##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended March 31, 2006                                               
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File
No. 001-15875


King Pharmaceuticals, Inc.


(Exact name of registrant as specified in its charter)


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

(423) 989-8000


(Registrants telephone number, including area code)


þ o






|                           |                      |                          | 
|-------------------------- | -------------------- | ------------------------ | 
|Large accelerated filer  þ | Accelerated filer  o | Non-accelerated filer  o | 

12b-2 o þ












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##### 










TABLE OF CONTENTS


|                                                      |  |                                                                                                             |    |           |    | 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- | -- | --------- | -- | 
|                                                      |  |                                                                                                             |    | Page      |   
|                                                      |  |                                                                                                             |    | Reference |   
|                                                      |  |                                                                                                             |    |           |   
|Part I  Financial Information                       
|Item 1.                                               |  | Financial Statements                                                                                        |    |           |    | 
|                                                      |  | Condensed Consolidated Balance Sheets                                                                       |    |           | 1  | 
|                                                      |  | Condensed Consolidated Statements of
    Operations                                                         |    |           | 2  | 
|                                                      |  | Condensed Consolidated Statements of
    Changes in Shareholders Equity and Other Comprehensive
    Income |    |           | 3  | 
|                                                      |  | Condensed Consolidated Statements of Cash
    Flows                                                         |    |           | 4  | 
|                                                      |  | Notes to Condensed Consolidated Financial
    Statements                                                    |    |           | 5  | 
|Item 2.                                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                   |    |           | 29 | 
|Item 3.                                               |  | Quantitative and Qualitative Disclosures
    about Market Risk                                              |    |           | 73 | 
|Item 4.                                               |  | Controls and Procedures                                                                                     |    |           | 73 | 
|                                                     
|Part II  Other
    Information                      
|Item 1.                                               |  | Legal Proceedings                                                                                           |    |           | 74 | 
|Item 1A.                                              |  | Risk Factors                                                                                                |    |           | 74 | 
|Item 6.                                               |  | Exhibits                                                                                                    |    |           | 74 | 
|Signatures                                            |  |                                                                                                             | 75 |          
|Ex-10.1  Generic Distribution Agreement              
|Ex-10.2  Product Supply Agreement                    
|Ex-10.3  Ramipril Application License Agreement      
|Ex-10.4  Ramipril Patient License Agreement          
|Ex-10.5  Dismissal Agreement                         
|Ex-10.6  Amended and Restated Manufacturing Agreement
|Ex-10.7  First Amendment to the US Product Agreement 
|Ex-10.8  Form of Performance Agreement               
|Ex-10.9  Form of Performance Agreement               
|EX-31.1  SECTION 302 CERTIFICAITON OF THE CEO        
|EX-31.2  SECTION 302 CERTIFICAITON OF THE CFO        
|EX-32.1  SECTION 906 CERTIFICAITON OF THE CEO        
|EX-32.2  SECTION 906 CERTIFICAITON OF THE CFO        



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##### Table of Contents



PART I  FINANCIAL INFORMATION







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

KING PHARMACEUTICALS, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                                                 |                                                                                                      |                                            |           |         |              |  |           |         |           | 
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------- | ------------ |  | --------- | ------- | --------- | 
|                                                                                 |                                                                                                      | March 31,                                  |           |         | December 31, | 
|                                                                                 |                                                                                                      | 2006                                       |           |         | 2005         | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | (Unaudited)                                |           |         |             
|ASSETS                                                                          
|Current Assets:                                                                  |                                                                                                      |                                            |           |         |              |  |           |        
|                                                                                 | Cash and cash equivalents                                                                            |                                            | $         | 328,298 |              |  | $         | 30,014  |          
|                                                                                 | Investments in debt securities                                                                       |                                            |           | 486,154 |              |  |           | 494,663 |          
|                                                                                 | Restricted cash                                                                                      |                                            |           |        |              |  |           | 130,400 |          
|                                                                                 | Accounts receivable, net of allowance for doubtful accounts of
    $11,795 and $12,280, respectively |                                            |           | 268,336 |              |  |           | 223,581 |          
|                                                                                 | Inventories                                                                                          |                                            |           | 217,256 |              |  |           | 228,063 |          
|                                                                                 | Deferred income tax assets                                                                           |                                            |           | 75,570  |              |  |           | 81,777  |          
|                                                                                 | Prepaid expenses and other current assets                                                            |                                            |           | 82,041  |              |  |           | 59,291  |          
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | Total current assets                       |           |         | 1,457,655    |  |           |         | 1,247,789 | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|Property, plant and equipment, net                                               |                                                                                                      |                                            | 302,162   |         |              |  | 302,474   |        
|Intangible assets, net                                                           |                                                                                                      |                                            | 972,395   |         |              |  | 967,194   |        
|Goodwill                                                                         |                                                                                                      |                                            | 121,152   |         |              |  | 121,152   |        
|Marketable securities                                                            |                                                                                                      |                                            | 15,494    |         |              |  | 18,502    |        
|Deferred income tax assets                                                       |                                                                                                      |                                            | 265,729   |         |              |  | 231,032   |        
|Other assets (includes restricted cash of $14,250 and $14,129,
    respectively) |                                                                                                      |                                            | 82,560    |         |              |  | 77,099    |        
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | Total assets                               |           | $       | 3,217,147    |  |           | $       | 2,965,242 | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                
|LIABILITIES AND SHAREHOLDERS EQUITY                                            
|Current Liabilities:                                                             |                                                                                                      |                                            |           |         |              |  |           |        
|                                                                                 | Accounts payable                                                                                     |                                            | $         | 69,369  |              |  | $         | 84,539  |          
|                                                                                 | Accrued expenses                                                                                     |                                            |           | 440,512 |              |  |           | 519,620 |          
|                                                                                 | Income taxes payable                                                                                 |                                            |           | 74,959  |              |  |           | 22,301  |          
|                                                                                 | Current portion of long-term debt                                                                    |                                            |           | 180,000 |              |  |           | 345,000 |          
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | Total current liabilities                  |           |         | 764,840      |  |           |         | 971,460   | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|Long-term debt                                                                   |                                                                                                      |                                            | 400,000   |         |              |  |          |        
|Other liabilities                                                                |                                                                                                      |                                            | 19,857    |         |              |  | 20,360    |        
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | Total liabilities                          |           |         | 1,184,697    |  |           |         | 991,820   | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|Commitments and contingencies (Note 9)                                           |                                                                                                      |                                            |           |         |              |  |           |        
|Shareholders equity                                                             |                                                                                                      |                                            | 2,032,450 |         |              |  | 1,973,422 |        
|                                                                                 |                                                                                                      |                                            |           |         |              | 
|                                                                                 |                                                                                                      | Total liabilities and shareholders equity |           | $       | 3,217,147    |  |           | $       | 2,965,242 | 
|                                                                                 |                                                                                                      |                                            |           |         |              | 



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KING PHARMACEUTICALS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


(Unaudited)


|                                                      |                                                                              |                                                  |                                                   |                                                       |         |         |         |         |         |         |       | 
|----------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------- | ----------------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ----- | 
|                                                      |                                                                              | Three Months Ended                               |                                                  
|                                                      |                                                                              | March 31,                                        |                                                  
|                                                      |                                                                              |                                                  |                                                  
|                                                      |                                                                              | 2006                                             |                                                   |                                                       | 2005    |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Revenues:                                             |                                                                              |                                                  |                                                   |                                                       |         |         |         |        
|                                                      | Net sales                                                                    |                                                  | $                                                 | 464,599                                               |         |         | $       | 350,570 |        
|                                                      | Royalty revenue                                                              |                                                  |                                                   | 19,636                                                |         |         |         | 18,055  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              | Total revenues                                   |                                                   |                                                       | 484,235 |         |         |         | 368,625 |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Operating costs and expenses:                         |                                                                              |                                                  |                                                   |                                                       |         |         |         |        
|                                                      | Cost of revenues, exclusive of depreciation and amortization
    shown below |                                                  |                                                   | 92,404                                                |         |         |         | 72,216  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      | Selling, general and administrative, exclusive of co-promotion
    fees      |                                                  |                                                   | 105,054                                               |         |         |         | 92,850  |        
|                                                      | Mylan transaction costs                                                      |                                                  |                                                   |                                                      |         |         |         | 3,277   |        
|                                                      | Co-promotion fees                                                            |                                                  |                                                   | 65,289                                                |         |         |         | 34,655  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              |                                                  | Total selling, general and administrative expense |                                                       |         | 170,343 |         |         |         | 130,782 |      
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      | Research and development                                                     |                                                  |                                                   | 29,882                                                |         |         |         | 11,472  |        
|                                                      | Research and development-in process upon acquisition                         |                                                  |                                                   | 85,000                                                |         |         |         |        |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              | Total research and development                   |                                                   |                                                       | 114,882 |         |         |         | 11,472  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      | Depreciation and amortization                                                |                                                  |                                                   | 34,365                                                |         |         |         | 41,426  |        
|                                                      | Restructuring charges (Note 13)                                              |                                                  |                                                   |                                                      |         |         |         | 2,023   |        
|                                                      | Gain on sale of products                                                     |                                                  |                                                   |                                                      |         |         |         | (847    | )      
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              |                                                  | Total operating costs and expenses                |                                                       |         | 411,994 |         |         |         | 257,072 |      
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      | Operating income                                                             |                                                  |                                                   | 72,241                                                |         |         |         | 111,553 |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Other income (expense):                               |                                                                              |                                                  |                                                   |                                                       |         |         |         |        
|                                                      | Interest income                                                              |                                                  |                                                   | 5,960                                                 |         |         |         | 2,277   |        
|                                                      | Interest expense                                                             |                                                  |                                                   | (2,984                                                | )       |         |         | (2,701  | )      
|                                                      | Loss on investment                                                           |                                                  |                                                   |                                                      |         |         |         | (6,853  | )      
|                                                      | Gain on early extinguishment of debt                                         |                                                  |                                                   | 1,022                                                 |         |         |         |        |        
|                                                      | Other, net                                                                   |                                                  |                                                   | (510                                                  | )       |         |         | (249    | )      
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              |                                                  | Total other income (expense)                      |                                                       |         | 3,488   |         |         |         | (7,526  | )    
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Income from continuing operations before income taxes |                                                                              |                                                  | 75,729                                            |                                                       |         |         | 104,027 |        
|Income tax expense                                    |                                                                              |                                                  | 24,894                                            |                                                       |         |         | 36,922  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Income from continuing operations                     |                                                                              |                                                  | 50,835                                            |                                                       |         |         | 67,105  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Discontinued operations (Note 16):                    |                                                                              |                                                  |                                                   |                                                       |         |         |         |        
|                                                      |                                                                              | (Loss) income from discontinued operations       |                                                   |                                                       | (247    | )       |         |         | 4,682   |        
|                                                      |                                                                              | Income tax (benefit) expense                     |                                                   |                                                       | (89     | )       |         |         | 1,732   |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              |                                                  |                                                   | Total (loss) income from discontinued operations, net |         |         | (158    | )       |         |         | 2,950 | 
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Net income                                            |                                                                              | $                                                | 50,677                                            |                                                       |         | $       | 70,055  |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|Income per common share:                              |                                                                              |                                                  |                                                   |                                                       |         |         |         |        
|                                                      | Basic:                                                                       |                                                  |                                                   |                                                       |         |         |         |         |        
|                                                      |                                                                              | Income from continuing operations                |                                                   | $                                                     | 0.21    |         |         | $       | 0.28    |        
|                                                      |                                                                              | Total (loss) income from discontinued operations |                                                   |                                                       | 0.00    |         |         |         | 0.01    |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              | Net income                                       |                                                   | $                                                     | 0.21    |         |         | $       | 0.29    |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      | Diluted:                                                                     |                                                  |                                                   |                                                       |         |         |         |         |        
|                                                      |                                                                              | Income from continuing operations                |                                                   | $                                                     | 0.21    |         |         | $       | 0.28    |        
|                                                      |                                                                              | Total (loss) income from discontinued operations |                                                   |                                                       | 0.00    |         |         |         | 0.01    |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        
|                                                      |                                                                              | Net income                                       |                                                   | $                                                     | 0.21    |         |         | $       | 0.29    |        
|                                                      |                                                                              |                                                  |                                                   |                                                       |         |        



