##### 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 September 30, 2005                                           
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File No. 0-24425


King Pharmaceuticals, Inc.


(Exact name of registrant as specified in its charter)


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

(423) 989-8000


(Registrants telephone number, including area code)


þ o


þ o


o þ












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TABLE OF CONTENTS



|                                                                                                    |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                                                                    
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                                    
|CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                    
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                               
|                                                                                                    | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|RISK FACTORS                                                                                       
|A WARNING ABOUT FORWARD-LOOKING STATEMENTS                                                         
|                                                                                                    | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                                                                    | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                                                                       
|                                                                                                    | Item 1. Legal Proceedings                                                                    
|                                                                                                    | Item 6. Exhibits                                                                             
|SIGNATURES                                                                                         
|EX-10.1  INCENTIVE PLAN RESTRICTED STOCK CERTIFICATE                                               
|EX-10.2  INCENTIVE PLAN OPTION CERTIFICATE                                                         
|EX-31.1  SECTION 302 CEO CERTIFICATION                                                             
|EX-31.2  SECTION 302 CFO CERTIFICATION                                                             
|EX-32.1  SECTION 906 CEO CERTIFICATION                                                             
|EX-32.2  SECTION 906 CFO CERTIFICATION                                                             



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##### Table of Contents






PART I  FINANCIAL INFORMATION




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

KING PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                                                |                                                                                                      |                                            |           |         |              |  |           |         |           | 
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------- | ------------ |  | --------- | ------- | --------- | 
|                                                                                |                                                                                                      | September 30,                              |           |         |             
|                                                                                |                                                                                                      | 2005                                       |           |         | December 31, | 
|                                                                                |                                                                                                      | (Unaudited)                                |           |         | 2004         | 
|                                                                                |                                                                                                      |                                            |           |         |              | 
|ASSETS                                                                         
|Current Assets:                                                                 |                                                                                                      |                                            |           |         |              |  |           |        
|                                                                                | Cash and cash equivalents                                                                            |                                            | $         | 80,230  |              |  | $         | 192,656 |          
|                                                                                | Investments in debt securities                                                                       |                                            |           | 557,937 |              |  |           | 149,430 |          
|                                                                                | Restricted cash                                                                                      |                                            |           | 130,400 |              |  |           | 97,730  |          
|                                                                                | Marketable securities                                                                                |                                            |           | 13,054  |              |  |           | 16,498  |          
|                                                                                | Accounts receivable, net of allowance for doubtful accounts of
    $12,962 and $15,348, respectively |                                            |           | 251,985 |              |  |           | 180,963 |          
|                                                                                | Inventories                                                                                          |                                            |           | 218,739 |              |  |           | 274,412 |          
|                                                                                | Deferred income tax assets                                                                           |                                            |           | 125,335 |              |  |           | 153,979 |          
|                                                                                | Prepaid expenses and other current assets                                                            |                                            |           | 67,427  |              |  |           | 61,395  |          
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                                |                                                                                                      | Total current assets                       |           |         | 1,445,107    |  |           |         | 1,127,063 | 
|                                                                                |                                                                                                      |                                            |           |         |              | 
|Property, plant and equipment, net                                              |                                                                                                      |                                            | 288,740   |         |              |  | 280,731   |        
|Intangible assets, net                                                          |                                                                                                      |                                            | 1,068,539 |         |              |  | 1,285,961 |        
|Goodwill                                                                        |                                                                                                      |                                            | 121,152   |         |              |  | 121,152   |        
|Deferred income tax assets                                                      |                                                                                                      |                                            | 144,744   |         |              |  | 92,931    |        
|Other assets (includes restricted cash of $14,044 and $2,775,
    respectively) |                                                                                                      |                                            | 29,053    |         |              |  | 16,318    |        
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                                |                                                                                                      | Total assets                               |           | $       | 3,097,335    |  |           | $       | 2,924,156 | 
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                               
|LIABILITIES AND SHAREHOLDERS EQUITY                                           
|Current Liabilities:                                                            |                                                                                                      |                                            |           |         |              |  |           |        
|                                                                                | Accounts payable                                                                                     |                                            | $         | 58,088  |              |  | $         | 92,920  |          
|                                                                                | Accrued expenses                                                                                     |                                            |           | 542,332 |              |  |           | 596,010 |          
|                                                                                | Income taxes payable                                                                                 |                                            |           | 64,802  |              |  |           |        |          
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                                |                                                                                                      | Total current liabilities                  |           |         | 665,222      |  |           |         | 688,930   | 
|                                                                                |                                                                                                      |                                            |           |         |              | 
|Long-term debt                                                                  |                                                                                                      |                                            | 345,000   |         |              |  | 345,000   |        
|Other liabilities                                                               |                                                                                                      |                                            | 25,236    |         |              |  | 41,436    |        
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                                |                                                                                                      | Total liabilities                          |           |         | 1,035,458    |  |           |         | 1,075,366 | 
|                                                                                |                                                                                                      |                                            |           |         |              | 
|Commitments and contingencies (Note 8)                                          |                                                                                                      |                                            |           |         |              |  |           |        
|Shareholders equity                                                            |                                                                                                      |                                            | 2,061,877 |         |              |  | 1,848,790 |        
|                                                                                |                                                                                                      |                                            |           |         |              | 
|                                                                                |                                                                                                      | Total liabilities and shareholders equity |           | $       | 3,097,335    |  |           | $       | 2,924,156 | 
|                                                                                |                                                                                                      |                                            |           |         |              | 



2



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##### Table of Contents



KING PHARMACEUTICALS, INC.







CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In thousands, except per share data)


