwise fails to comply with the terms of their
    agreements with us, or if we mismanage the development process,
    the introduction of new or reformulated products may not be
    successful.
    
    may not be successful in developing the products or product line
    extensions for us,
    may face financial or business related difficulties which could
    make it difficult or impossible for them to continue business
    operations, or
    may otherwise breach or terminate their agreements with us.    We are
    near maximum capacity at our Middleton, Wisconsin facility,
    which limits our ability to increase production of
    Thrombin-JMI®.
  ® ® and/or ® ®
  Wholesaler
    and distributor buying patterns and other factors may cause our
    quarterly results to fluctuate, and these fluctuations may
    adversely affect our short-term profitability.
   66




---



##### Table of Contents



The
    insolvency of any of our principal customers, who are wholesale
    pharmaceutical distributors, could have a material adverse
    effect on our business, financial condition, results of
    operations and cash flows.
    Our
    wholly owned subsidiary, King Pharmaceuticals Research and
    Development, Inc., successor to Jones Pharma Incorporated, is a
    defendant in litigation which is currently being handled by its
    insurance carriers. Should this coverage be inadequate or
    subsequently denied or were we to lose some of these lawsuits,
    our results of operations could be adversely
    affected.
  In re and/or
  ®
 67




---



##### Table of Contents



®
    Sales
    of
    Thrombin-JMI®
    may be affected by the perception of risks associated with some
    of the raw materials used in its manufacture; if we are unable
    to successfully develop purification procedures at our
    facilities that are in accordance with the FDAs
    expectations for biological products generally, the FDA could
    limit our ability to manufacture biological products at those
    facilities.
  ® ® ® ®
  ® ® ® ® ®
   68




---



##### Table of Contents



®
  A
    failure by Dey, L.P. to successfully market the
    EpiPen®
    auto-injector, or an increase in competition, could have a
    material adverse effect on our results of
    operations.
  ® ® ® ® ® ® ®
  Our
    relationships with the U.S. Department of Defense and other
    government entities are subject to risks associated with doing
    business with the government.
       69




---



##### Table of Contents



If we
    fail to comply with our reporting and payment obligations under
    the Medicaid rebate program or other governmental pricing
    programs, we could be subject to additional reimbursements,
    penalties, sanctions and fines which could have a material
    adverse effect on our business.
      If our
    operations were disrupted by a natural disaster or other
    catastrophic event, our business could be harmed.
      If we
    are unable to obtain approval of new HFA propellants for
    Intal®
    and
    Tilade®,
    our sales of these products could be adversely
    affected.
  ® ® ® ® ® ®
  There
    are risks associated with our restructured agreement with Wyeth
    regarding Altace®.
  ® ® ® ® ®
  
    our ability to sell and market
    Altace®
    effectively;
    the successful transition of Wyeths marketing
    responsibilities to King during the remainder of 2006;
    the level of marketing and sales expenditures necessary to sell
    and market
    Altace®
    effectively; and
    Wyeths continued commitment to sell and market
    Altace®
    for the remainder of 2006. 70




---



##### Table of Contents



®
  The
    loss of our key personnel or an inability to attract new
    personnel could harm our business.
    Our
    shareholder rights plan, charter and bylaws discourage
    unsolicited takeover proposals and could prevent shareholders
    from realizing a premium on their common stock.
    
    a classified Board of Directors;
    the ability of our Board of Directors to designate the terms of
    and issue new series of preferred stock;
    advance notice requirements for nominations for election to our
    Board of Directors; and
    special voting requirements for the amendment of our charter and
    bylaws.    Our
    stock price is volatile, which could result in substantial
    losses for our investors.
    
    variations in our results of operations;
    perceived risks and uncertainties concerning our business;
    announcements of earnings;
    developments in the governmental investigations or securities
    litigation;
    the commencement of, or adverse developments in, any material
    litigation;
    failure to meet or exceed our own projections for revenue,
    product sales and earnings per share;
    failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
    failure to meet or exceed security analysts financial
    projections for our company;
    comments or recommendations made by securities analysts;
    general market conditions;
    perceptions about market conditions in the pharmaceutical
    industry;
    announcements of technological innovations or the results of
    clinical trials or studies; 71




---



##### Table of Contents




    changes in marketing, product pricing and sales strategies or
    development of new products by us or our competitors;
    changes in domestic or foreign governmental regulations or
    regulatory approval processes; and
    announcements concerning regulatory compliance and government
    agency reviews.    Risks
    Related to Our Industry
  Failure
    to comply with laws and government regulations could adversely
    affect our ability to operate our business.
      and/or and/or
     72




---



##### Table of Contents



An
    increase in product liability claims or product recalls could
    harm our business.
  ® ® ®
   73




---



##### Table of Contents



Any
    reduction in reimbursement levels by managed care organizations
    or other third-party payors may have an adverse effect on our
    revenues.
    and/or
    If we
    fail to comply with the safe harbors provided under various
    federal and state laws, our business could be adversely
    affected.
   74