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KING PHARMACEUTICALS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |   |       |        |   |   |           |        |        | 
|------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------- | ----------- | - | -------- | - | --------- | ------------ | ----- | - | ------------- | - |  | ------------- | ------- | ------ | ----- | - | ----- | ------ | - | - | --------- | ------ | ------ | 
|                                                              |                                                                        |                            |             |   |          |   |           | Accumulated  |       |   |              
|                                                              |                                                                        | Common Stock               |             |   |          |   |           |              | Other |   |               |  
|                                                              |                                                                        |                            |             |   | Unearned |   |           | Retained     |       |   | Comprehensive |   |  |              
|                                                              |                                                                        | Shares                     |             |   | Amount   |   |           | Compensation |       |   | Earnings      |   |  | Income (Loss) |         |        | Total |  
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|Balance at December 31, 2004                                  |                                                                        |                            | 241,706,583 |   |          | $ | 1,210,647 |              |       | $ |              |   |  | $             | 637,120 |        |       | $ | 1,023 |        |   | $ | 1,848,790 |       
|Comprehensive income:                                         |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |   |       |        |   |   |           |       
|                                                              | Net Income                                                             |                            |             |  |          |   |           |             |       |   |               |  |  |               |         | 70,055 |       |   |       |       |   |   |           | 70,055 |       
|                                                              | Net unrealized loss on marketable securities, net of tax of $429       |                            |             |  |          |   |           |             |       |   |               |  |  |               |         |       |       |   |       | (742   | ) |   |           | (742   | )     
|                                                              | Foreign currency translation                                           |                            |             |  |          |   |           |             |       |   |               |  |  |               |         |       |       |   |       | (79    | ) |   |           | (79    | )     
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|                                                              |                                                                        | Total comprehensive income |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |   |       |        |   |   |           |        | 69,234 | 
|Stock option activity                                         |                                                                        |                            | 24,085      |   |          |   | 56        |              |       |   |              |   |  |               |        |        |       |   |      |        |   |   | 56        |       
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|Balance at March 31, 2005                                     |                                                                        |                            | 241,730,668 |   |          | $ | 1,210,703 |              |       | $ |              |   |  | $             | 707,175 |        |       | $ | 202   |        |   | $ | 1,918,080 |       
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|Balance at December 31, 2005                                  |                                                                        |                            | 241,802,724 |   |          | $ | 1,222,246 |              |       | $ | (8,764        | ) |  | $             | 754,953 |        |       | $ | 4,987 |        |   | $ | 1,973,422 |       
|Adoption of statement of Financial Accounting Standard 123(R) |                                                                        |                            |            |   |          |   | (8,764    | )            |       |   | 8,764         |   |  |               |        |        |       |   |      |        |   |   |          |       
|Comprehensive income:                                         |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |   |       |        |   |   |           |       
|                                                              | Net income                                                             |                            |             |  |          |   |           |             |       |   |               |  |  |               |         | 50,677 |       |   |       |       |   |   |           | 50,677 |       
|                                                              | Net unrealized loss on marketable securities, net of tax of
    $1,213 |                            |             |  |          |   |           |             |       |   |               |  |  |               |         |       |       |   |       | (2,252 | ) |   |           | (2,252 | )     
|                                                              | Foreign currency translation                                           |                            |             |  |          |   |           |             |       |   |               |  |  |               |         |       |       |   |       | (10    | ) |   |           | (10    | )     
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|                                                              |                                                                        | Total comprehensive income |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |   |       |        |   |   |           |        | 48,415 | 
|Stock-based compensation expense                              |                                                                        |                            |            |   |          |   | 3,889     |              |       |   |              |   |  |               |        |        |       |   |       |        |   |   | 3,889     |       
|Exercise of stock options                                     |                                                                        |                            | 394,330     |   |          |   | 6,468     |              |       |   |              |   |  |               |        |        |       |   |      |        |   |   | 6,468     |       
|Tax benefit from exercise of stock options                    |                                                                        |                            |            |   |          |   | 256       |              |       |   |              |   |  |               |        |        |       |   |      |        |   |   | 256       |       
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  
|Balance at March 31, 2006                                     |                                                                        |                            | 242,197,054 |   |          | $ | 1,224,095 |              |       | $ |              |   |  | $             | 805,630 |        |       | $ | 2,725 |        |   | $ | 2,032,450 |       
|                                                              |                                                                        |                            |             |   |          |   |           |              |       |   |               |   |  |               |         |        |       |  



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KING PHARMACEUTICALS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                                                |                                                                          |                                                                                      |         |          |         |   |          |          |          |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ------- | -------- | ------- | - | -------- | -------- | -------- | -
|                                                                                |                                                                          | Three Months Ended                                                                   |        
|                                                                                |                                                                          | March 31,                                                                            |        
|                                                                                |                                                                          |                                                                                      |        
|                                                                                |                                                                          | 2006                                                                                 |         |          | 2005    |  
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|Cash flows (used in) provided by operating activities                           |                                                                          | $                                                                                    | (5,592  | )        |         | $ | 23,503   |         
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|Cash flows from investing activities:                                           |                                                                          |                                                                                      |         |          |         |   |          |         
|                                                                                | Transfers from (to) restricted cash                                      |                                                                                      |         | 130,279  |         |   |          | (7,982   | )       
|                                                                                | Purchases of investments in debt securities                              |                                                                                      |         | (784,976 | )       |   |          | (317,730 | )       
|                                                                                | Proceeds from maturities and sales of investments in debt
    securities |                                                                                      |         | 793,485  |         |   |          | 167,145  |         
|                                                                                | Purchases of property, plant and equipment                               |                                                                                      |         | (8,768   | )       |   |          | (9,075   | )       
|                                                                                | Proceeds from sale of property and equipment                             |                                                                                      |         |         |         |   |          | 1        |         
|                                                                                | Purchases of product rights                                              |                                                                                      |         | (23,926  | )       |   |          |         |         
|                                                                                | Arrow International Limited collaboration agreement                      |                                                                                      |         | (35,000  | )       |   |          |         |         
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|                                                                                |                                                                          | Net cash provided by (used in) investing activities (2005
    Revised  see Note 14) |         |          | 71,094  |   |          |          | (167,641 | )
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|Cash flows from financing activities:                                           |                                                                          |                                                                                      |         |          |         |   |          |         
|                                                                                | Proceeds from exercise of stock options, net                             |                                                                                      |         | 6,468    |         |   |          | 56       |         
|                                                                                | Excess tax benefits from stock-based compensation                        |                                                                                      |         | 274      |         |   |          |         |         
|                                                                                | Proceeds from issuance of long-term debt                                 |                                                                                      |         | 400,000  |         |   |          |         |         
|                                                                                | Payments on long-term debt                                               |                                                                                      |         | (163,350 | )       |   |          |         |         
|                                                                                | Debt issuance costs                                                      |                                                                                      |         | (10,610  | )       |   |          |         |         
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|                                                                                |                                                                          | Net cash provided by financing activities                                            |         |          | 232,782 |   |          |          | 56       |  
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|Increase (decrease) in cash and cash equivalents                                |                                                                          |                                                                                      | 298,284 |          |         |   | (144,082 | )       
|Cash and cash equivalents, beginning of period (2005
    Revised  see Note 14) |                                                                          |                                                                                      | 30,014  |          |         |   | 192,656  |         
|                                                                                |                                                                          |                                                                                      |         |          |         |  
|Cash and cash equivalents, end of period (2005
    Revised  see Note 14)       |                                                                          | $                                                                                    | 328,298 |          |         | $ | 48,574   |         
|                                                                                |                                                                          |                                                                                      |         |          |         |  



4



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##### Table of Contents



KING PHARMACEUTICALS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2006 and 2005


(Unaudited)


(In thousands, except per share data)




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

10-Q S-X 10-K






|   |                         
|-- | ------------------------
|2. | Stock-Based Compensation







5



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                                                        |                    |   |        |  
|------------------------- | ------------------------------------------------------ | ------------------ | - | ------ | -
|                          |                                                        | Three Months Ended |  
|                          |                                                        | March 31, 2005     |  
|                          |                                                        |                    |  
|Net income:               |                                                        |                    |   |       
|                          | As reported                                            |                    | $ | 70,055 |  
|                          | Less: pro forma compensation costs for options granted |                    |   | (1,351 | )
|                          |                                                        |                    |  
|                          | Pro forma                                              |                    | $ | 68,704 |  
|                          |                                                        |                    |  
|Basic income per share:   |                                                        |                    |   |       
|                          | As reported                                            |                    | $ | 0.29   |  
|                          |                                                        |                    |  
|                          | Pro forma                                              |                    | $ | 0.28   |  
|                          |                                                        |                    |  
|Diluted income per share: |                                                        |                    |   |       
|                          | As reported                                            |                    | $ | 0.29   |  
|                          |                                                        |                    |  
|                          | Pro forma                                              |                    | $ | 0.28   |  
|                          |                                                        |                    |  



Restricted Stock Awards and Long-Term Performance Unit
Awards.


Long-Term




straight-line


market-related


straight-line


6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                      |           |        |         |            |            |   |       |       | 
|--------------------------------------------------------------------- | --------- | ------ | ------- | ---------- | ---------- | - | ----- | ----- | 
|                                                                      |           |        |         | Weighted   |           
|                                                                      |           |        |         | Average    |           
|                                                                      |           |        |         | Grant-Date |           
|                                                                      |           | Shares |         |            | Fair Value |  
|                                                                      |           |        |         |            |            |  
|Restricted Stock Awards:                                              |           |        |         |            |            |   |       |      
|Nonvested balance at December 31, 2005                                |           |        | 687,775 |            |            | $ | 15.55 |      
|                                                                      | Granted   |        |         | 168,500    |            |   |       | 19.58 | 
|                                                                      | Vested    |        |         |           |            |   |       |      | 
|                                                                      | Forfeited |        |         |           |            |   |       |      | 
|                                                                      |           |        |         |            |            |  
|Nonvested balance at March 31, 2006                                   |           |        | 856,275 |            |            | $ | 16.34 |      
|                                                                      |           |        |         |            |            |  
|Long-Term Performance Unit Awards (one year performance
    cycle):   |           |        |         |            |            |   |       |      
|Nonvested balance at December 31, 2005                                |           |        |        |            |            | $ |      |      
|                                                                      | Granted   |        |         | 523,970    |            |   |       | 19.68 | 
|                                                                      | Vested    |        |         |           |            |   |       |      | 
|                                                                      | Forfeited |        |         |           |            |   |       |      | 
|                                                                      |           |        |         |            |            |  
|Nonvested balance at March 31, 2006                                   |           |        | 523,970 |            |            | $ | 19.68 |      
|                                                                      |           |        |         |            |            |  
|Long-Term Performance Unit Awards (three year performance
    cycle): |           |        |         |            |            |   |       |      
|Nonvested balance at December 31, 2005                                |           |        |        |            |            | $ |      |      
|                                                                      | Granted   |        |         | 126,580    |            |   |       | 29.93 | 
|                                                                      | Vested    |        |         |           |            |   |       |      | 
|                                                                      | Forfeited |        |         |           |            |   |       |      | 
|                                                                      |           |        |         |            |            |  
|Nonvested balance at March 31, 2006                                   |           |        | 126,580 |            |            | $ | 29.93 |      
|                                                                      |           |        |         |            |            |  



Stock Options. straight-line


7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |      |      |   |      |  |       |  
|------------------------ |  | ---- | ---- | - | ---- |  | ----- | -
|                         |  | 2006 |      |   | 2005 | 
|                         |  |      |      |   |      | 
|Expected volatility      |  |      | 52.6 | % |      |  | 46.41 | %
|Expected term (in years) |  |      | 6    |   |      |  | 4     |  
|Risk-free interest rate  |  |      | 4.61 | % |      |  | 4.04  | %
|Expected dividend yield  |  |      | 0.00 | % |      |  | 0.00  | %





|                                        |           |        |           |          |                |          |             |              |  |           |       |  |  |   |       |  | 
|--------------------------------------- | --------- | ------ | --------- | -------- | -------------- | -------- | ----------- | ------------ |  | --------- | ----- |  |  | - | ----- |  | 
|                                        |           |        |           |          |                | Weighted |             |              | 
|                                        |           |        |           |          |                | Average  |             |              | 
|                                        |           |        |           | Weighted |                |          | Remaining   |              |  | Aggregate |      
|                                        |           |        |           | Average  |                |          | Contractual |              |  | Intrinsic |      
|                                        |           | Shares |           |          | Exercise Price |          |             | Term (years) |  |           | Value | 
|                                        |           |        |           |          |                |          |             |              |  |           |       | 
|Outstanding options, December 31, 2005, |           |        | 7,073,966 |          |                | $        | 18.83       |              |  |           | 7.65  |  |  | $ | 8,106 | 
|                                        | Granted   |        |           | 328,260  |                |          |             | 19.49        |  |           |       |  |  |   |       |  | 
|                                        | Exercised |        |           | (394,396 | )              |          |             | 16.40        |  |           |       |  |  |   |       |  | 
|                                        | Expired   |        |           | (216,789 | )              |          |             | 25.54        |  |           |       |  |  |   |       |  | 
|                                        | Forfeited |        |           | (51,714  | )              |          |             | 15.97        |  |           |       |  |  |   |       |  | 
|                                        |           |        |           |          |                |          |             |              |  |           |       | 
|Outstanding options, March 31, 2006     |           |        | 6,739,327 |          |                | $        | 18.82       |              |  |           | 7.61  |  |  | $ | 9,101 | 
|Exercisable, March 31, 2006             |           |        | 3,572,135 |          |                | $        | 21.54       |              |  |           | 6.28  |  |  | $ | 3,414 | 







|                                                 |  |      |     |  |      |   |    | 
|------------------------------------------------ |  | ---- | --- |  | ---- | - | -- | 
|                                                 |  | 2006 |     |  | 2005 |  
|                                                 |  |      |     |  |      |  
|Total intrinsic value of stock options exercised |  | $    | 812 |  |      | $ | 19 | 
|Total fair value of stock awards vested          |  | $    |    |  |      | $ |   | 