|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |          |          |           |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------- | ------- | ----------------- | ------- | ------- | ------- | ------ | ------- | ------- | --------- | ----- | --------- | -------- | -------- | -------- | --------- | -
|                                                             |                                                                                           | Three Months Ended                               |                                                   |         | Nine Months Ended |        
|                                                             |                                                                                           | September 30,                                    |                                                   |         | September 30,     |        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |        
|                                                             |                                                                                           | 2005                                             |                                                   |         | 2004              |         |         | 2005    |        |         | 2004    |          
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Revenues:                                                    |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |         
|                                                             | Net sales                                                                                 |                                                  | $                                                 | 495,688 |                   |         | $       | 374,432 |        |         | $       | 1,289,619 |       |           | $        | 903,617  |         
|                                                             | Royalty revenue                                                                           |                                                  |                                                   | 22,344  |                   |         |         | 20,252  |        |         |         | 59,977    |       |           |          | 58,128   |         
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           |                                                  | Total revenues                                    |         |                   | 518,032 |         |         |        | 394,684 |         |           |       | 1,349,596 |          |          |          | 961,745   |  
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Operating costs and expenses:                                |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |         
|                                                             | Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below |                                                  |                                                   | 92,257  |                   |         |         | 97,422  |        |         |         | 255,677   |       |           |          | 266,087  |         
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             | Selling, general and administrative, exclusive of co-promotion
    fees                   |                                                  |                                                   | 111,638 |                   |         |         | 97,810  |        |         |         | 305,911   |       |           |          | 289,537  |         
|                                                             | Medicaid related charge (Note 8)                                                          |                                                  |                                                   |        |                   |         |         |        |        |         |         |          |       |           |          | 65,000   |         
|                                                             | Mylan transaction costs                                                                   |                                                  |                                                   | 466     |                   |         |         | 2,787   |        |         |         | 3,898     |       |           |          | 5,913    |         
|                                                             | Co-promotion fees                                                                         |                                                  |                                                   | 70,346  |                   |         |         | 39,301  |        |         |         | 162,588   |       |           |          | 82,247   |         
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           |                                                  | Total selling, general and administrative expense |         |                   | 182,450 |         |         |        | 139,898 |         |           |       | 472,397   |          |          |          | 442,697   |  
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             | Research and development                                                                  |                                                  |                                                   | 24,049  |                   |         |         | 16,280  |        |         |         | 53,021    |       |           |          | 49,780   |         
|                                                             | Research and development-in process upon acquisition                                      |                                                  |                                                   |        |                   |         |         | 17,145  |        |         |         |          |       |           |          | 17,145   |         
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           |                                                  | Total research and development                    |         |                   | 24,049  |         |         |        | 33,425  |         |           |       | 53,021    |          |          |          | 66,925    |  
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             | Depreciation and amortization                                                             |                                                  |                                                   | 31,352  |                   |         |         | 38,843  |        |         |         | 112,698   |       |           |          | 116,627  |         
|                                                             | Intangible asset impairment                                                               |                                                  |                                                   |        |                   |         |         | 97,320  |        |         |         | 126,923   |       |           |          | 132,257  |         
|                                                             | Restructuring charges (Note 12)                                                           |                                                  |                                                   | 597     |                   |         |         | 4,674   |        |         |         | 2,603     |       |           |          | 10,828   |         
|                                                             | Gain on sale of products                                                                  |                                                  |                                                   | (20     | )                 |         |         | (5,245  | )      |         |         | (1,458    | )     |           |          | (9,524   | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           |                                                  | Total operating costs and expenses                |         |                   | 330,685 |         |         |        | 406,337 |         |           |       | 1,021,861 |          |          |          | 1,025,897 |  
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             | Operating income (loss)                                                                   |                                                  |                                                   | 187,347 |                   |         |         | (11,653 | )      |         |         | 327,735   |       |           |          | (64,152  | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Other income (expense):                                      |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |         
|                                                             | Interest income                                                                           |                                                  |                                                   | 5,253   |                   |         |         | 1,124   |        |         |         | 11,463    |       |           |          | 3,259    |         
|                                                             | Interest expense                                                                          |                                                  |                                                   | (3,136  | )                 |         |         | (3,147  | )      |         |         | (8,876    | )     |           |          | (9,518   | )       
|                                                             | Valuation charge  convertible notes receivable                                           |                                                  |                                                   |        |                   |         |         |        |        |         |         |          |       |           |          | (2,887   | )       
|                                                             | Gain (loss) on investment                                                                 |                                                  |                                                   | 1,040   |                   |         |         | (6,520  | )      |         |         | (6,182    | )     |           |          | (6,520   | )       
|                                                             | Other, net                                                                                |                                                  |                                                   | (751    | )                 |         |         | (640    | )      |         |         | (2,047    | )     |           |          | (175     | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           |                                                  | Total other income (expense)                      |         |                   | 2,406   |         |         |        | (9,183  | )       |           |       | (5,642    | )        |          |          | (15,841   | )
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Income (loss) from continuing operations before income taxes |                                                                                           |                                                  | 189,753                                           |         |                   |         | (20,836 | )       |        |         | 322,093 |           |       |           | (79,993  | )       
|Income tax expense (benefit)                                 |                                                                                           |                                                  | 67,109                                            |         |                   |         | (17,197 | )       |        |         | 111,302 |           |       |           | (14,372  | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Income (loss) from continuing operations                     |                                                                                           |                                                  | 122,644                                           |         |                   |         | (3,639  | )       |        |         | 210,791 |           |       |           | (65,621  | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Discontinued operations (Note 7):                            |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |         
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment              |                                                  |                                                   | (1,226  | )                 |         |         | (6,996  | )      |         |         | 2,607     |       |           |          | (172,310 | )       
|                                                             | Income tax (benefit) expense                                                              |                                                  |                                                   | (439    | )                 |         |         | (2,621  | )      |         |         | 989       |       |           |          | (62,915  | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           | (Loss) income from discontinued operations, net  |                                                   |         | (787              | )       |         |         | (4,375 | )       |         |           | 1,618 |           |          |          | (109,395 | )        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Net income (loss)                                            |                                                                                           | $                                                | 121,857                                           |         |                   | $       | (8,014  | )       |        | $       | 212,409 |           |       | $         | (175,016 | )       
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|Income (loss) per common share:                              |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |         
|                                                             | Basic:                                                                                    |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |          |         
|                                                             |                                                                                           | Income (loss) from continuing operations         |                                                   | $       | 0.50              |         |         | $       | (0.01  | )       |         | $         | 0.87  |           |          | $        | (0.27    | )        
|                                                             |                                                                                           | Total (loss) income from discontinued operations |                                                   |         | 0.00              |         |         |         | (0.02  | )       |         |           | 0.01  |           |          |          | (0.45    | )        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           | Net income (loss)                                |                                                   | $       | 0.50              |         |         | $       | (0.03  | )       |         | $         | 0.88  |           |          | $        | (0.72    | )        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             | Diluted:                                                                                  |                                                  |                                                   |         |                   |         |         |         |        |         |         |           |       |           |          |          |         
|                                                             |                                                                                           | Income (loss) from continuing operations         |                                                   | $       | 0.50              |         |         | $       | (0.01  | )       |         | $         | 0.87  |           |          | $        | (0.27    | )        
|                                                             |                                                                                           | Total (loss) income from discontinued operations |                                                   |         | 0.00              |         |         |         | (0.02  | )       |         |           | 0.01  |           |          |          | (0.45    | )        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          
|                                                             |                                                                                           | Net income (loss)                                |                                                   | $       | 0.50              |         |         | $       | (0.03  | )       |         | $         | 0.88  |           |          | $        | (0.72    | )        
|                                                             |                                                                                           |                                                  |                                                   |         |                   |         |         |         |        |         |         |          



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##### Table of Contents



KING PHARMACEUTICALS, INC.







CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          |          |  
|----------------------------- | ---------------------------------------------------------------- | -------------------------- | ----------- | - | -------- | ----------- | --------- | ------------- |  | - | ------- | -------- | - | ----- | ----- | ---- | - | - | --------- | -------- | -------- | -
|                              |                                                                  |                            |             |   |          | Accumulated |           |               | 
|                              |                                                                  | Common Stock               |             |   |          |             | Other     |               |  |  
|                              |                                                                  |                            |             |   | Retained |             |           | Comprehensive |  |   |        
|                              |                                                                  | Shares                     |             |   | Amount   |             |           | Earnings      |  |   | Income  |          |   | Total |      
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2003  |                                                                  |                            | 241,190,852 |   |          | $           | 1,205,970 |               |  | $ | 797,408 |          |   | $     | 1,113 |      |   | $ | 2,004,491 |         
|Comprehensive income:         |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |         
|                              | Net loss                                                         |                            |             |  |          |             |           |              |  |   |         | (175,016 | ) |       |       |     |   |   |           | (175,016 | )       
|                              | Net unrealized loss on marketable securities, net of tax of $159 |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | (295 | ) |   |           | (295     | )       
|                              | Foreign currency translation                                     |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | 32   |   |   |           | 32       |         
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|                              |                                                                  | Total comprehensive loss   |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          | (175,279 | )
|Stock option activity         |                                                                  |                            | 454,754     |   |          |             | 4,220     |               |  |   |        |          |   |       |      |      |   |   | 4,220     |         
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at September 30, 2004 |                                                                  |                            | 241,645,606 |   |          | $           | 1,210,190 |               |  | $ | 622,392 |          |   | $     | 850   |      |   | $ | 1,833,432 |         
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at December 31, 2004  |                                                                  |                            | 241,706,583 |   |          | $           | 1,210,647 |               |  | $ | 637,120 |          |   | $     | 1,023 |      |   | $ | 1,848,790 |         
|Comprehensive income:         |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |         
|                              | Net income                                                       |                            |             |  |          |             |           |              |  |   |         | 212,409  |   |       |       |     |   |   |           | 212,409  |         
|                              | Net unrealized gain on marketable securities, net of tax of $10  |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | 75   |   |   |           | 75       |         
|                              | Foreign currency translation                                     |                            |             |  |          |             |           |              |  |   |         |         |   |       |       | (79  | ) |   |           | (79      | )       
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|                              |                                                                  | Total comprehensive income |             |   |          |             |           |               |  |   |         |          |   |       |       |      |   |   |           |          | 212,405  |  
|Stock option activity         |                                                                  |                            | 79,399      |   |          |             | 682       |               |  |   |        |          |   |       |      |      |   |   | 682       |         
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      
|Balance at September 30, 2005 |                                                                  |                            | 241,785,982 |   |          | $           | 1,211,329 |               |  | $ | 849,529 |          |   | $     | 1,019 |      |   | $ | 2,061,877 |         
|                              |                                                                  |                            |             |   |          |             |           |               |  |   |         |          |   |       |      



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KING PHARMACEUTICALS, INC.







CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                               |                                                                |                                                                        |          |            |          |   |         |            |          |  
|-------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------- | -------- | ---------- | -------- | - | ------- | ---------- | -------- | -
|                                                               |                                                                | Nine Months Ended                                                      |         
|                                                               |                                                                | September 30,                                                          |         
|                                                               |                                                                |                                                                        |         
|                                                               |                                                                | 2005                                                                   |          |            | 2004     |  
|                                                               |                                                                |                                                                        |          |            |          |  
|Cash flows from operating activities of continuing operations  |                                                                | $                                                                      | 404,823  |            |          | $ | 158,293 |           
|                                                               |                                                                |                                                                        |          |            |          |  
|Cash flows from investing activities of continuing operations: |                                                                |                                                                        |          |            |          |   |         |           
|                                                               | Transfers (to) from restricted cash                            |                                                                        |          | (73,544    | )        |   |         | 344        |         
|                                                               | Investments in debt securities                                 |                                                                        |          | (2,499,779 | )        |   |         | (1,477,077 | )       
|                                                               | Purchases of property, plant and equipment                     |                                                                        |          | (32,334    | )        |   |         | (41,916    | )       
|                                                               | Purchases of product rights                                    |                                                                        |          |           |          |   |         | (1,000     | )       
|                                                               | Proceeds from debt securities                                  |                                                                        |          | 2,091,272  |          |   |         | 1,431,544  |         
|                                                               | Proceeds from the sale of products                             |                                                                        |          |           |          |   |         | 27,388     |         
|                                                               | Proceeds from sale of marketable securities                    |                                                                        |          | 6,453      |          |   |         |           |         
|                                                               | Proceeds from sale of assets                                   |                                                                        |          | 1          |          |   |         | 115        |         
|                                                               | Acquisition of primary care business of Elan                   |                                                                        |          |           |          |   |         | (36,000    | )       
|                                                               | Palatin collaboration                                          |                                                                        |          | (10,000    | )        |   |         | (20,000    | )       
|                                                               |                                                                |                                                                        |          |            |          |  
|                                                               |                                                                | Net cash used in investing activities of continuing operations         |          |            | (517,931 | ) |         |            | (116,602 | )
|                                                               |                                                                |                                                                        |          |            |          |  
|Cash flows from financing activities of continuing operations: |                                                                |                                                                        |          |            |          |   |         |           
|                                                               | Proceeds from exercise of stock options, net                   |                                                                        |          | 682        |          |   |         | 4,220      |         
|                                                               | Payments on other long-term debt and capital lease obligations |                                                                        |          |           |          |   |         | (97        | )       
|                                                               |                                                                |                                                                        |          |            |          |  
|                                                               |                                                                | Net cash provided by financing activities of continuing
    operations |          |            | 682      |   |         |            | 4,123    |  
|                                                               |                                                                |                                                                        |          |            |          |  
|Net cash provided by discontinued operations                   |                                                                |                                                                        |         |            |          |   | 10,751  |           
|                                                               |                                                                |                                                                        |          |            |          |  
|Increase (decrease) in cash and cash equivalents               |                                                                |                                                                        | (112,426 | )          |          |   | 56,565  |           
|Cash and cash equivalents, beginning of period                 |                                                                |                                                                        | 192,656  |            |          |   | 43,128  |           
|                                                               |                                                                |                                                                        |          |            |          |  
|Cash and cash equivalents, end of period                       |                                                                | $                                                                      | 80,230   |            |          | $ | 99,693  |           
|                                                               |                                                                |                                                                        |          |            |          |  



5



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##### Table of Contents



KING PHARMACEUTICALS, INC.







NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2005 and 2004


(Unaudited)


(In thousands, except per share data)




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







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



|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |         |   |  |   |          |  
|--------------------------------------- | ------------------------------------------------------ | ------------------ | - | ------- | ----------------- |  | - | ------ | - |  | ---- | ------- | - |  | - | -------- | -
|                                        |                                                        | Three Months Ended |   |         | Nine Months Ended | 
|                                        |                                                        | September 30,      |   |         | September 30,     | 
|                                        |                                                        |                    |   |         |                   | 
|                                        |                                                        | 2005               |   |         | 2004              |  |   | 2005   |   |  | 2004 |        
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|Net income (loss):                      |                                                        |                    |   |         |                   |  |   |        |   |  |      |         |   |  |   |         
|                                        | As reported                                            |                    | $ | 121,857 |                   |  | $ | (8,014 | ) |  | $    | 212,409 |   |  | $ | (175,016 | )
|                                        | Less: pro forma compensation costs for options granted |                    |   | (1,025  | )                 |  |   | (1,719 | ) |  |      | (3,892  | ) |  |   | (5,287   | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|                                        | Pro forma                                              |                    | $ | 120,832 |                   |  | $ | (9,733 | ) |  | $    | 208,517 |   |  | $ | (180,303 | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|Basic income (loss) per share:          |                                                        |                    |   |         |                   |  |   |        |   |  |      |         |   |  |   |         
|                                        | As reported                                            |                    | $ | 0.50    |                   |  | $ | (0.03  | ) |  | $    | 0.88    |   |  | $ | (0.72    | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|                                        | Pro forma                                              |                    | $ | 0.50    |                   |  | $ | (0.04  | ) |  | $    | 0.86    |   |  | $ | (0.75    | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|Diluted income (loss) per common share: |                                                        |                    |   |         |                   |  |   |        |   |  |      |         |   |  |   |         
|                                        | As reported                                            |                    | $ | 0.50    |                   |  | $ | (0.03  | ) |  | $    | 0.88    |   |  | $ | (0.72    | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        
|                                        | Pro forma                                              |                    | $ | 0.50    |                   |  | $ | (0.04  | ) |  | $    | 0.86    |   |  | $ | (0.75    | )
|                                        |                                                        |                    |   |         |                   |  |   |        |   |  |      |        