---



##### Table of Contents



and/or
  In the
    future, the publication of negative results of studies or
    clinical trials may adversely impact our products.
    New
    legislation or regulatory proposals may adversely affect our
    revenues.
       75




---



##### Table of Contents



The
    pharmaceutical industry is highly competitive, and other
    companies in our industry have much greater resources than we
    do.
    
    we will be able to continue to acquire commercially attractive
    pharmaceutical products, companies or technologies;
    additional competitors will not enter the market; or
    competition for acquisition of products in development,
    currently marketed products, companies and technologies will not
    have a material adverse effect on our business, financial
    condition and results of operations.    Competition for Acquisitions and In-License
    Opportunities.
  
    we will be successful in the acquisition, or in-license of
    commercially attractive pharmaceutical opportunities, compounds,
    products, companies or technologies,
    additional competitors will not enter the market,
    competition for acquisition and in-license of pharmaceutical
    opportunities, compounds or products, including products in
    development, currently marketed products, companies and
    technologies will not have a material adverse effect on our
    business, financial condition and results of operations, or
    we will be successful in bringing compounds, products in
    development or other opportunities to commercial success.  Product Competition.
  ®
  ®
  ®
  ®
  ®
 76




---



##### Table of Contents



A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
        
    the future potential of, including anticipated net sales and
    prescription trends for, our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Thrombin-JMI®,
    Sonata®
    and
    Levoxyl®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Sonata®
    and
    Adenoscan®;
    expected trends and projections with respect to particular
    products, reportable segments and income and expense line items;
    the timeliness and accuracy of wholesale inventory data provided
    by our customers;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the development, approval and successful commercialization of
    Remoxytm,
    an investigational drug for the treatment of
    moderate-to-severe
    chronic pain; binodenoson, our next generation cardiac
    pharmacologic stress-imaging agent; bremelanotide, an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; the development of a new
    formulation of
    Skelaxin®;
    pre-clinical programs; and product life-cycle development
    projects;
    the development, approval and successful commercialization of a
    diazepam-filled auto-injector, new inhaler for
    Intal®
    and
    Tilade®
    using the alternative propellant HFA, and an
    Altace®/diuretic
    combination product;
    our successful execution of our growth strategies;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for
    Thrombin-JMI®;
    anticipated increases in sales of acquired products or royalty
    revenues;
    the success of our Amended Co-Promotion Agreement with Wyeth; 77




---



##### Table of Contents




    the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;
    the development of product line extensions;
    the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal®
    inhaler formulation utilizing HFA, and other regulatory agencies
    worldwide;
    products developed, acquired or in-licensed that may be
    commercialized;
    the intent, belief or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome of various pending legal
    proceedings including the
    Altace®
    and
    Skelaxin®
    patent challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report; and
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.    Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk          Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Rules 13a-15(f) 15d-15(f)
 78




---



##### Table of Contents



PART II 
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors    Item 4.
    Submission
    of Matters to a Vote of Security Holders    Election of Directors.
  For


Withhold AuthorityEarnest W.
    Deavenport, Jr.


217,900,723



5,185,001Elizabeth M. Greetham


218,328,767



4,756,956     Class I(term to expire in 2008)

R. Charles Moyer, Ph.D.
    D. Greg Rooker
    Ted G. WoodClass III(term to expire in 2007)

Gregory D. Jordan, Ph.D.
    Brian A. Markison   Amendment of the Second Amended and Restated
    Charter.
  For


Against


Abstain


Broker Non-Vote195,052,920



26,775,071



1,257,732


0   Ratification of the Independent
    Accountants.
  For


Against


Abstain


Broker Non-Vote220,990,068



946,450



1,149,205


0   Non-Binding Shareholder
    Proposal.
  For


Against


Abstain


Broker Non-Vote165,869,065



31,278,366



1,623,853


24,314,439  79




---



##### Table of Contents



Item 6.
    Exhibits  ExhibitNumber



Description3
.1



Second Amended and Restated
    Charter of King Pharmaceuticals, Inc., as amended.10
.1



Promotion Agreement, dated
    June 27, 2006, by and between King Pharmaceuticals, Inc.
    and Depomed, Inc.10
.2



Form of Restricted Unit
    Certificate and Restricted Unit Grant Agreement31
.1



Certification by Chief Executive
    Officer Pursuant to Rule 13A-14(a) or 15D-14(a) of the
    Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2



Certification by Chief Financial
    Officer Pursuant to Rule 13A-14(a) or 15D-14(a) of the
    Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1



Certification by Chief Executive
    Officer Pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32
.2



Certification by Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
    
    Portions of this Exhibit have been omitted and filed separately
    with the Securities and Exchange Commission as part of an
    application for confidential treatment pursuant to the
    Securities Exchange Act of 1934. 80




---



##### Table of Contents



SIGNATURES      By:
    /s/  BRIAN
    A. MARKISON    President and Chief Executive Officer
    By:
    /s/  JOSEPH
    SQUICCIARINO    Chief Financial Officer
   81