8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|3. | Earnings Per Share



|                                 |                                 |                              |  |             |      |  |  |             | 
|-------------------------------- | ------------------------------- | ---------------------------- |  | ----------- | ---- |  |  | ----------- | 
|                                 |                                 | Three Months Ended March 31, | 
|                                 |                                 |                              | 
|                                 |                                 | 2006                         |  |             | 2005 | 
|                                 |                                 |                              |  |             |      | 
|Basic income per common share:   |                                 |                              |  |             |      |  |  |            
|                                 | Weighted average common shares  |                              |  | 242,022,443 |      |  |  | 241,723,742 | 
|                                 |                                 |                              |  |             |      | 
|Diluted income per common share: |                                 |                              |  |             |      |  |  |            
|                                 | Weighted average common shares  |                              |  | 242,022,443 |      |  |  | 241,723,742 | 
|                                 | Effect of stock options         |                              |  | 361,405     |      |  |  | 78,904      | 
|                                 | Effect of dilutive share awards |                              |  | 197,468     |      |  |  |            | 
|                                 |                                 |                              |  |             |      | 
|                                 | Weighted average common shares  |                              |  | 242,581,316 |      |  |  | 241,802,646 | 
|                                 |                                 |                              |  |             |      | 

3 4 1 4


3 4




|   |            
|-- | -----------
|4. | Inventories



|                                                                                   |  |           |         |   |              |   |         |  
|---------------------------------------------------------------------------------- |  | --------- | ------- | - | ------------ | - | ------- | -
|                                                                                   |  | March 31, |         |   | December 31, |  
|                                                                                   |  | 2006      |         |   | 2005         |  
|                                                                                   |  |           |         |   |              |  
|Raw materials                                                                      |  | $         | 128,226 |   |              | $ | 150,979 |  
|Work-in-process                                                                    |  |           | 21,102  |   |              |   | 14,955  |  
|Finished goods (including $3,568 and $6,728 of sample inventory,
    respectively) |  |           | 93,504  |   |              |   | 91,695  |  
|                                                                                   |  |           |         |   |              |  
|                                                                                   |  |           | 242,832 |   |              |   | 257,629 |  
|Inventory valuation allowance                                                      |  |           | (25,576 | ) |              |   | (29,566 | )
|                                                                                   |  |           |         |   |              |  
|Total inventories                                                                  |  | $         | 217,256 |   |              | $ | 228,063 |  
|                                                                                   |  |           |         |   |              |  

9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|5. | Property, Plant and Equipment

®






|   |             
|-- | ------------
|6. | Acquisitions

® earn-out ® earn-out




|                  |  |   |        | 
|----------------- |  | - | ------ | 
|Intangible assets |  | $ | 23,926 | 
|Inventory         |  |   | 618    | 
|Fixed assets      |  |   | 3      | 
|                  |  |   |       
|                  |  | $ | 24,547 | 
|                  |  |   |       



®


10



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






®




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



|                              |                         |                |           |           |                   |   |         |          |  |   |              |           |  |   |         |         | 
|----------------------------- | ----------------------- | -------------- | --------- | --------- | ----------------- | - | ------- | -------- |  | - | ------------ | --------- |  | - | ------- | ------- | 
|                              |                         | March 31, 2006 |           |           | December 31, 2005 |  
|                              |                         |                |           |           |                   |  
|                              |                         | Gross          |           |           |                   |   | Gross   |          |  |  
|                              |                         | Carrying       |           |           | Accumulated       |   |         | Carrying |  |   | Accumulated  |          
|                              |                         | Amount         |           |           | Amortization      |   |         | Amount   |  |   | Amortization |          
|                              |                         |                |           |           |                   |   |         |          |  |   |              |          
|Trademarks and product rights |                         | $              | 1,198,113 |           |                   | $ | 315,057 |          |  | $ | 1,174,028    |           |  | $ | 296,801 |        
|Patents                       |                         |                | 268,266   |           |                   |   | 179,518 |          |  |   | 261,277      |           |  |   | 171,976 |        
|Other intangibles             |                         |                | 9,459     |           |                   |   | 8,868   |          |  |   | 9,459        |           |  |   | 8,793   |        
|                              |                         |                |           |           |                   |   |         |          |  |   |              |          
|                              | Total intangible assets |                | $         | 1,475,838 |                   |   | $       | 503,443  |  |   | $            | 1,444,764 |  |   | $       | 477,570 | 
|                              |                         |                |           |           |                   |   |         |          |  |   |              |          



® ® ®




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

11



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |               
|-- | --------------
|8. | Long-Term Debt



|                                         |                      |           |         |         |              |   |         |         | 
|---------------------------------------- | -------------------- | --------- | ------- | ------- | ------------ | - | ------- | ------- | 
|                                         |                      | March 31, |         |         | December 31, |  
|                                         |                      | 2006      |         |         | 2005         |  
|                                         |                      |           |         |         |              |  
|Convertible senior notes(a)              |                      | $         | 400,000 |         |              | $ |        |        
|Convertible debentures(b)                |                      |           | 180,000 |         |              |   | 345,000 |        
|Senior secured revolving credit facility |                      |           |        |         |              |   |        |        
|                                         |                      |           |         |         |              |  
|                                         | Total long-term debt |           |         | 580,000 |              |   |         | 345,000 | 
|                                         |                      |           |         |         |              |  
|                                         | Less current portion |           |         | 180,000 |              |   |         | 345,000 | 
|                                         |                      |           |         |         |              |  
|                                         | Long-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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | To establish the Notes, the Company incurred approximately
    $10,610 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

12



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | wrote off deferred financing costs of $628 relating to the
    repurchased Debentures. See Note 17 for a discussion of a
    subsequent event related to the Debentures.



|   |              
|-- | -------------
|9. | Contingencies

Fen/Phen Litigation


In re


®


®




13



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Thimerosal/ Childrens Vaccine Related
Litigation








Hormone Replacement Therapy




14



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In re:


Average Wholesale Price Litigation


In re:








| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation



15



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















| |                  
| | -----------------
| | SEC Investigation





16



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Securities Litigation











17



---



##### 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 ® ®




18



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




® ®


® ® ®


® ® method-of ®


®


19



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




®


® ® ®




® ® ® ® ®


®


20



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


® ®






| |                    
| | -------------------
| | Other Contingencies

® ® ®




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





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





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

®


21



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                |                                   |                                              |   |          |         |  |   |          |         | 
|--------------- | --------------------------------- | -------------------------------------------- | - | -------- | ------- |  | - | -------- | ------- | 
|                |                                   | Three Months Ended                           |  
|                |                                   | March 31,                                    |  
|                |                                   |                                              |  
|                |                                   | 2006                                         |   |          | 2005    | 
|                |                                   |                                              |   |          |         | 
|Total revenues: |                                   |                                              |   |          |         |  |   |         
|                | Branded pharmaceuticals           |                                              | $ | 417,620  |         |  | $ | 321,769  |        
|                | Meridian Medical Technologies     |                                              |   | 41,284   |         |  |   | 23,214   |        
|                | Royalties                         |                                              |   | 19,636   |         |  |   | 18,055   |        
|                | Contract manufacturing and other  |                                              |   | 121,282  |         |  |   | 119,365  |        
|                | Eliminations                      |                                              |   | (115,587 | )       |  |   | (113,778 | )      
|                |                                   |                                              |   |          |         | 
|                |                                   | Consolidated total net revenues              |   | $        | 484,235 |  |   | $        | 368,625 | 
|                |                                   |                                              |   |          |         | 
|Segment profit: |                                   |                                              |   |          |         |  |   |         
|                | Branded pharmaceuticals           |                                              | $ | 352,229  |         |  | $ | 272,112  |        
|                | Meridian Medical Technologies     |                                              |   | 22,037   |         |  |   | 12,313   |        
|                | Royalties                         |                                              |   | 17,266   |         |  |   | 15,806   |        
|                | Contract manufacturing and other  |                                              |   | 299      |         |  |   | (3,822   | )      
|                | Other operating costs and expense |                                              |   | (319,590 | )       |  |   | (184,856 | )      
|                | Other income (expense)            |                                              |   | 3,488    |         |  |   | (7,526   | )      
|                |                                   |                                              |   |          |         | 
|                |                                   | Income from continuing operations before tax |   | $        | 75,729  |  |   | $        | 104,027 | 
|                |                                   |                                              |   |          |         | 

22



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|              |                                  |                           |   |           |              |  |   |           |           | 
|------------- | -------------------------------- | ------------------------- | - | --------- | ------------ |  | - | --------- | --------- | 
|              |                                  | As of                     |   |           | As of        | 
|              |                                  | March 31,                 |   |           | December 31, | 
|              |                                  | 2006                      |   |           | 2005         | 
|              |                                  |                           |   |           |              | 
|Total assets: |                                  |                           |   |           |              |  |   |          
|              | Branded pharmaceuticals          |                           | $ | 2,861,327 |              |  | $ | 2,654,782 |          
|              | Meridian Medical Technologies    |                           |   | 293,389   |              |  |   | 261,956   |          
|              | Royalties                        |                           |   | 23,916    |              |  |   | 20,444    |          
|              | Contract manufacturing and other |                           |   | 38,515    |              |  |   | 26,840    |          
|              | Other                            |                           |   |          |              |  |   | 1,220     |          
|              |                                  |                           |   |           |              | 
|              |                                  | Consolidated total assets |   | $         | 3,217,147    |  |   | $         | 2,965,242 | 
|              |                                  |                           |   |           |              | 



|                |                          |                                              |   |         |         |  |   |         |         | 
|--------------- | ------------------------ | -------------------------------------------- | - | ------- | ------- |  | - | ------- | ------- | 
|                |                          | Three Months Ended                           |  
|                |                          | March 31,                                    |  
|                |                          |                                              |  
|                |                          | 2006                                         |   |         | 2005    | 
|                |                          |                                              |   |         |         | 
|Total revenues: |                          |                                              |   |         |         |  |   |        
|                | Cardiovascular/metabolic |                                              | $ | 203,868 |         |  | $ | 134,518 |        
|                | Neuroscience             |                                              |   | 119,893 |         |  |   | 91,395  |        
|                | Hospital/acute care      |                                              |   | 81,016  |         |  |   | 85,848  |        
|                | Other                    |                                              |   | 12,843  |         |  |   | 10,008  |        
|                |                          |                                              |   |         |         | 
|                |                          | Consolidated branded pharmaceutical revenues |   | $       | 417,620 |  |   | $       | 321,769 | 
|                |                          |                                              |   |         |         | 



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





|                             |  |              |       |  |           |   |          |  |  |          |            |      |  |   |   |  |  |   |     | 
|---------------------------- |  | ------------ | ----- |  | --------- | - | -------- |  |  | -------- | ---------- | ---- |  | - | - |  |  | - | --- | 
|                             |  | Accrued      |       |  |           |   |          |  |  |          | Accrued    |     
|                             |  | Balance at   |       |  | Income    |   |          |  |  |          | Balance at |     
|                             |  | December 31, |       |  | Statement |   |          |  |  |          | March 31,  |     
|                             |  | 2005         |       |  | Impact    |   | Payments |  |  | Non-cash |            | 2006 | 
|                             |  |              |       |  |           |   |          |  |  |          |            |      | 
|Employee separation payments |  | $            | 1,509 |  |           | $ |         |  |  | $        | 980        |      |  | $ |  |  |  | $ | 529 | 
|                             |  |              |       |  |           |   |          |  |  |          |            |      |  |   |  





|    |                               
|--- | ------------------------------
|14. | Investments in Debt Securities



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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



® ®




|    |                        
|--- | -----------------------
|16. | Discontinued Operations

® ®


® ® ® ®




|                        |  |                    |      |   |      |   |       | 
|----------------------- |  | ------------------ | ---- | - | ---- | - | ----- | 
|                        |  | Three Months Ended |     
|                        |  | March 31,          |     
|                        |  |                    |     
|                        |  | 2006               |      |   | 2005 |  
|                        |  |                    |      |   |      |  
|Total revenues          |  | $                  | (250 | ) |      | $ | 4,682 | 
|Operating (loss) income |  |                    | (247 | ) |      |   | 4,682 | 
|Net (loss) income       |  | $                  | (158 | ) |      | $ | 2,950 | 





|    |                 
|--- | ----------------
|17. | Subsequent Event

3 4


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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                               
|--- | ------------------------------
|18. | Guarantor Financial Statements