6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                        |                                |                    |  |         |                   |  |  |         |  |  |      |         |  |  |  |         | 
|--------------------------------------- | ------------------------------ | ------------------ |  | ------- | ----------------- |  |  | ------- |  |  | ---- | ------- |  |  |  | ------- | 
|                                        |                                | Three Months Ended |  |         | Nine Months Ended | 
|                                        |                                | September 30,      |  |         | September 30,     | 
|                                        |                                |                    |  |         |                   | 
|                                        |                                | 2005               |  |         | 2004              |  |  | 2005    |  |  | 2004 |        
|                                        |                                |                    |  |         |                   |  |  |         |  |  |      |        
|Basic income (loss) per common share:   |                                |                    |  |         |                   |  |  |         |  |  |      |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,755 |                   |  |  | 241,551 |  |  |      | 241,737 |  |  |  | 241,411 | 
|                                        |                                |                    |  |         |                   |  |  |         |  |  |      |        
|Diluted income (loss) per common share: |                                |                    |  |         |                   |  |  |         |  |  |      |         |  |  |  |        
|                                        | Weighted average common shares |                    |  | 241,755 |                   |  |  | 241,551 |  |  |      | 241,737 |  |  |  | 241,411 | 
|                                        | Effect of stock options        |                    |  | 152     |                   |  |  |        |  |  |      | 94      |  |  |  |        | 
|                                        |                                |                    |  |         |                   |  |  |         |  |  |      |        
|                                        | Weighted average common shares |                    |  | 241,907 |                   |  |  | 241,551 |  |  |      | 241,831 |  |  |  | 241,411 | 
|                                        |                                |                    |  |         |                   |  |  |         |  |  |      |        





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



|                                                                                    |  |               |         |   |              |   |         |  
|----------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                                                                    |  | September 30, |         |   | December 31, |  
|                                                                                    |  | 2005          |         |   | 2004         |  
|                                                                                    |  |               |         |   |              |  
|Raw materials                                                                       |  | $             | 136,912 |   |              | $ | 168,541 |  
|Work-in-process                                                                     |  |               | 20,092  |   |              |   | 20,287  |  
|Finished goods (including $8,793 and $11,350 of sample
    inventory, respectively) |  |               | 94,069  |   |              |   | 133,527 |  
|                                                                                    |  |               |         |   |              |  
|                                                                                    |  |               | 251,073 |   |              |   | 322,355 |  
|Inventory valuation allowance                                                       |  |               | (32,334 | ) |              |   | (47,943 | )
|                                                                                    |  |               |         |   |              |  
|                                                                                    |  | $             | 218,739 |   |              | $ | 274,412 |  
|                                                                                    |  |               |         |   |              |  



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



7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                               
|-- | ------------------------------
|6. | Intangible Assets and Goodwill



|                              |                         |          |           |           |              |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | --------- | ------------ | - | ------- | ------- | 
|                              |                         | Gross    |           |           |             
|                              |                         | Carrying |           |           | Accumulated  |  
|                              |                         | Amount   |           |           | Amortization |  
|                              |                         |          |           |           |              |  
|Trademarks and product rights |                         | $        | 1,243,788 |           |              | $ | 277,756 |        
|Patents                       |                         |          | 267,049   |           |              |   | 165,284 |        
|Other intangibles             |                         |          | 9,459     |           |              |   | 8,717   |        
|                              |                         |          |           |           |              |  
|                              | Total intangible assets |          | $         | 1,520,296 |              |   | $       | 451,757 | 
|                              |                         |          |           |           |              |  











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



|   |                        
|-- | -----------------------
|7. | Discontinued Operations



8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                                             |  |                    |        |   |                   |   |        |      |  |   |       |  |  |   |          |  
|------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | ---- |  | - | ----- |  |  | - | -------- | -
|                                                             |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                             |  | September 30,      |        |   | September 30,     |  
|                                                             |  |                    |        |   |                   |  
|                                                             |  | 2005               |        |   | 2004              |   |        | 2005 |  |   | 2004  | 
|                                                             |  |                    |        |   |                   |   |        |      |  |   |       | 
|Total revenues                                               |  | $                  | (1,228 | ) |                   | $ | (689   | )    |  | $ | 2,606 |  |  | $ | 13,250   |  
|Operating (loss) income, including expected loss on disposal |  |                    | (1,226 | ) |                   |   | (6,996 | )    |  |   | 2,607 |  |  |   | (172,310 | )
|Net (loss) income                                            |  | $                  | (787   | ) |                   | $ | (4,375 | )    |  | $ | 1,618 |  |  | $ | (109,395 | )



|   |              
|-- | -------------
|8. | Contingencies



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







9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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









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



10



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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









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





11



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















12



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                
| | -------------------------------
| | Securities and ERISA Litigation







13



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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



Approved Drug Products With Therapeutic
Equivalence Evaluations


14



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












15



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














16



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Other Contingencies








|   |                        
|-- | -----------------------
|9. | Accounting Developments







|    |             
|--- | ------------
|10. | Income Taxes



17



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                    
|--- | -------------------
|11. | Segment Information







|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |           |           |  |   |          |         |  
|--------------- | --------------------------------- | --------------------------------------------------- | - | -------- | ----------------- |  | - | -------- | ------- | - | ---- | --------- | --------- |  | - | -------- | ------- | -
|                |                                   | Three Months Ended                                  |   |          | Nine Months Ended | 
|                |                                   | September 30,                                       |   |          | September 30,     | 
|                |                                   |                                                     |   |          |                   | 
|                |                                   | 2005                                                |   |          | 2004              |  |   | 2005     |         |   | 2004 |          
|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |          
|Total revenues: |                                   |                                                     |   |          |                   |  |   |          |         |   |      |           |           |  |   |         
|                | Branded pharmaceuticals           |                                                     | $ | 454,548  |                   |  | $ | 334,839  |         |   | $    | 1,176,627 |           |  | $ | 788,912  |        
|                | Meridian Medical Technologies     |                                                     |   | 38,366   |                   |  |   | 33,934   |         |   |      | 96,998    |           |  |   | 96,115   |        
|                | Royalties                         |                                                     |   | 22,344   |                   |  |   | 20,252   |         |   |      | 59,977    |           |  |   | 58,128   |        
|                | Contract manufacturing and other  |                                                     |   | 229,112  |                   |  |   | 212,319  |         |   |      | 478,323   |           |  |   | 497,750  |        
|                | Eliminations                      |                                                     |   | (226,338 | )                 |  |   | (206,660 | )       |   |      | (462,329  | )         |  |   | (479,160 | )      
|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |          
|                |                                   | Consolidated total net revenues                     |   | $        | 518,032           |  |   | $        | 394,684 |   |      | $         | 1,349,596 |  |   | $        | 961,745 |  
|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |          
|Segment profit: |                                   |                                                     |   |          |                   |  |   |          |         |   |      |           |           |  |   |         
|                | Branded pharmaceuticals           |                                                     | $ | 387,360  |                   |  | $ | 261,293  |         |   | $    | 995,154   |           |  | $ | 598,911  |        
|                | Meridian Medical Technologies     |                                                     |   | 19,948   |                   |  |   | 18,028   |         |   |      | 50,425    |           |  |   | 51,482   |        
|                | Royalties                         |                                                     |   | 20,194   |                   |  |   | 17,602   |         |   |      | 53,140    |           |  |   | 49,757   |        
|                | Contract manufacturing and other  |                                                     |   | (1,727   | )                 |  |   | 339      |         |   |      | (4,800    | )         |  |   | (4,492   | )      
|                | Other operating costs and expense |                                                     |   | (238,428 | )                 |  |   | (308,915 | )       |   |      | (766,184  | )         |  |   | (759,810 | )      
|                | Other income (expense)            |                                                     |   | 2,406    |                   |  |   | (9,183   | )       |   |      | (5,642    | )         |  |   | (15,841  | )      
|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |          
|                |                                   | Income (loss) from continuing operations before tax |   | $        | 189,753           |  |   | $        | (20,836 | ) |      | $         | 322,093   |  |   | $        | (79,993 | )
|                |                                   |                                                     |   |          |                   |  |   |          |         |   |      |          

18



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|              |                                  |                           |   |           |              |  |   |           |           | 
|------------- | -------------------------------- | ------------------------- | - | --------- | ------------ |  | - | --------- | --------- | 
|              |                                  | As of                     |   |           | As of        | 
|              |                                  | September 30,             |   |           | December 31, | 
|              |                                  | 2005                      |   |           | 2004         | 
|              |                                  |                           |   |           |              | 
|Total assets: |                                  |                           |   |           |              |  |   |          
|              | Branded pharmaceuticals          |                           | $ | 2,709,373 |              |  | $ | 2,530,725 |          
|              | Meridian Medical Technologies    |                           |   | 255,003   |              |  |   | 275,850   |          
|              | Royalties                        |                           |   | 24,708    |              |  |   | 22,430    |          
|              | Contract manufacturing and other |                           |   | 108,251   |              |  |   | 95,151    |          
|              |                                  |                           |   |           |              | 
|              |                                  | Consolidated total assets |   | $         | 3,097,335    |  |   | $         | 2,924,156 | 
|              |                                  |                           |   |           |              | 



|                |                |                                              |   |         |                   |  |   |         |         |  |      |         |           |  |   |         |         | 
|--------------- | -------------- | -------------------------------------------- | - | ------- | ----------------- |  | - | ------- | ------- |  | ---- | ------- | --------- |  | - | ------- | ------- | 
|                |                | Three Months Ended                           |   |         | Nine Months Ended | 
|                |                | September 30,                                |   |         | September 30,     | 
|                |                |                                              |   |         |                   | 
|                |                | 2005                                         |   |         | 2004              |  |   | 2005    |         |  | 2004 |        
|                |                |                                              |   |         |                   |  |   |         |         |  |      |        
|Total revenues: |                |                                              |   |         |                   |  |   |         |         |  |      |         |           |  |   |        
|                | Cardiovascular |                                              | $ | 177,071 |                   |  | $ | 128,579 |         |  | $    | 415,332 |           |  | $ | 269,233 |        
|                | Anti-infective |                                              |   | 23,128  |                   |  |   | 17,024  |         |  |      | 65,422  |           |  |   | 38,528  |        
|                | Critical care  |                                              |   | 54,869  |                   |  |   | 54,879  |         |  |      | 173,395 |           |  |   | 134,227 |        
|                | Endocrinology  |                                              |   | 51,001  |                   |  |   | 30,412  |         |  |      | 150,136 |           |  |   | 99,801  |        
|                | Respiratory    |                                              |   | 3,277   |                   |  |   | 3,652   |         |  |      | 11,854  |           |  |   | 13,747  |        
|                | Neuroscience   |                                              |   | 135,515 |                   |  |   | 86,035  |         |  |      | 333,021 |           |  |   | 206,783 |        
|                | Other branded  |                                              |   | 9,687   |                   |  |   | 14,258  |         |  |      | 27,467  |           |  |   | 26,593  |        
|                |                |                                              |   |         |                   |  |   |         |         |  |      |        
|                |                | Consolidated branded pharmaceutical revenues |   | $       | 454,548           |  |   | $       | 334,839 |  |      | $       | 1,176,627 |  |   | $       | 788,912 | 
|                |                |                                              |   |         |                   |  |   |         |         |  |      |        



|    |                         
|--- | ------------------------
|12. | Restructuring Activities



|                          |  |              |     |  |           |   |       |          |         |            |       |   |           |        |     |  |          |         |     |               |  |   |      |  |  |   |     |  |  |   |     | 
|------------------------- |  | ------------ | --- |  | --------- | - | ----- | -------- | ------- | ---------- | ----- | - | --------- | ------ | --- |  | -------- | ------- | --- | ------------- |  | - | ---- |  |  | - | --- |  |  | - | --- | 
|                          |  | Accrued      |     |  |           |   |       |          | Accrued |            |       |   |           |        |     |  |          | Accrued |    
|                          |  | Balance at   |     |  | Income    |   |       |          |         | Balance at |       |   | Income    |        |     |  |          |         |     | Balance at    | 
|                          |  | December 31, |     |  | Statement |   |       |          |         | June 30,   |       |   | Statement |        |     |  |          |         |     | September 30, | 
|                          |  | 2004         |     |  | Impact    |   |       | Payments |         |            | 2005  |   |           | Impact |     |  | Payments |         |     | Non-cash      |  |   | 2005 | 
|                          |  |              |     |  |           |   |       |          |         |            |       |   |           |        |     |  |          |         |     |               |  |   |      | 
|Employee relocation       |  | $            |    |  |           | $ | 322   |          |         | $          | 322   |   |           | $      |    |  |          | $       |     |               |  | $ |      |  |  | $ |    |  |  | $ |    | 
|Facility demolition costs |  |              | 924 |  |           |   |      |          |         |            |      |   |           |        | 924 |  |          |         |    |               |  |   |     |  |  |   |    |  |  |   | 924 | 
|Termination of lease      |  |              |    |  |           |   | 1,733 |          |         |            | 1,733 |   |           |        |    |  |          |         |    |               |  |   |     |  |  |   |    |  |  |   |    | 
|Other                     |  |              |    |  |           |   | (49   | )        |         |            | (49   | ) |           |        |    |  |          |         | 597 |               |  |   | 97   |  |  |   | 500 |  |  |   |    | 
|                          |  |              |     |  |           |   |       |          |         |            |       |   |           |        |     |  |          |         |     |               |  |   |      | 
|                          |  | $            | 924 |  |           | $ | 2,006 |          |         | $          | 2,006 |   |           | $      | 924 |  |          | $       | 597 |               |  | $ | 97   |  |  | $ | 500 |  |  | $ | 924 | 
|                          |  |              |     |  |           |   |       |          |         |            |       |   |           |        |     |  |          |         |     |               |  |   |      | 