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING BALANCE SHEETS


|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |   |            |   |            |   |           |         |           | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | --------- | --------- | ----------------- |  | --------- | ------------ | --------- | ----------- | ------- | ----- | ------ | ------------ | ---------- | - | ---------- | --------- | --------- | ------------ | --------- |  | ------------ | ----------- | --------- | ------- | --------- | ------- | ------------ | - | ------ | ----- | ------ | - | ---------- | - | ---------- | - | --------- | ------- | --------- | 
|                                     |                                           | March 31, 2006                             |           |           |                  
|                                     |                                           | (Unaudited)                                |           |           | December 31, 2005 | 
|                                     |                                           |                                            |           |           |                   | 
|                                     |                                           |                                            |           | Non       |                   |  |           |              |           |             | Non     |       |        |             
|                                     |                                           |                                            |           | Guarantor |                   |  | Guarantor |              |           | Eliminating |         |       | King   |              |            |   |            | Guarantor |           |              | Guarantor |  |              | Eliminating |           |         | King      |        
|                                     |                                           | King                                       |           |           | Subsidiaries      |  |           | Subsidiaries |           |             | Entries |       |        | Consolidated |            |   | King       |           |           | Subsidiaries |           |  | Subsidiaries |             |           | Entries |           |         | Consolidated |  
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | (In thousands)                             |          
|ASSETS                               |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |   |            |   |            |   |           |        
|Current assets:                      |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |   |            |   |            |   |           |        
|                                     | Cash and cash equivalents                 |                                            | $         | 325,511   |                   |  | $         | 420          |           |             | $       | 2,367 |        |              | $          |  |            |           | $         | 328,298      |           |  | $            | 26,802      |           |         | $         | 1,071   |              |   | $      | 2,141 |        |   | $          |  |            |   | $         | 30,014  |          
|                                     | Investments in debt securities            |                                            |           | 486,154   |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 486,154      |           |  |              | 494,663     |           |         |           |        |              |   |        |      |        |   |            |  |            |   |           | 494,663 |          
|                                     | Restricted cash                           |                                            |           |          |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           |             |           |  |              | 130,400     |           |         |           |        |              |   |        |      |        |   |            |  |            |   |           | 130,400 |          
|                                     | Accounts receivable, net                  |                                            |           | 601       |                   |  |           | 265,482      |           |             |         | 2,253 |        |              |            |  |            |           |           | 268,336      |           |  |              | 1,221       |           |         |           | 221,854 |              |   |        | 506   |        |   |            |  |            |   |           | 223,581 |          
|                                     | Inventories                               |                                            |           | 175,767   |                   |  |           | 41,349       |           |             |         | 140   |        |              |            |  |            |           |           | 217,256      |           |  |              | 195,421     |           |         |           | 31,877  |              |   |        | 765   |        |   |            |  |            |   |           | 228,063 |          
|                                     | Deferred income tax assets                |                                            |           | 15,317    |                   |  |           | 60,253       |           |             |         |      |        |              |            |  |            |           |           | 75,570       |           |  |              | 21,524      |           |         |           | 60,253  |              |   |        |      |        |   |            |  |            |   |           | 81,777  |          
|                                     | Prepaid expenses and other current assets |                                            |           | 71,834    |                   |  |           | 10,207       |           |             |         |      |        |              |            |  |            |           |           | 82,041       |           |  |              | 50,724      |           |         |           | 8,566   |              |   |        | 1     |        |   |            |  |            |   |           | 59,291  |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current assets                       |           |           | 1,075,184         |  |           |              | 377,711   |             |         |       | 4,760  |              |            |   |           |           |           |              | 1,457,655 |  |              |             | 920,755   |         |           |         | 323,621      |   |        |       | 3,413  |   |            |   |           |   |           |         | 1,247,789 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Property, plant and equipment, net   |                                           |                                            | 109,671   |           |                   |  | 192,491   |              |           |             |        |       |        |              |           |   |            |           | 302,162   |              |           |  | 108,712      |             |           |         | 193,762   |         |              |   |       |       |        |   |           |   |            |   | 302,474   |        
|Intangible assets, net               |                                           |                                            | 22        |           |                   |  | 969,227   |              |           |             | 3,146   |       |        |              |           |   |            |           | 972,395   |              |           |  | 44           |             |           |         | 963,944   |         |              |   | 3,206  |       |        |   |           |   |            |   | 967,194   |        
|Goodwill                             |                                           |                                            |          |           |                   |  | 121,152   |              |           |             |        |       |        |              |           |   |            |           | 121,152   |              |           |  |             |             |           |         | 121,152   |         |              |   |       |       |        |   |           |   |            |   | 121,152   |        
|Marketable securities                |                                           |                                            | 15,494    |           |                   |  |          |              |           |             |        |       |        |              |           |   |            |           | 15,494    |              |           |  | 18,502       |             |           |         |          |         |              |   |       |       |        |   |           |   |            |   | 18,502    |        
|Deferred income tax assets           |                                           |                                            | (5,031    | )         |                   |  | 269,697   |              |           |             | 1,063   |       |        |              |           |   |            |           | 265,729   |              |           |  | (9,483       | )           |           |         | 239,452   |         |              |   | 1,063  |       |        |   |           |   |            |   | 231,032   |        
|Other assets                         |                                           |                                            | 34,379    |           |                   |  | 48,181    |              |           |             |        |       |        |              |           |   |            |           | 82,560    |              |           |  | 30,225       |             |           |         | 46,874    |         |              |   |       |       |        |   |           |   |            |   | 77,099    |        
|Investments in subsidiaries          |                                           |                                            | 2,351,045 |           |                   |  |          |              |           |             |        |       |        |              | (2,351,045 | ) |            |           |          |              |           |  | 2,299,835    |             |           |         |          |         |              |   |       |       |        |   | (2,299,835 | ) |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total assets                               |           | $         | 3,580,764         |  |           | $            | 1,978,459 |             |         | $     | 8,969  |              |            | $ | (2,351,045 | )         |           | $            | 3,217,147 |  |              | $           | 3,368,590 |         |           | $       | 1,888,805    |   |        | $     | 7,682  |   |            | $ | (2,299,835 | ) |           | $       | 2,965,242 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |   |            |   |            |   |           |        
|Current liabilities:                 |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |   |            |   |            |   |           |        
|                                     | Accounts payable                          |                                            | $         | 41,625    |                   |  | $         | 27,656       |           |             | $       | 88    |        |              | $          |  |            |           | $         | 69,369       |           |  | $            | 60,700      |           |         | $         | 23,762  |              |   | $      | 77    |        |   | $          |  |            |   | $         | 84,539  |          
|                                     | Accrued expenses                          |                                            |           | 69,121    |                   |  |           | 371,388      |           |             |         | 3     |        |              |            |  |            |           |           | 440,512      |           |  |              | 151,125     |           |         |           | 368,491 |              |   |        | 4     |        |   |            |  |            |   |           | 519,620 |          
|                                     | Income taxes payable                      |                                            |           | 76,229    |                   |  |           | (1,149       | )         |             |         | (121  | )      |              |            |  |            |           |           | 74,959       |           |  |              | 24,123      |           |         |           | (1,701  | )            |   |        | (121  | )      |   |            |  |            |   |           | 22,301  |          
|                                     | Current portion of long-term debt         |                                            |           | 180,000   |                   |  |           |             |           |             |         |      |        |              |            |  |            |           |           | 180,000      |           |  |              | 345,000     |           |         |           |        |              |   |        |      |        |   |            |  |            |   |           | 345,000 |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current liabilities                  |           |           | 366,975           |  |           |              | 397,895   |             |         |       | (30    | )            |            |   |           |           |           |              | 764,840   |  |              |             | 580,948   |         |           |         | 390,552      |   |        |       | (40    | ) |            |   |           |   |           |         | 971,460   | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Long-term debt                       |                                           |                                            | 400,000   |           |                   |  |          |              |           |             |        |       |        |              |           |   |            |           | 400,000   |              |           |  |             |             |           |         |          |         |              |   |       |       |        |   |           |   |            |   |          |        
|Other liabilities                    |                                           |                                            | 15,674    |           |                   |  | 4,183     |              |           |             |        |       |        |              |           |   |            |           | 19,857    |              |           |  | 17,371       |             |           |         | 2,989     |         |              |   |       |       |        |   |           |   |            |   | 20,360    |        
|Intercompany payable (receivable)    |                                           |                                            | 765,665   |           |                   |  | (777,616  | )            |           |             | 11,951  |       |        |              |           |   |            |           |          |              |           |  | 796,849      |             |           |         | (808,256  | )       |              |   | 11,407 |       |        |   |           |   |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities                          |           |           | 1,548,314         |  |           |              | (375,538  | )           |         |       | 11,921 |              |            |   |           |           |           |              | 1,184,697 |  |              |             | 1,395,168 |         |           |         | (414,715     | ) |        |       | 11,367 |   |            |   |           |   |           |         | 991,820   | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Shareholders equity                 |                                           |                                            | 2,032,450 |           |                   |  | 2,353,997 |              |           |             | (2,952  | )     |        |              | (2,351,045 | ) |            |           | 2,032,450 |              |           |  | 1,973,422    |             |           |         | 2,303,520 |         |              |   | (3,685 | )     |        |   | (2,299,835 | ) |            |   | 1,973,422 |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities and shareholders equity |           | $         | 3,580,764         |  |           | $            | 1,978,459 |             |         | $     | 8,969  |              |            | $ | (2,351,045 | )         |           | $            | 3,217,147 |  |              | $           | 3,368,590 |         |           | $       | 1,888,805    |   |        | $     | 7,682  |   |            | $ | (2,299,835 | ) |           | $       | 2,965,242 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |       |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  