19



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                               
|--- | ------------------------------
|13. | Investments in Debt Securities









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







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





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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                               
|--- | ------------------------------
|16. | Guarantor Financial Statements

3 4


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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING BALANCE SHEETS


(In thousands)


|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |         |           | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | --------- | --------- | ----------------- |  | --------- | ------------ | --------- | ----------- | ------- | ------ | ------ | ------------ | ---------- | - | ---------- | --------- | --------- | ------------ | --------- |  | ------------ | ----------- | --------- | ------- | --------- | ------- | ------------ | - | ------ | ----- | ------ |  | ---------- | - | ---------- | - | --------- | ------- | --------- | 
|                                     |                                           | September 30, 2005                         |           |           |                  
|                                     |                                           | (Unaudited)                                |           |           | December 31, 2004 | 
|                                     |                                           |                                            |           |           |                   | 
|                                     |                                           |                                            |           | Non       |                   |  |           |              |           |             | Non     |        |        |             
|                                     |                                           |                                            |           | Guarantor |                   |  | Guarantor |              |           | Eliminating |         |        | King   |              |            |   |            | Guarantor |           |              | Guarantor |  |              | Eliminating |           |         | King      |        
|                                     |                                           | King                                       |           |           | Subsidiaries      |  |           | Subsidiaries |           |             | Entries |        |        | Consolidated |            |   | King       |           |           | Subsidiaries |           |  | Subsidiaries |             |           | Entries |           |         | Consolidated |  
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|ASSETS                              
|Current assets:                      |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|                                     | Cash and cash equivalents                 |                                            | $         | 78,250    |                   |  | $         | (183         | )         |             | $       | 2,163  |        |              | $          |  |            |           | $         | 80,230       |           |  | $            | 164,451     |           |         | $         | 27,035  |              |   | $      | 1,170 |        |  | $          |  |            |   | $         | 192,656 |          
|                                     | Investments in debt securities            |                                            |           | 557,937   |                   |  |           |             |           |             |         |       |        |              |            |  |            |           |           | 557,937      |           |  |              | 149,430     |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           | 149,430 |          
|                                     | Restricted cash                           |                                            |           | 130,400   |                   |  |           |             |           |             |         |       |        |              |            |  |            |           |           | 130,400      |           |  |              | 66,543      |           |         |           | 31,187  |              |   |        |      |        |  |            |  |            |   |           | 97,730  |          
|                                     | Marketable securities                     |                                            |           | 13,054    |                   |  |           |             |           |             |         |       |        |              |            |  |            |           |           | 13,054       |           |  |              | 16,498      |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           | 16,498  |          
|                                     | Accounts receivable, net                  |                                            |           | 49        |                   |  |           | 251,734      |           |             |         | 202    |        |              |            |  |            |           |           | 251,985      |           |  |              | 3,344       |           |         |           | 174,797 |              |   |        | 2,822 |        |  |            |  |            |   |           | 180,963 |          
|                                     | Inventories                               |                                            |           | 181,689   |                   |  |           | 36,468       |           |             |         | 582    |        |              |            |  |            |           |           | 218,739      |           |  |              | 237,448     |           |         |           | 36,743  |              |   |        | 221   |        |  |            |  |            |   |           | 274,412 |          
|                                     | Deferred income tax assets                |                                            |           | 25,780    |                   |  |           | 99,555       |           |             |         |       |        |              |            |  |            |           |           | 125,335      |           |  |              | 32,809      |           |         |           | 121,170 |              |   |        |      |        |  |            |  |            |   |           | 153,979 |          
|                                     | Prepaid expenses and other current assets |                                            |           | 15,197    |                   |  |           | 52,230       |           |             |         |       |        |              |            |  |            |           |           | 67,427       |           |  |              | 22,846      |           |         |           | 38,481  |              |   |        | 68    |        |  |            |  |            |   |           | 61,395  |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current assets                       |           |           | 1,002,356         |  |           |              | 439,804   |             |         |        | 2,947  |              |            |   |           |           |           |              | 1,445,107 |  |              |             | 693,369   |         |           |         | 429,413      |   |        |       | 4,281  |  |            |   |           |   |           |         | 1,127,063 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Property, plant and equipment, net   |                                           |                                            | 107,021   |           |                   |  | 181,719   |              |           |             |        |        |        |              |           |   |            |           | 288,740   |              |           |  | 112,416      |             |           |         | 168,313   |         |              |   | 2      |       |        |  |           |   |            |   | 280,731   |        
|Intangible assets, net               |                                           |                                            | 72        |           |                   |  | 1,058,672 |              |           |             | 9,795   |        |        |              |           |   |            |           | 1,068,539 |              |           |  | 194          |             |           |         | 1,275,474 |         |              |   | 10,293 |       |        |  |           |   |            |   | 1,285,961 |        
|Goodwill                             |                                           |                                            |          |           |                   |  | 121,152   |              |           |             |        |        |        |              |           |   |            |           | 121,152   |              |           |  |             |             |           |         | 121,152   |         |              |   |       |       |        |  |           |   |            |   | 121,152   |        
|Deferred income tax assets           |                                           |                                            | (6,370    | )         |                   |  | 151,114   |              |           |             |        |        |        |              |           |   |            |           | 144,744   |              |           |  | 14,197       |             |           |         | 78,734    |         |              |   |       |       |        |  |           |   |            |   | 92,931    |        
|Other assets                         |                                           |                                            | 28,813    |           |                   |  | 240       |              |           |             |        |        |        |              |           |   |            |           | 29,053    |              |           |  | 16,078       |             |           |         | 240       |         |              |   |       |       |        |  |           |   |            |   | 16,318    |        
|Investments in subsidiaries          |                                           |                                            | 2,358,500 |           |                   |  |          |              |           |             |        |        |        |              | (2,358,500 | ) |            |           |          |              |           |  | 2,186,234    |             |           |         |          |         |              |   |       |       |        |  | (2,186,234 | ) |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total assets                               |           | $         | 3,490,392         |  |           | $            | 1,952,701 |             |         | $      | 12,742 |              |            | $ | (2,358,500 | )         |           | $            | 3,097,335 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |   |        |       |        |  |            |   |            |   |           |        
|                                     | Accounts payable                          |                                            | $         | 29,634    |                   |  | $         | 28,414       |           |             | $       | 40     |        |              | $          |  |            |           | $         | 58,088       |           |  | $            | 61,427      |           |         | $         | 31,339  |              |   | $      | 154   |        |  | $          |  |            |   | $         | 92,920  |          
|                                     | Accrued expenses                          |                                            |           | 120,584   |                   |  |           | 421,758      |           |             |         | (10    | )      |              |            |  |            |           |           | 542,332      |           |  |              | 125,095     |           |         |           | 470,899 |              |   |        | 16    |        |  |            |  |            |   |           | 596,010 |          
|                                     | Income taxes payable                      |                                            |           | 13,502    |                   |  |           | 52,409       |           |             |         | (1,109 | )      |              |            |  |            |           |           | 64,802       |           |  |              |            |           |         |           |        |              |   |        |      |        |  |            |  |            |   |           |        |          
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total current liabilities                  |           |           | 163,720           |  |           |              | 502,581   |             |         |        | (1,079 | )            |            |   |           |           |           |              | 665,222   |  |              |             | 186,522   |         |           |         | 502,238      |   |        |       | 170    |  |            |   |           |   |           |         | 688,930   | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Long-term debt                       |                                           |                                            | 345,000   |           |                   |  |          |              |           |             |        |        |        |              |           |   |            |           | 345,000   |              |           |  | 345,000      |             |           |         |          |         |              |   |       |       |        |  |           |   |            |   | 345,000   |        
|Other liabilities                    |                                           |                                            | 22,461    |           |                   |  | 2,775     |              |           |             |        |        |        |              |           |   |            |           | 25,236    |              |           |  | 29,417       |             |           |         | 12,019    |         |              |   |       |       |        |  |           |   |            |   | 41,436    |        
|Intercompany payable (receivable)    |                                           |                                            | 897,334   |           |                   |  | (906,229  | )            |           |             | 8,895   |        |        |              |           |   |            |           |          |              |           |  | 612,759      |             |           |         | (620,511  | )       |              |   | 7,752  |       |        |  |           |   |            |   |          |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities                          |           |           | 1,428,515         |  |           |              | (400,873  | )           |         |        | 7,816  |              |            |   |           |           |           |              | 1,035,458 |  |              |             | 1,173,698 |         |           |         | (106,254     | ) |        |       | 7,922  |  |            |   |           |   |           |         | 1,075,366 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|Shareholders equity                 |                                           |                                            | 2,061,877 |           |                   |  | 2,353,574 |              |           |             | 4,926   |        |        |              | (2,358,500 | ) |            |           | 2,061,877 |              |           |  | 1,848,790    |             |           |         | 2,179,580 |         |              |   | 6,654  |       |        |  | (2,186,234 | ) |            |   | 1,848,790 |        
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  
|                                     |                                           | Total liabilities and shareholders equity |           | $         | 3,490,392         |  |           | $            | 1,952,701 |             |         | $      | 12,742 |              |            | $ | (2,358,500 | )         |           | $            | 3,097,335 |  |              | $           | 3,022,488 |         |           | $       | 2,073,326    |   |        | $     | 14,576 |  |            | $ | (2,186,234 | ) |           | $       | 2,924,156 | 
|                                     |                                           |                                            |           |           |                   |  |           |              |           |             |         |        |        |              |            |   |            |           |           |              |           |  |              |             |           |         |           |         |              |  