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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              |  |      |      |      |   |         |         |         |   |         |         |         |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ---------------------------------- | ------ | --------- | --------------------------------- |  | --------- | ------------ | ------- |  | ------------ | ----- | ----- | ------------ | ------- | ------- | --------- | - | ------ | ------------ | ------- |  | ------------ | ------- | ------ | ------------ | ------- | ------- | ------------ |  | ---- | ---- | ---- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                             |                                                                              | Three Months Ended March 31, 2006  |        |           | Three Months Ended March 31, 2005 | 
|                                                             |                                                                              |                                    |        |           |                                   | 
|                                                             |                                                                              |                                    |        | Non       |                                   |  |           |              |         |  | Non          |       |       |             
|                                                             |                                                                              |                                    |        | Guarantor |                                   |  | Guarantor |              |         |  |              | King  |       |              |         |         | Guarantor |   |        | Guarantor    |         |  |              |         | King   |             
|                                                             |                                                                              | King                               |        |           | Subsidiaries                      |  |           | Subsidiaries |         |  | Eliminations |       |       | Consolidated |         |         | King      |   |        | Subsidiaries |         |  | Subsidiaries |         |        | Eliminations |         |         | Consolidated | 
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             |                                                                              | (Unaudited)                        |       
|                                                             |                                                                              | (In thousands)                     |       
|Revenues:                                                    |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              |  |      |      |      |   |         |         |         |   |         |        
|                                                             | Net sales                                                                    |                                    | $      | 97,832    |                                   |  | $         | 462,668      |         |  | $            | 1,557 |       |              | $       | (97,458 | )         |   | $      | 464,599      |         |  | $            | 94,318  |        |              | $       | 349,259 |              |  | $    | 440  |      |   | $       | (93,447 | )       |   | $       | 350,570 |        
|                                                             | Royalty revenue                                                              |                                    |        |          |                                   |  |           | 19,636       |         |  |              |      |       |              |         |        |           |   |        | 19,636       |         |  |              |        |        |              |         | 18,055  |              |  |      |     |      |   |         |        |         |   |         | 18,055  |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             |                                                                              | Total revenues                     |        |           | 97,832                            |  |           |              | 482,304 |  |              |       | 1,557 |              |         |         | (97,458   | ) |        |              | 484,235 |  |              |         | 94,318 |              |         |         | 367,314      |  |      |      | 440  |   |         |         | (93,447 | ) |         |         | 368,625 |  
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|Operating costs and expenses:                                |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              |  |      |      |      |   |         |         |         |   |         |        
|                                                             | Cost of revenues                                                             |                                    |        | 37,355    |                                   |  |           | 151,782      |         |  |              | 725   |       |              |         | (97,458 | )         |   |        | 92,404       |         |  |              | 39,170  |        |              |         | 126,263 |              |  |      | 230  |      |   |         | (93,447 | )       |   |         | 72,216  |        
|                                                             | Selling, general and administrative                                          |                                    |        | 49,086    |                                   |  |           | 121,661      |         |  |              | (404  | )     |              |         |        |           |   |        | 170,343      |         |  |              | 39,079  |        |              |         | 88,330  |              |  |      | 96   |      |   |         |        |         |   |         | 127,505 |        
|                                                             | Mylan transaction costs                                                      |                                    |        |          |                                   |  |           |             |         |  |              |      |       |              |         |        |           |   |        |             |         |  |              | 3,277   |        |              |         |        |              |  |      |     |      |   |         |        |         |   |         | 3,277   |        
|                                                             | Research and development                                                     |                                    |        | 873       |                                   |  |           | 114,009      |         |  |              |      |       |              |         |        |           |   |        | 114,882      |         |  |              | 161     |        |              |         | 11,311  |              |  |      |     |      |   |         |        |         |   |         | 11,472  |        
|                                                             | Depreciation and amortization                                                |                                    |        | 4,010     |                                   |  |           | 30,295       |         |  |              | 60    |       |              |         |        |           |   |        | 34,365       |         |  |              | 3,887   |        |              |         | 37,373  |              |  |      | 166  |      |   |         |        |         |   |         | 41,426  |        
|                                                             | Restructuring charges                                                        |                                    |        |          |                                   |  |           |             |         |  |              |      |       |              |         |        |           |   |        |             |         |  |              | 159     |        |              |         | 1,864   |              |  |      |     |      |   |         |        |         |   |         | 2,023   |        
|                                                             | Gain on sale of products                                                     |                                    |        |          |                                   |  |           |             |         |  |              |      |       |              |         |        |           |   |        |             |         |  |              |        |        |              |         | (847    | )            |  |      |     |      |   |         |        |         |   |         | (847    | )      
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             |                                                                              | Total operating costs and expenses |        |           | 91,324                            |  |           |              | 417,747 |  |              |       | 381   |              |         |         | (97,458   | ) |        |              | 411,994 |  |              |         | 85,733 |              |         |         | 264,294      |  |      |      | 492  |   |         |         | (93,447 | ) |         |         | 257,072 |  
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|Operating income (loss)                                      |                                                                              |                                    | 6,508  |           |                                   |  | 64,557    |              |         |  | 1,176        |       |       |              |        |         |           |   | 72,241 |              |         |  | 8,585        |         |        |              | 103,020 |         |              |  | (52  | )    |      |   |        |         |         |   | 111,553 |        
|Other income (expense):                                      |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              |  |      |      |      |   |         |         |         |   |         |        
|                                                             | Interest income                                                              |                                    |        | 5,853     |                                   |  |           | 107          |         |  |              |      |       |              |         |        |           |   |        | 5,960        |         |  |              | 2,042   |        |              |         | 235     |              |  |      |     |      |   |         |        |         |   |         | 2,277   |        
|                                                             | Interest expense                                                             |                                    |        | (2,981    | )                                 |  |           | (3           | )       |  |              |      |       |              |         |        |           |   |        | (2,984       | )       |  |              | (2,686  | )      |              |         | (15     | )            |  |      |     |      |   |         |        |         |   |         | (2,701  | )      
|                                                             | Gain on early extinguishment of debt                                         |                                    |        | 1,022     |                                   |  |           |             |         |  |              |      |       |              |         |        |           |   |        | 1,022        |         |  |              |        |        |              |         |        |              |  |      |     |      |   |         |        |         |   |         |        |        
|                                                             | Loss on investment                                                           |                                    |        |          |                                   |  |           |             |         |  |              |      |       |              |         |        |           |   |        |             |         |  |              | (6,853  | )      |              |         |        |              |  |      |     |      |   |         |        |         |   |         | (6,853  | )      
|                                                             | Other, net                                                                   |                                    |        | (57       | )                                 |  |           | (534         | )       |  |              | 81    |       |              |         |        |           |   |        | (510         | )       |  |              | (77     | )      |              |         | (32     | )            |  |      | (140 | )    |   |         |        |         |   |         | (249    | )      
|                                                             | Equity in earnings (loss) of subsidiaries                                    |                                    |        | 51,218    |                                   |  |           |             |         |  |              |      |       |              |         | (51,218 | )         |   |        |             |         |  |              | 79,657  |        |              |         |        |              |  |      |     |      |   |         | (79,657 | )       |   |         |        |        
|                                                             | Intercompany interest (expense) income                                       |                                    |        | (10,649   | )                                 |  |           | 10,781       |         |  |              | (132  | )     |              |         |        |           |   |        |             |         |  |              | (12,193 | )      |              |         | 12,342  |              |  |      | (149 | )    |   |         |        |         |   |         |        |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             |                                                                              | Total other income (expense)       |        |           | 44,406                            |  |           |              | 10,351  |  |              |       | (51   | )            |         |         | (51,218   | ) |        |              | 3,488   |  |              |         | 59,890 |              |         |         | 12,530       |  |      |      | (289 | ) |         |         | (79,657 | ) |         |         | (7,526  | )
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|Income (loss) from continuing operations before income taxes |                                                                              |                                    | 50,914 |           |                                   |  | 74,908    |              |         |  | 1,125        |       |       |              | (51,218 | )       |           |   | 75,729 |              |         |  | 68,475       |         |        |              | 115,550 |         |              |  | (341 | )    |      |   | (79,657 | )       |         |   | 104,027 |        
|Income tax expense (benefit)                                 |                                                                              |                                    | 237    |           |                                   |  | 24,263    |              |         |  | 394          |       |       |              |        |         |           |   | 24,894 |              |         |  | (1,580       | )       |        |              | 38,621  |         |              |  | (119 | )    |      |   |        |         |         |   | 36,922  |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|Income (loss) from continuing operations                     |                                                                              |                                    | 50,677 |           |                                   |  | 50,645    |              |         |  | 731          |       |       |              | (51,218 | )       |           |   | 50,835 |              |         |  | 70,055       |         |        |              | 76,929  |         |              |  | (222 | )    |      |   | (79,657 | )       |         |   | 67,105  |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|Discontinued operations:                                     |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              |  |      |      |      |   |         |         |         |   |         |        
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment |                                    |        |          |                                   |  |           | (247         | )       |  |              |      |       |              |         |        |           |   |        | (247         | )       |  |              |        |        |              |         | 4,682   |              |  |      |     |      |   |         |        |         |   |         | 4,682   |        
|                                                             | Income tax (benefit) expense                                                 |                                    |        |          |                                   |  |           | (89          | )       |  |              |      |       |              |         |        |           |   |        | (89          | )       |  |              |        |        |              |         | 1,732   |              |  |      |     |      |   |         |        |         |   |         | 1,732   |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             | (Loss) income from discontinued operations, net                              |                                    |        |          |                                   |  |           | (158         | )       |  |              |      |       |              |         |        |           |   |        | (158         | )       |  |              |        |        |              |         | 2,950   |              |  |      |     |      |   |         |        |         |   |         | 2,950   |        
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 
|                                                             |                                                                              | Net income (loss)                  |        | $         | 50,677                            |  |           | $            | 50,487  |  |              | $     | 731   |              |         | $       | (51,218   | ) |        | $            | 50,677  |  |              | $       | 70,055 |              |         | $       | 79,879       |  |      | $    | (222 | ) |         | $       | (79,657 | ) |         | $       | 70,055  |  
|                                                             |                                                                              |                                    |        |           |                                   |  |           |              |         |  |              |       |       |              |         |         |           |   |        |              |         |  |              |         |        |              |         |         |              | 

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |         |   |   |       |     |  |   |          |          |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------- | ------- | --------- | --------------------------------- | - | --------- | ------------ | - | ---- | ------------ | --- |  | ---- | --------- | -------- | ------------ | --------- | -------- | ------------ | ---- | - | ------------ | ------- | - | - | ----- | --- |  | - | -------- | -------- | -
|                                                                                 |                                                                          | Three Months Ended March 31, 2006 |         |           | Three Months Ended March 31, 2005 |  
|                                                                                 |                                                                          |                                   |         |           |                                   |  
|                                                                                 |                                                                          |                                   |         | Non       |                                   |   |           |              |   |      | Non          |     |  |     
|                                                                                 |                                                                          |                                   |         | Guarantor |                                   |   | Guarantor |              |   | King |              |     |  |      | Guarantor |          |              | Guarantor |          |              | King |  
|                                                                                 |                                                                          | King                              |         |           | Subsidiaries                      |   |           | Subsidiaries |   |      | Consolidated |     |  | King |           |          | Subsidiaries |           |          | Subsidiaries |      |   | Consolidated |        
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|                                                                                 |                                                                          | (Unaudited)                       |        
|                                                                                 |                                                                          | (In thousands)                    |        
|Cash flows from operating activities of continuing operations                    |                                                                          | $                                 | (38,462 | )         |                                   | $ | 33,187    |              |   | $    | (317         | )   |  | $    | (5,592    | )        |              | $         | (7,771   | )            |      | $ | 30,702       |         |   | $ | 572   |     |  | $ | 23,503   |         
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Cash flows from investing activities of continuing operations:                   |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |         |   |   |       |     |  |   |          |         
|                                                                                 | Transfers from (to) restricted cash                                      |                                   |         | 130,279   |                                   |   |           |             |   |      |              |    |  |      |           | 130,279  |              |           |          | (9,564       | )    |   |              | 1,582   |   |   |       |    |  |   |          | (7,982   | )
|                                                                                 | Purchases of investments in debt securities                              |                                   |         | (784,976  | )                                 |   |           |             |   |      |              |    |  |      |           | (784,976 | )            |           |          | (317,730     | )    |   |              |        |   |   |       |    |  |   |          | (317,730 | )
|                                                                                 | Proceeds from maturities and sales of investments in debt
    securities |                                   |         | 793,485   |                                   |   |           |             |   |      |              |    |  |      |           | 793,485  |              |           |          | 167,145      |      |   |              |        |   |   |       |    |  |   |          | 167,145  |  
|                                                                                 | Purchases of property, plant and equipment                               |                                   |         | (5,095    | )                                 |   |           | (3,673       | ) |      |              |    |  |      |           | (8,768   | )            |           |          | (2,081       | )    |   |              | (6,994  | ) |   |       |    |  |   |          | (9,075   | )
|                                                                                 | Proceeds from sale of property and equipment                             |                                   |         |          |                                   |   |           |             |   |      |              |    |  |      |           |         |              |           |          | 1            |      |   |              |        |   |   |       |    |  |   |          | 1        |  
|                                                                                 | Purchases of product rights                                              |                                   |         |          |                                   |   |           | (23,926      | ) |      |              |    |  |      |           | (23,926  | )            |           |          |             |      |   |              |        |   |   |       |    |  |   |          |         |  
|                                                                                 | Arrow International Limited collaboration agreement                      |                                   |         |          |                                   |   |           | (35,000      | ) |      |              |    |  |      |           | (35,000  | )            |           |          |             |      |   |              |        |   |   |       |    |  |   |          |         |  
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Net cash provided by (used in) investing activities of
    continuing operations |                                                                          |                                   | 133,693 |           |                                   |   | (62,599   | )            |   |      |             |     |  |      | 71,094    |          |              |           | (162,229 | )            |      |   | (5,412       | )       |   |   |      |     |  |   | (167,641 | )       
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Cash flows from financing activities of continuing operations:                   |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |         |   |   |       |     |  |   |          |         
|                                                                                 | Proceeds from exercise of stock options, net                             |                                   |         | 6,468     |                                   |   |           |             |   |      |              |    |  |      |           | 6,468    |              |           |          | 56           |      |   |              |        |   |   |       |    |  |   |          | 56       |  
|                                                                                 | Excess tax benefit from stock-based compensation                         |                                   |         | 274       |                                   |   |           |             |   |      |              |    |  |      |           | 274      |              |           |          |              |      |   |              |         |   |   |       |     |  |   |          |          |  
|                                                                                 | Proceeds from issuance of long-term debt                                 |                                   |         | 400,000   |                                   |   |           |             |   |      |              |    |  |      |           | 400,000  |              |           |          |              |      |   |              |         |   |   |       |     |  |   |          |          |  
|                                                                                 | Payments on long-term debt                                               |                                   |         | (163,350  | )                                 |   |           |             |   |      |              |    |  |      |           | (163,350 | )            |           |          |             |      |   |              |        |   |   |       |    |  |   |          |         |  
|                                                                                 | Debt issuance costs                                                      |                                   |         | (10,610   | )                                 |   |           |             |   |      |              |    |  |      |           | (10,610  | )            |           |          |              |      |   |              |         |   |   |       |     |  |   |          |          |  
|                                                                                 | Intercompany                                                             |                                   |         | (29,304   | )                                 |   |           | 28,761       |   |      |              | 543 |  |      |           |         |              |           |          | 49,760       |      |   |              | (50,030 | ) |   |       | 270 |  |   |          |         |  
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Net cash provided by (used in) financing activities of
    continuing operations |                                                                          |                                   | 203,478 |           |                                   |   | 28,761    |              |   |      | 543          |     |  |      | 232,782   |          |              |           | 49,816   |              |      |   | (50,030      | )       |   |   | 270   |     |  |   | 56       |         
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Increase (decrease) in cash and cash equivalents                                 |                                                                          |                                   | 298,709 |           |                                   |   | (651      | )            |   |      | 226          |     |  |      | 298,284   |          |              |           | (120,184 | )            |      |   | (24,740      | )       |   |   | 842   |     |  |   | (144,082 | )       
|Cash and cash equivalents, beginning of period                                   |                                                                          |                                   | 26,802  |           |                                   |   | 1,071     |              |   |      | 2,141        |     |  |      | 30,014    |          |              |           | 164,451  |              |      |   | 27,035       |         |   |   | 1,170 |     |  |   | 192,656  |         
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        
|Cash and cash equivalents, end of period                                         |                                                                          | $                                 | 325,511 |           |                                   | $ | 420       |              |   | $    | 2,367        |     |  | $    | 328,298   |          |              | $         | 44,267   |              |      | $ | 2,295        |         |   | $ | 2,012 |     |  | $ | 48,574   |         
|                                                                                 |                                                                          |                                   |         |           |                                   |   |           |              |   |      |              |     |  |      |           |          |              |           |          |              |      |   |              |        