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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


(Unaudited)


(In thousands)


|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |   |    |     |     |  |        |          |          |   |         |         |         |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------- | ------- | --------- | ------------------------------------- |  | --------- | ------------ | ------- |  | ------------ | ----- | ------ | ------------ | ------- | -------- | --------- | - | ------- | ------------ | ------- |  | ------------ | ------- | ------- | ------------ | -------- | ------- | ------------ | - | -- | --- | --- |  | ------ | -------- | -------- | - | ------- | ------- | ------- | -
|                                                             |                                                                              | Three Months Ended September 30, 2005 |         |           | Three Months Ended September 30, 2004 | 
|                                                             |                                                                              |                                       |         |           |                                       | 
|                                                             |                                                                              |                                       |         | Non       |                                       |  |           |              |         |  | Non          |       |        |             
|                                                             |                                                                              |                                       |         | Guarantor |                                       |  | Guarantor |              |         |  |              | King  |        |              |         |          | Guarantor |   |         | Guarantor    |         |  |              |         | King    |             
|                                                             |                                                                              | King                                  |         |           | Subsidiaries                          |  |           | Subsidiaries |         |  | Eliminations |       |        | Consolidated |         |          | King      |   |         | Subsidiaries |         |  | Subsidiaries |         |         | Eliminations |          |         | Consolidated |  
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Revenues:                                                    |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |   |    |     |     |  |        |          |          |   |         |        
|                                                             | Net sales                                                                    |                                       | $       | 200,301   |                                       |  | $         | 495,280      |         |  | $            | 221   |        |              | $       | (200,114 | )         |   | $       | 495,688      |         |  | $            | 177,050 |         |              | $        | 373,241 |              |   | $  | 427 |     |  | $      | (176,286 | )        |   | $       | 374,432 |        
|                                                             | Royalty revenue                                                              |                                       |         |          |                                       |  |           | 22,344       |         |  |              |      |        |              |         |         |           |   |         | 22,344       |         |  |              |        |         |              |          | 20,252  |              |   |    |    |     |  |        |         |          |   |         | 20,252  |        
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|                                                             |                                                                              | Total revenues                        |         |           | 200,301                               |  |           |              | 517,624 |  |              |       | 221    |              |         |          | (200,114  | ) |         |              | 518,032 |  |              |         | 177,050 |              |          |         | 393,493      |   |    |     | 427 |  |        |          | (176,286 | ) |         |         | 394,684 |  
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Operating costs and expenses:                                |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |   |    |     |     |  |        |          |          |   |         |        
|                                                             | Cost of revenues                                                             |                                       |         | 34,162    |                                       |  |           | 258,087      |         |  |              | 122   |        |              |         | (200,114 | )         |   |         | 92,257       |         |  |              | 31,938  |         |              |          | 241,596 |              |   |    | 174 |     |  |        | (176,286 | )        |   |         | 97,422  |        
|                                                             | Selling, general and administrative                                          |                                       |         | 59,403    |                                       |  |           | 121,027      |         |  |              | 1,554 |        |              |         |         |           |   |         | 181,984      |         |  |              | 47,379  |         |              |          | 89,629  |              |   |    | 103 |     |  |        |         |          |   |         | 137,111 |        
|                                                             | Medicaid related charges                                                     |                                       |         |          |                                       |  |           |             |         |  |              |      |        |              |         |         |           |   |         |             |         |  |              |        |         |              |          |        |              |   |    |    |     |  |        |         |          |   |         |        |        
|                                                             | Mylan transaction costs                                                      |                                       |         | 466       |                                       |  |           |             |         |  |              |      |        |              |         |         |           |   |         | 466          |         |  |              | 2,787   |         |              |          |        |              |   |    |    |     |  |        |         |          |   |         | 2,787   |        
|                                                             | Research and development                                                     |                                       |         | 174       |                                       |  |           | 23,875       |         |  |              |      |        |              |         |         |           |   |         | 24,049       |         |  |              | 120     |         |              |          | 33,305  |              |   |    |    |     |  |        |         |          |   |         | 33,425  |        
|                                                             | Depreciation and amortization                                                |                                       |         | 3,959     |                                       |  |           | 27,226       |         |  |              | 167   |        |              |         |         |           |   |         | 31,352       |         |  |              | 4,345   |         |              |          | 34,384  |              |   |    | 114 |     |  |        |         |          |   |         | 38,843  |        
|                                                             | Intangible asset impairment                                                  |                                       |         |          |                                       |  |           |             |         |  |              |      |        |              |         |         |           |   |         |             |         |  |              | 4,400   |         |              |          | 92,920  |              |   |    |    |     |  |        |         |          |   |         | 97,320  |        
|                                                             | Restructuring charges                                                        |                                       |         |          |                                       |  |           | 597          |         |  |              |      |        |              |         |         |           |   |         | 597          |         |  |              | 1,363   |         |              |          | 3,311   |              |   |    |    |     |  |        |         |          |   |         | 4,674   |        
|                                                             | Gain on sale of products                                                     |                                       |         |          |                                       |  |           | (20          | )       |  |              |      |        |              |         |         |           |   |         | (20          | )       |  |              | (4,022  | )       |              |          | (1,223  | )            |   |    |    |     |  |        |         |          |   |         | (5,245  | )      
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|                                                             |                                                                              | Total operating costs and expenses    |         |           | 98,164                                |  |           |              | 430,792 |  |              |       | 1,843  |              |         |          | (200,114  | ) |         |              | 330,685 |  |              |         | 88,310  |              |          |         | 493,922      |   |    |     | 391 |  |        |          | (176,286 | ) |         |         | 406,337 |  