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

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


I. OVERVIEW


Our Business


in-license,


in-licensing




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



| |                                           
| | ------------------------------------------
| | Three Months Ended March 31, 2006 and 2005



|                       |                               |                      |         |         |      |   |         |         |  
|---------------------- | ----------------------------- | -------------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                       |                               | For the Three Months |        
|                       |                               | Ended March 31,      |        
|                       |                               |                      |        
|                       |                               | 2006                 |         |         | 2005 |  
|                       |                               |                      |         |         |      |  
|                       |                               | (In thousands)       |        
|Total Revenues         |                               |                      |         |         |      |   |         |        
|                       | Branded pharmaceuticals       |                      | $       | 417,620 |      |   | $       | 321,769 |  
|                       | Meridian Medical Technologies |                      |         | 41,284  |      |   |         | 23,214  |  
|                       | Royalties                     |                      |         | 19,636  |      |   |         | 18,055  |  
|                       | Contract manufacturing        |                      |         | 5,695   |      |   |         | 5,587   |  
|                       |                               |                      |         |         |      |  
|Total revenues         |                               | $                    | 484,235 |         |      | $ | 368,625 |        
|Cost of Revenues       |                               |                      |         |         |      |   |         |        
|                       | Branded pharmaceuticals       |                      | $       | 65,391  |      |   | $       | 49,657  |  
|                       | Meridian Medical Technologies |                      |         | 19,247  |      |   |         | 10,901  |  
|                       | Royalties                     |                      |         | 2,370   |      |   |         | 2,249   |  
|                       | Contract manufacturing        |                      |         | 5,396   |      |   |         | 9,409   |  
|                       |                               |                      |         |         |      |  
|Total cost of revenues |                               | $                    | 92,404  |         |      | $ | 72,216  |        
|Gross Profit           |                               |                      |         |         |      |   |         |        
|                       | Branded pharmaceuticals       |                      | $       | 352,229 |      |   | $       | 272,112 |  
|                       | Meridian Medical Technologies |                      |         | 22,037  |      |   |         | 12,313  |  
|                       | Royalties                     |                      |         | 17,266  |      |   |         | 15,806  |  
|                       | Contract manufacturing        |                      |         | 299     |      |   |         | (3,822  | )
|                       |                               |                      |         |         |      |  
|Total gross profit     |                               | $                    | 391,831 |         |      | $ | 296,409 |        
|                       |                               |                      |         |         |      |  



|                        |  |                      |         |   |      |   |         |  
|----------------------- |  | -------------------- | ------- | - | ---- | - | ------- | -
|                        |  | For the Three Months |        
|                        |  | Ended March 31,      |        
|                        |  |                      |        
|                        |  | 2006                 |         |   | 2005 |  
|                        |  |                      |         |   |      |  
|                        |  | (In thousands)       |        
|Gross Sales             |  | $                    | 607,859 |   |      | $ | 466,366 |  
|Returns                 |  |                      | (702    | ) |      |   | (4,438  | )
|Chargebacks             |  |                      | 29,390  |   |      |   | 18,558  |  
|Commercial Rebates      |  |                      | 56,278  |   |      |   | 34,718  |  
|Medicaid Rebates        |  |                      | 8,712   |   |      |   | 16,861  |  
|Medicare Part D Rebates |  |                      | 11,168  |   |      |   |        |  
|Trade Discounts/Other   |  |                      | 19,028  |   |      |   | 27,360  |  
|                        |  |                      |         |   |      |  
|                        |  |                      | 483,985 |   |      |   | 373,307 |  
|Discontinued Operations |  |                      | (250    | ) |      |   | 4,682   |  
|                        |  |                      |         |   |      |  
|Net Sales               |  | $                    | 484,235 |   |      | $ | 368,625 |  
|                        |  |                      |         |   |      |  

®


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

|                                                          |  |      |          |   |      |   |         |  
|--------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                                          |  | 2006 |          |   | 2005 |  
|                                                          |  |      |          |   |      |  
|Balance at January 1, net of prepaid amounts              |  | $    | 119,914  |   |      | $ | 172,161 |  
|Current provision related to sales made in current period |  |      | 73,123   |   |      |   | 55,456  |  
|Current provision related to sales made in prior periods  |  |      | (3,532   | ) |      |   | (9,202  | )
|Actual rebates                                            |  |      | (109,492 | ) |      |   | (77,083 | )
|                                                          |  |      |          |   |      |  
|Balance at March 31, net of prepaid amounts               |  | $    | 80,013   |   |      | $ | 141,332 |  
|                                                          |  |      |          |   |      |  



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

|                           |  |      |        |   |      |   |         |  
|-------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                           |  | 2006 |        |   | 2005 |  
|                           |  |      |        |   |      |  
|Balance at January 1       |  | $    | 50,902 |   |      | $ | 122,863 |  
|Current provision          |  |      | (702   | ) |      |   | (4,438  | )
|Actual returns             |  |      | (7,692 | ) |      |   | (45,394 | )
|                           |  |      |        |   |      |  
|Ending balance at March 31 |  | $    | 42,508 |   |      | $ | 73,031  |  
|                           |  |      |        |   |      |  



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

|                           |  |      |         |   |      |   |         |  
|-------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                           |  | 2006 |         |   | 2005 |  
|                           |  |      |         |   |      |  
|Balance at January 1       |  | $    | 13,153  |   |      | $ | 27,953  |  
|Current provision          |  |      | 29,390  |   |      |   | 18,558  |  
|Actual chargebacks         |  |      | (25,972 | ) |      |   | (22,048 | )
|                           |  |      |         |   |      |  
|Ending balance at March 31 |  | $    | 16,571  |   |      | $ | 24,463  |  
|                           |  |      |         |   |      |  



®


31



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®


Branded Pharmaceuticals


|                                |               |                      |         |         |               |   |         |         |  |   |        |        |   |  |      |       |  
|------------------------------- | ------------- | -------------------- | ------- | ------- | ------------- | - | ------- | ------- |  | - | ------ | ------ | - |  | ---- | ----- | -
|                                |               | For the Three Months |         |         | Change        |  
|                                |               | Ended March 31,      |         |         | 2006 vs. 2005 |  
|                                |               |                      |         |         |               |  
|                                |               | 2006                 |         |         | 2005          |   |         | $       |  |   | %      |       
|                                |               |                      |         |         |               |   |         |         |  |   |        |       
|                                |               | (In thousands)       |        
|Branded Pharmaceutical revenue: |               |                      |         |         |               |   |         |         |  |   |        |        |   |  |      |      
|                                | Altace®       |                      | $       | 158,848 |               |   | $       | 85,697  |  |   | $      | 73,151 |   |  |      | 85.4  | %
|                                | Skelaxin®     |                      |         | 98,626  |               |   |         | 71,888  |  |   |        | 26,738 |   |  |      | 37.2  |  
|                                | Thrombin-JMI® |                      |         | 58,197  |               |   |         | 63,266  |  |   |        | (5,069 | ) |  |      | (8.0  | )
|                                | Levoxyl®      |                      |         | 30,955  |               |   |         | 39,971  |  |   |        | (9,016 | ) |  |      | (22.6 | )
|                                | Sonata®       |                      |         | 21,267  |               |   |         | 19,508  |  |   |        | 1,759  |   |  |      | 9.0   |  
|                                | Other         |                      |         | 49,727  |               |   |         | 41,439  |  |   |        | 8,288  |   |  |      | 20.0  |  
|                                |               |                      |         |         |               |   |         |         |  |   |        |       
|                                | Total revenue |                      |         | 417,620 |               |   |         | 321,769 |  |   |        | 95,851 |   |  |      | 29.8  |  
|Cost of Revenues                |               |                      | 65,391  |         |               |   | 49,657  |         |  |   | 15,734 |        |   |  | 31.7 |      
|                                |               |                      |         |         |               |   |         |         |  |   |        |       
|Gross Profit Margin             |               | $                    | 352,229 |         |               | $ | 272,112 |         |  | $ | 80,117 |        |   |  | 29.4 | %    
|                                |               |                      |         |         |               |   |         |         |  |   |        |       

® ® ® ® ® ® ® ® ®




| |                      
| | ---------------------
| | Sales of Key Products



| |        
| | -------
| | Altace®

® ® ® ® ® ®




| |          
| | ---------
| | Skelaxin®

® ® ® ®


32



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® ® ®




| |              
| | -------------
| | Thrombin-JMI®

®




| |         
| | --------
| | Levoxyl®

® ®


® ® ® ® ®




| |        
| | -------
| | Sonata®

® ® ® ®




| |      
| | -----
| | Other





| |                 
| | ----------------
| | Cost of Revenues



33



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®




| |                              
| | -----------------------------
| | Meridian Medical Technologies

|                    |                      |                      |        |        |               |   |        |        |  |   |       |        |  |  |      |      |  
|------------------- | -------------------- | -------------------- | ------ | ------ | ------------- | - | ------ | ------ |  | - | ----- | ------ |  |  | ---- | ---- | -
|                    |                      | For the Three Months |        |        | Change        |  
|                    |                      | Ended March 31,      |        |        | 2006 vs. 2005 |  
|                    |                      |                      |        |        |               |  
|                    |                      | 2006                 |        |        | 2005          |   |        | $      |  |   | %     |       
|                    |                      |                      |        |        |               |   |        |        |  |   |       |       
|                    |                      | (In thousands)       |       
|Meridian Medical    |                      |                      |        |        |               |   |        |        |  |   |       |        |  |  |      |     
|                    | Technologies revenue |                      | $      | 41,284 |               |   | $      | 23,214 |  |   | $     | 18,070 |  |  |      | 77.8 | %
|                    | Cost of Revenues     |                      |        | 19,247 |               |   |        | 10,901 |  |   |       | 8,346  |  |  |      | 76.6 |  
|                    |                      |                      |        |        |               |   |        |        |  |   |       |       
|Gross Profit Margin |                      | $                    | 22,037 |        |               | $ | 12,313 |        |  | $ | 9,724 |        |  |  | 79.0 | %   
|                    |                      |                      |        |        |               |   |        |        |  |   |       |       

® ® ®






| |          
| | ---------
| | Royalties

|                    |                  |                      |        |       |               |   |        |       |  |   |       |     |  |  |     |     | 
|------------------- | ---------------- | -------------------- | ------ | ----- | ------------- | - | ------ | ----- |  | - | ----- | --- |  |  | --- | --- | 
|                    |                  |                      |       
|                    |                  | For the Three Months |        |       | Change        |  
|                    |                  | Ended March 31,      |        |       | 2006 vs. 2005 |  
|                    |                  |                      |        |       |               |  
|                    |                  | 2006                 |        |       | 2005          |   |        | $     |  |   | %     |    
|                    |                  |                      |        |       |               |   |        |       |  |   |       |    
|                    |                  | (In thousands)       |       
|Royalty revenue     |                  | $                    | 19,636 |       |               | $ | 18,055 |       |  | $ | 1,581 |     |  |  | 8.8 | %  
|                    | Cost of Revenues |                      |        | 2,370 |               |   |        | 2,249 |  |   |       | 121 |  |  |     | 5.4 | 
|                    |                  |                      |        |       |               |   |        |       |  |   |       |    
|Gross Profit Margin |                  | $                    | 17,266 |       |               | $ | 15,806 |       |  | $ | 1,460 |     |  |  | 9.2 | %  
|                    |                  |                      |        |       |               |   |        |       |  |   |       |    

® ®




| |                       
| | ----------------------
| | Contract Manufacturing

|                               |                  |                      |       |       |               |        |        |       |  |   |       |        |   |  |     |       |  
|------------------------------ | ---------------- | -------------------- | ----- | ----- | ------------- | ------ | ------ | ----- |  | - | ----- | ------ | - |  | --- | ----- | -
|                               |                  |                      |       |       |               | Change |       
|                               |                  |                      |       |       |              
|                               |                  | For the Three Months |       |       |              
|                               |                  | Ended March 31,      |       |       | 2006 vs. 2005 |       
|                               |                  |                      |       |       |               |       
|                               |                  | 2006                 |       |       | 2005          |        |        | $     |  |   | %     |       
|                               |                  |                      |       |       |               |        |        |       |  |   |       |       
|                               |                  | (In thousands)       |      
|Contract manufacturing revenue |                  | $                    | 5,695 |       |               | $      | 5,587  |       |  | $ | 108   |        |   |  | 1.9 | %    
|                               | Cost of Revenues |                      |       | 5,396 |               |        |        | 9,409 |  |   |       | (4,013 | ) |  |     | (42.7 | )
|                               |                  |                      |       |       |               |        |        |       |  |   |       |       
|Gross Profit Margin            |                  | $                    | 299   |       |               | $      | (3,822 | )     |  | $ | 4,121 |        |   |  |    |      
|                               |                  |                      |       |       |               |        |        |       |  |   |       |       

34



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Operating Costs and Expenses


|                                                      |  |                      |         |  |               |   |         |   |  |   |         |   |  |  |        |   
|----------------------------------------------------- |  | -------------------- | ------- |  | ------------- | - | ------- | - |  | - | ------- | - |  |  | ------ | --
|                                                      |  | For the Three Months |         |  | Change        |  
|                                                      |  | Ended March 31,      |         |  | 2006 vs. 2005 |  
|                                                      |  |                      |         |  |               |  
|                                                      |  | 2006                 |         |  | 2005          |   |         | $ |  |   | %       |  
|                                                      |  |                      |         |  |               |   |         |   |  |   |         |  
|                                                      |  | (In thousands)       |        
|Total gross profit                                    |  | $                    | 391,831 |  |               | $ | 296,409 |   |  | $ | 95,422  |   |  |  | 32.2   | % 
|Selling, general and administrative                   |  |                      | 170,343 |  |               |   | 130,782 |   |  |   | 39,561  |   |  |  | 30.2   |   
|Research and development                              |  |                      | 114,882 |  |               |   | 11,472  |   |  |   | 103,410 |   |  |  | >100.0 |   
|Depreciation and amortization                         |  |                      | 34,365  |  |               |   | 41,426  |   |  |   | (7,061  | ) |  |  | (17.0  | ) 
|Merger, restructuring, and other nonrecurring charges |  |                      |        |  |               |   | 2,023   |   |  |   | (2,023  | ) |  |  | (100.0 | ) 
|Gain on sale of products                              |  |                      |        |  |               |   | (847    | ) |  |   | 847     |   |  |  | (100.0 | ) 
|                                                      |  |                      |         |  |               |   |         |   |  |   |         |  
|Operating income                                      |  | $                    | 72,241  |  |               | $ | 111,553 |   |  | $ | (39,312 | ) |  |  | (35.2  | )%
|                                                      |  |                      |         |  |               |   |         |   |  |   |         |  



| |                                             
| | --------------------------------------------
| | Selling, General and Administrative Expenses

|                                                                        |                                           |                      |         |         |               |   |        |         |  |   |        |        |  |  |        |      |  
|----------------------------------------------------------------------- | ----------------------------------------- | -------------------- | ------- | ------- | ------------- | - | ------ | ------- |  | - | ------ | ------ |  |  | ------ | ---- | -
|                                                                        |                                           | For the Three Months |         |         | Change        |  
|                                                                        |                                           | Ended March 31,      |         |         | 2006 vs. 2005 |  
|                                                                        |                                           |                      |         |         |               |  
|                                                                        |                                           | 2006                 |         |         | 2005          |   |        | $       |  |   | %      |       
|                                                                        |                                           |                      |         |         |               |   |        |         |  |   |        |       
|                                                                        |                                           | (In thousands)       |        
|Selling, general and administrative, exclusive of co-promotion
    fees |                                           | $                    | 105,054 |         |               | $ | 92,850 |         |  | $ | 12,204 |        |  |  | 13.1   | %   
|Mylan transaction costs                                                 |                                           |                      |        |         |               |   | 3,277  |         |  |   | (3,277 | )      |  |  | (100.0 | )   
|Co-promotion fees                                                       |                                           |                      | 65,289  |         |               |   | 34,655 |         |  |   | 30,634 |        |  |  | 88.4   |     
|                                                                        |                                           |                      |         |         |               |   |        |         |  |   |        |       
|                                                                        | Total selling, general and administrative |                      | $       | 170,343 |               |   | $      | 130,782 |  |   | $      | 39,561 |  |  |        | 30.2 | %
|                                                                        |                                           |                      |         |         |               |   |        |         |  |   |        |       

® ® ®








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $3.0 million and $3.7 million in 2006 and
    2005, respectively, primarily due to professional fees related
    to the now completed investigation of our company by the
    HHS/OIG, and the partially completed investigation by the SEC.
    For additional information, please see Settlement of
    Governmental Pricing Investigation, SEC
    Investigation and Securities and ERISA
    Litigation included in Note 9,
    Contingencies, in Item 1, Financial
    Statements.
|
| |  | A charge in the amount of $3.3 million in 2005 for
    professional fees and expenses related to the terminated merger
    agreement with Mylan Laboratories, Inc.                                                                                                                                                                                                                                                                                                                                          



35



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| |                                 
| | --------------------------------
| | Research and Development Expense

|                                                       |                                |                      |        |         |               |   |        |        |  |   |        |         | 
|------------------------------------------------------ | ------------------------------ | -------------------- | ------ | ------- | ------------- | - | ------ | ------ |  | - | ------ | ------- | 
|                                                       |                                | For the Three Months |        |         |              
|                                                       |                                | Ended March 31,      |        |         | Change        |  
|                                                       |                                |                      |        |         | 2006 vs. 2005 |  
|                                                       |                                | 2006                 |        |         | 2005          |   |        | $      | 
|                                                       |                                |                      |        |         |               |   |        |        | 
|                                                       |                                | (In thousands)       |       
|Research and development                               |                                | $                    | 29,882 |         |               | $ | 11,472 |        |  | $ | 18,410 |        
|Research and development  in process upon acquisition |                                |                      | 85,000 |         |               |   |       |        |  |   | 85,000 |        
|                                                       |                                |                      |        |         |               |   |        |        | 
|                                                       | Total research and development |                      | $      | 114,882 |               |   | $      | 11,472 |  |   | $      | 103,410 | 
|                                                       |                                |                      |        |         |               |   |        |        | 



®




| |                                      
| | -------------------------------------
| | Depreciation and Amortization Expense

®


® ® ®


36



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##### Table of Contents



® ® ® ® ® ®


®






| |                         
| | ------------------------
| | Other Operating Expenses





| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Restructuring charges in the amount of $2.0 million in 2005
    primarily due to a decision to discontinue some relatively
    insignificant products associated with our Meridian Medical
    Technologies business.
|
| |  | Gain of $0.8 million in 2005 primarily due to the sale of
    some of our assets.                                                                                                                                     

Non-Operating Items


|                                     |                              |                      |        |       |      |   |        |        |  
|------------------------------------ | ---------------------------- | -------------------- | ------ | ----- | ---- | - | ------ | ------ | -
|                                     |                              | For the Three Months |       
|                                     |                              | Ended March 31,      |       
|                                     |                              |                      |       
|                                     |                              | 2006                 |        |       | 2005 |  
|                                     |                              |                      |        |       |      |  
|                                     |                              | (In thousands)       |       
|Interest income                      |                              | $                    | 5,960  |       |      | $ | 2,277  |       
|Interest expense                     |                              |                      | (2,984 | )     |      |   | (2,701 | )     
|Loss on investment                   |                              |                      |       |       |      |   | (6,853 | )     
|Gain on early extinguishment of debt |                              |                      | 1,022  |       |      |   |       |       
|Other, net                           |                              |                      | (510   | )     |      |   | (249   | )     
|                                     |                              |                      |        |       |      |  
|                                     | Total other income (expense) |                      |        | 3,488 |      |   |        | (7,526 | )
|Income tax expense                   |                              |                      | 24,894 |       |      |   | 36,922 |       
|Discontinued operations              |                              |                      | (158   | )     |      |   | 2,950  |       



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



37



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##### Table of Contents







| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A charge of $6.9 million in 2005 related to our investment
    in Novavax, Inc. We sold our investment in Novavax, Inc. during
    the third quarter of 2005.
|
| |  | Income of $1.0 million during 2006 resulting from the early
    retirement of $165.0 million of our
    23/4% Convertible Debentures due November 15, 2021.  



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







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

® ® ® ®


Liquidity and Capital Resources




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



® ®


®


38



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##### Table of Contents





®


®


tm tm moderate-to tm tm tm


PT-141,


® ® ® ® ® ® ® ® ®


® ® ® twelve-month ®


39



---



##### Table of Contents





| |                                                 
| | ------------------------------------------------
| | Settlement of Governmental Pricing Investigation













8-K




| |                  
| | -----------------
| | SEC Investigation



40



---



##### Table of Contents







| |                      
| | ---------------------
| | Securities Litigation











41



---



##### Table of Contents













| |                  
| | -----------------
| | Patent Challenges

® ® ® ® ® ® ® ®


Cash Flows




| |                     
| | --------------------
| | Operating Activities

|                                                    |  |                      |        |   |      |   |        | 
|--------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | 
|                                                    |  | For the Three Months |       
|                                                    |  | Ended March 31,      |       
|                                                    |  |                      |       
|                                                    |  | 2006                 |        |   | 2005 |  
|                                                    |  |                      |        |   |      |  
|                                                    |  | (In thousands)       |       
|Net cash (used in) provided by operating activities |  | $                    | (5,592 | ) |      | $ | 23,503 | 

co-promotion


42



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##### Table of Contents





|                                                                           |  |                      |          |   |      |   |         |  
|-------------------------------------------------------------------------- |  | -------------------- | -------- | - | ---- | - | ------- | -
|                                                                           |  | For the Three Months |         
|                                                                           |  | Ended March 31,      |         
|                                                                           |  |                      |         
|                                                                           |  | 2006                 |          |   | 2005 |  
|                                                                           |  |                      |          |   |      |  
|                                                                           |  | (In thousands)       |         
|Accounts receivable, net of allowance                                      |  | $                    | (44,588  | ) |      | $ | (25,657 | )
|Inventories                                                                |  |                      | 10,807   |   |      |   | 19,004  |  
|Prepaid expenses and other current assets                                  |  |                      | (22,750  | ) |      |   | (2,844  | )
|Accounts payable                                                           |  |                      | (14,730  | ) |      |   | (47,501 | )
|Accrued expenses and other liabilities                                     |  |                      | (128,460 | ) |      |   | (71,062 | )
|Income taxes payable                                                       |  |                      | 53,021   |   |      |   | 13,168  |  
|Deferred revenue                                                           |  |                      | (2,273   | ) |      |   | (2,273  | )
|Other assets                                                               |  |                      | (3,579   | ) |      |   | (98     | )
|Deferred taxes                                                             |  |                      | (27,295  | ) |      |   | 25,053  |  
|                                                                           |  |                      |          |   |      |  
|Total changes from operating assets and liabilities and deferred
    taxes |  | $                    | (179,847 | ) |      | $ | (92,210 | )



| |                     
| | --------------------
| | Investing Activities

|                                                    |  |                      |        |  |      |   |          |  
|--------------------------------------------------- |  | -------------------- | ------ |  | ---- | - | -------- | -
|                                                    |  | For the Three Months |       
|                                                    |  | Ended March 31,      |       
|                                                    |  |                      |       
|                                                    |  | 2006                 |        |  | 2005 |  
|                                                    |  |                      |        |  |      |  
|                                                    |  | (In thousands)       |       
|Net cash provided by (used in) investing activities |  | $                    | 71,094 |  |      | $ | (167,641 | )

®








| |                     
| | --------------------
| | Financing Activities

|                                          |  |                |         |  |      |   |    | 
|----------------------------------------- |  | -------------- | ------- |  | ---- | - | -- | 
|                                          |  | 2006           |         |  | 2005 |  
|                                          |  |                |         |  |      |  
|                                          |  | (In thousands) |        
|Net cash provided by financing activities |  | $              | 232,782 |  |      | $ | 56 | 

43



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##### Table of Contents



1 4 3 4




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

1 4 1 4




3 4 3 4 3 4 1 4




44



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##### Table of Contents





S-3




| |                    
| | -------------------
| | Impact of Inflation





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

Stock-based




Critical Accounting Policies and Estimates








45



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



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

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|                              |                                    |                          |               |             |              |           |          |         |         |         |         |         |         |         | 
|----------------------------- | ---------------------------------- | ------------------------ | ------------- | ----------- | ------------ | --------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                              |                                    |                          |               | Accumulated |              |           | Net Book |        
|                              |                                    | Cost                     |               |             | Amortization |           |          | Value   |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              |                                    | (In thousands)           |              
|Branded                       |                                    |                          |               |             |              |           |          |         |         |         |         |        
|                              | Altace®                            |                          | $             | 276,150     |              |           | $        | 73,891  |         |         | $       | 202,259 |        
|                              | Other Cardiovascular/metabolic     |                          |               | 80,770      |              |           |          | 39,953  |         |         |         | 40,817  |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              |                                    | Cardiovascular/metabolic |               |             | 356,920      |           |          |         | 113,844 |         |         |         | 243,076 |        
|                              | Intal®                             |                          |               | 106,192     |              |           |          | 16,766  |         |         |         | 89,426  |        
|                              | Other Hospital/acute care          |                          |               | 191,393     |              |           |          | 48,103  |         |         |         | 143,290 |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              |                                    | Hospital/acute care      |               |             | 297,585      |           |          |         | 64,869  |         |         |         | 232,716 |        
|                              | Skelaxin®                          |                          |               | 203,015     |              |           |          | 36,518  |         |         |         | 166,497 |        
|                              | Sonata®                            |                          |               | 23,146      |              |           |          | 23,146  |         |         |         |        |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              |                                    | Neuroscience             |               |             | 226,161      |           |          |         | 59,664  |         |         |         | 166,497 |        
|                              |                                    | Other                    |               |             | 144,675      |           |          |         | 55,893  |         |         |         | 88,782  |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              |                                    |                          | Total Branded |             |              | 1,025,341 |          |         |         | 294,270 |         |         |         | 731,071 | 
|Meridian Medical Technologies |                                    |                          | 170,302       |             |              |           | 18,694   |         |         |         | 151,608 |        
|Royalties                     |                                    |                          | 2,470         |             |              |           | 2,093    |         |         |         | 377     |        
|Contract manufacturing        |                                    |                          |              |             |              |           |         |         |         |         |        |        
|All other                     |                                    |                          |              |             |              |           |         |         |         |         |        |        
|                              |                                    |                          |               |             |              |           |          |         |        
|                              | Total trademark and product rights |                          | $             | 1,198,113   |              |           | $        | 315,057 |         |         | $       | 883,056 |        
|                              |                                    |                          |               |             |              |           |          |         |        



|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |   |   |   |   |       |        |       |        | 
|----------------------------- | ---------------------------------- | ------------------------ | ------------- | ------------ | - | - | ------------------ | ------ | ----- | ----------- |  | ------------ |  |  | - | - | - | - | ----- | ------ | ----- | ------ | 
|                              |                                    | Three Months Ended       |               |              |   |   | Three Months Ended |       
|                              |                                    | March 31, 2006           |               |              |   |   | March 31, 2005     |       
|                              |                                    |                          |               |              |   |   |                    |       
|                              |                                    |                          |               | Amortization |   |   | Life               |        |       |             |  | Amortization | 
|                              |                                    | Impairments              |               | Expense      |   |   | (Years)            |        |       | Impairments |  | Expense      | 
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              | 
|                              |                                    | (In thousands)           |               |              |   |   | (In thousands)     |       
|Branded                       |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |   |   |   |   |       |       
|                              | Altace®                            |                          | $             |             |   |   | $                  | 3,677  |       |             |  | 21           |  |  | $ |  |   |   | $     | 3,225  |      
|                              | Other Cardiovascular/metabolic     |                          |               |             |   |   |                    | 1,823  |       |             |  |              |  |  |   |  |   |   |       | 1,876  |      
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  
|                              |                                    | Cardiovascular/metabolic |               |              |  |   |                    |        | 5,500 |             |  |              |  |  |   |   |  |   |       |        | 5,101 |       
|                              | Intal®                             |                          |               |             |   |   |                    | 1,902  |       |             |  | 15           |  |  |   |  |   |   |       | 1,361  |      
|                              | Other Hospital/acute care          |                          |               |             |   |   |                    | 3,402  |       |             |  |             |  |  |   |  |   |   |       | 2,897  |      
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  
|                              |                                    | Hospital/acute care      |               |              |  |   |                    |        | 5,304 |             |  |              |  |  |   |   |  |   |       |        | 4,258 |       
|                              | Skelaxin®                          |                          |               |             |   |   |                    | 3,887  |       |             |  | 13.5         |  |  |   |  |   |   |       | 3,887  |      
|                              | Sonata®                            |                          |               |             |   |   |                    |       |       |             |  |             |  |  |   |  |   |   |       | 2,993  |      
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  
|                              |                                    | Neuroscience             |               |              |  |   |                    |        | 3,887 |             |  |              |  |  |   |   |  |   |       |        | 6,880 |       
|                              |                                    | Other                    |               |              |  |   |                    |        | 2,060 |             |  |              |  |  |   |   |  |   |       |        | 1,322 |       
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  
|                              |                                    |                          | Total Branded |              |   |  |                    |        |       | 16,751      |  |              |  |  |   |   |   |  |       |        |       | 17,561 | 
|Meridian Medical Technologies |                                    |                          |              |              |   |   | 1,494              |        |       |             |  |              |  |  |  |   |   |   | 1,291 |       
|Royalties                     |                                    |                          |              |              |   |   | 11                 |        |       |             |  |              |  |  |  |   |   |   | 11    |       
|Contract manufacturing        |                                    |                          |              |              |   |   |                   |        |       |             |  |              |  |  |  |   |   |   |      |       
|All other                     |                                    |                          |              |              |   |   |                   |        |       |             |  |              |  |  |  |   |   |   |      |       
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  
|                              | Total trademark and product rights |                          | $             |             |   |   | $                  | 18,256 |       |             |  |              |  |  | $ |  |   |   | $     | 18,863 |      
|                              |                                    |                          |               |              |   |   |                    |        |       |             |  |              |  |  |  

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|          |  |                                  |                  |             |                |  |                    | 
|--------- |  | -------------------------------- | ---------------- | ----------- | -------------- |  | ------------------ | 
|          |  | Remaining Life at March 31, 2006 |                 
|          |  |                                  |                 
|          |  |                                  |                  | Trademark & |               
|          |  | Patent                           |                  |             | Product Rights | 
|          |  |                                  |                  |             |                | 
|Altace®   |  |                                  | 3 years 1  month |             |                |  | 13 years 9  months | 
|Skelaxin® |  |                                  |                 |             |                |  | 10 years 9  months | 
|Sonata®   |  |                                  | 9 months         |             |                |  |                   | 
|Intal®    |  |                                  |                 |             |                |  | 11 years 9  months | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories. Our inventories are valued at the lower of
    cost or market value. We evaluate our entire inventory for short
    dated or slow moving product and inventory commitments under
    supply agreements based on projections of future demand and
    market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply agreements
    or if our estimated future inventory requirements exceed actual
    inventory quantities that we will be able to sell to our
    customers, we record a charge in costs of revenues.
|
| |  | Accruals for rebates, returns, and chargebacks. We
    establish accruals for returns, chargebacks and Medicaid,
    Medicare, and commercial rebates in the same period we recognize
    the related sales. The accruals reduce revenues and are included
    in accrued expenses. At the time a rebate or chargeback payment
    is made or a product return is received, which occurs with a
    delay after the related sale, we record a reduction to accrued
    expenses and, at the end of each quarter, adjust accrued
    expenses for differences between estimated and actual payments.
    Due to estimates and assumptions inherent in determining the
    amount of returns, chargebacks and rebates, the actual amount of
    product returns and claims for chargebacks and rebates may be
    different from our estimates.                                                                                                                                                                                                                                                                                                                                                                 



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

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

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RISK FACTORS


You should carefully consider the risks described below and
the other information contained in this report, including our
unaudited consolidated financial statements and related notes.
You should also consider the information contained in our annual
report on
Form 10-K for the
year ended December 31, 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.

® ® composition-of method-of ®


® ®


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® ® ®


® ® method-of ®


®




® ®


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® ®


® ® ® ® ®


® ® ®










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



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





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









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





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will be able to maintain
    effective internal control over financial reporting.

10-K








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

® ® ® ® ®


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





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

in-licensing






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

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



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





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

® Thrombin-JMI® ®


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® ® ® ® ® ® ®


® ® ® ® ® ®








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| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third-party developers of some of our new product
    candidates and reformulated products fail to devote sufficient
    time and resources to our concerns, or if their performance is
    substandard or otherwise fails to comply with the terms of their
    agreements with us, 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®.

Thrombin-JMI® Thrombin-JMI® Thrombin-JMI® Thrombin-JMI®




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





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


®


®




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multi-party




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

Thrombin-JMI® Thrombin-JMI® FDA-approved Thrombin-JMI® Thrombin-JMI®


® ® ® ® ®


® ®




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

® ®


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® ® ® ® ®




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









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





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| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | 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 either the continuation or
    termination of our agreement with Wyeth to
    co-promote Altace®.

® ®




| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wyeth may pursue alternative technologies or develop alternative
    products, either on its own or in collaboration with others,
    that may compete with
    Altace®
    or which could affect Wyeths commitment to the
    collaboration;
|
| |  | Wyeth may pursue higher-priority programs or change the focus of
    its marketing programs, which could also affect its commitment
    to the collaboration; and                                                                             
|
| |  | Wyeth may choose to devote fewer resources to the marketing of
    Altace®.                                                                                                                                                                   

® ®


®


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® ® ®




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | 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;                                                                                                             

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



Risks Related to Our Industry




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









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

® ® ®


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







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







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





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



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| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | 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,                                                                                                                       

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


®


®


®


®


®






A WARNING ABOUT FORWARD-LOOKING STATEMENTS










| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated net sales and
    prescription trends for our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Thrombin-JMI®,
    Sonata®
    and
    Levoxyl®;
|
| |  | expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Sonata®
    and
    Adenoscan®;                     
|
| |  | expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;                                                                                                 
|
| |  | the timeliness and accuracy of wholesale inventory data provided
    by our customers;                                                                                                                                         
|
| |  | the adequacy of our liquidity and capital resources;                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | expectations regarding the repurchase of our
    23/4% Convertible Debentures due November 21, 2021;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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 Co-Promotion Agreement with Wyeth;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal®
    inhaler formulation utilizing HFA, and other regulatory agencies
    worldwide;                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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














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





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PART II  OTHER INFORMATION







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





|         |             
|-------- | ------------
|Item 1A. | Risk Factors








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

|        |    |     |  |             |  |                                                                                                                                                                                      
|------- | -- | --- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|Number  |    |     |  | Description
|        |    |     |  |            
|        | 10 | .1 |  |            |  | Generic Distribution Agreement by and between King
    Pharmaceuticals, Inc. and Cobalt Pharmaceuticals, Inc., dated as
    of February 12, 2006.                                    
|        | 10 | .2 |  |            |  | Product Supply Agreement by and among King Pharmaceuticals,
    Inc., Selamine Limited, Robin Hood Holdings Limited and Arrow
    Pharm Malta Limited, dated as of February 12, 2006.
|        | 10 | .3 |  |            |  | Ramipril Application License Agreement by and among King
    Pharmaceuticals, Inc., Arrow International Limited and Robin
    Hood Holdings Limited, dated as of February 12, 2006.  
|        | 10 | .4 |  |            |  | Ramipril Patent License Agreement by and among King
    Pharmaceuticals, Inc., Selamine Limited and Robin Hood Holdings
    Limited, dated as of February 12, 2006.                  
|        | 10 | .5  |  |            |  | Dismissal Agreement by and among King Pharmaceuticals, Inc.,
    Cobalt Pharmaceuticals, Inc. and Aventis Pharma Deutschland
    GmbH, dated as of February 27, 2006.                
|        | 10 | .6 |  |            |  | Amended and Restated U.S. Product Manufacturing Agreement by and
    between King Pharmaceuticals, Inc. and Sanofi-Aventis
    Deutschland GmbH, dated as of February 27, 2006.      
|        | 10 | .7  |  |            |  | First Amendment to the U.S. Product Agreement by and between
    King Pharmaceuticals, Inc. and Sanofi-Aventis U.S. LLC, dated as
    of February 27, 2006.                          
|        | 10 | .8* |  |            |  | Form of Long-Term Performance Unit Award
    Agreement  One Year Performance Cycle                                                                                                  
|        | 10 | .9* |  |            |  | Form of Long-Term Performance Unit Award
    Agreement  Three Year Performance Cycle                                                                                                
|        | 31 | .1  |  |            |  | Certificate of Chief Executive Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.                                                                                
|        | 31 | .2  |  |            |  | Certificate of Chief Financial Officer Pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.                                                                                
|        | 32 | .1  |  |            |  | Certificate of Chief Executive Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                
|        | 32 | .2  |  |            |  | Certificate of Chief Financial Officer Pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                






|  |                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



|  |                                                                 
|- | ----------------------------------------------------------------
|* | Denotes management contract or compensatory plan or arrangement.

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SIGNATURES






| |                                      
| | -------------------------------------
| | KING PHARMACEUTICALS, INC.           
|
| | By: /s/ BRIAN A. MARKISON            
| |                                      
| | Brian A. Markison                    
| | President and Chief Executive Officer





| |                            
| | ---------------------------
| | By: /s/ JOSEPH SQUICCIARINO
| |                            
| | Joseph Squicciarino        
| | Chief Financial Officer    



75