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Operating income (loss)                                      |                                                                              |                                       | 102,137 |           |                                       |  | 86,832    |              |         |  | (1,622       | )     |        |              |        |          |           |   | 187,347 |              |         |  | 88,740       |         |         |              | (100,429 | )       |              |   | 36 |     |     |  |       |          |          |   | (11,653 | )      
|Other income (expense):                                      |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |   |    |     |     |  |        |          |          |   |         |        
|                                                             | Interest income                                                              |                                       |         | 5,244     |                                       |  |           | 9            |         |  |              |      |        |              |         |         |           |   |         | 5,253        |         |  |              | 880     |         |              |          | 244     |              |   |    |    |     |  |        |         |          |   |         | 1,124   |        
|                                                             | Interest expense                                                             |                                       |         | (3,105    | )                                     |  |           | (31          | )       |  |              |      |        |              |         |         |           |   |         | (3,136       | )       |  |              | (3,058  | )       |              |          | (89     | )            |   |    |    |     |  |        |         |          |   |         | (3,147  | )      
|                                                             | Gain (loss) on investment                                                    |                                       |         | 1,040     |                                       |  |           |             |         |  |              |      |        |              |         |         |           |   |         | 1,040        |         |  |              | (6,520  | )       |              |          |        |              |   |    |    |     |  |        |         |          |   |         | (6,520  | )      
|                                                             | Other, net                                                                   |                                       |         | (312      | )                                     |  |           | (425         | )       |  |              | (14   | )      |              |         |         |           |   |         | (751         | )       |  |              | (222    | )       |              |          | (440    | )            |   |    | 22  |     |  |        |         |          |   |         | (640    | )      
|                                                             | Equity in earnings (loss) of subsidiaries                                    |                                       |         | 69,255    |                                       |  |           |             |         |  |              |      |        |              |         | (69,255  | )         |   |         |             |         |  |              | (69,147 | )       |              |          |        |              |   |    |    |     |  |        | 69,147   |          |   |         |        |        
|                                                             | Intercompany interest (expense) income                                       |                                       |         | (18,952   | )                                     |  |           | 19,122       |         |  |              | (170  | )      |              |         |         |           |   |         |             |         |  |              | (9,565  | )       |              |          | 9,565   |              |   |    |    |     |  |        |         |          |   |         |        |        
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|                                                             |                                                                              | Total other income (expense)          |         |           | 53,170                                |  |           |              | 18,675  |  |              |       | (184   | )            |         |          | (69,255   | ) |         |              | 2,406   |  |              |         | (87,632 | )            |          |         | 9,280        |   |    |     | 22  |  |        |          | 69,147   |   |         |         | (9,183  | )
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Income (loss) from continuing operations before income taxes |                                                                              |                                       | 155,307 |           |                                       |  | 105,507   |              |         |  | (1,806       | )     |        |              | (69,255 | )        |           |   | 189,753 |              |         |  | 1,108        |         |         |              | (91,149  | )       |              |   | 58 |     |     |  | 69,147 |          |          |   | (20,836 | )      
|Income tax expense (benefit)                                 |                                                                              |                                       | 33,450  |           |                                       |  | 34,291    |              |         |  | (632         | )     |        |              |        |          |           |   | 67,109  |              |         |  | 9,229        |         |         |              | (26,446  | )       |              |   | 20 |     |     |  |       |          |          |   | (17,197 | )      
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Income (loss) from continuing operations                     |                                                                              |                                       | 121,857 |           |                                       |  | 71,216    |              |         |  | (1,174       | )     |        |              | (69,255 | )        |           |   | 122,644 |              |         |  | (8,121       | )       |         |              | (64,703  | )       |              |   | 38 |     |     |  | 69,147 |          |          |   | (3,639  | )      
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|Discontinued operations:                                     |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |   |    |     |     |  |        |          |          |   |         |        
|                                                             | (Loss) income from discontinued operations, including loss on
    impairment |                                       |         |          |                                       |  |           | (1,226       | )       |  |              |      |        |              |         |         |           |   |         | (1,226       | )       |  |              | 170     |         |              |          | (7,166  | )            |   |    |    |     |  |        |         |          |   |         | (6,996  | )      
|                                                             | Income tax (benefit) expense                                                 |                                       |         |          |                                       |  |           | (439         | )       |  |              |      |        |              |         |         |           |   |         | (439         | )       |  |              | 63      |         |              |          | (2,684  | )            |   |    |    |     |  |        |         |          |   |         | (2,621  | )      
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|                                                             | (Loss) income from discontinued operations, net                              |                                       |         |          |                                       |  |           | (787         | )       |  |              |      |        |              |         |         |           |   |         | (787         | )       |  |              | 107     |         |              |          | (4,482  | )            |   |    |    |     |  |        |         |          |   |         | (4,375  | )      
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  
|                                                             |                                                                              | Net income (loss)                     |         | $         | 121,857                               |  |           | $            | 70,429  |  |              | $     | (1,174 | )            |         | $        | (69,255   | ) |         | $            | 121,857 |  |              | $       | (8,014  | )            |          | $       | (69,185      | ) |    | $   | 38  |  |        | $        | 69,147   |   |         | $       | (8,014  | )
|                                                             |                                                                              |                                       |         |           |                                       |  |           |              |         |  |              |       |        |              |         |          |           |   |         |              |         |  |              |         |         |              |          |         |              |  

23



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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF INCOME


(Unaudited)


(In thousands)


|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |   |      |       |       |   |         |          |          |   |         |          |           |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------ | ------- | --------- | ------------------------------------ |  | --------- | ------------ | --------- |  | ------------ | ----- | ------ | ------------ | -------- | -------- | --------- | - | ------- | ------------ | --------- | - | ------------ | -------- | -------- | ------------ | -------- | -------- | ------------ | - | ---- | ----- | ----- | - | ------- | -------- | -------- | - | ------- | -------- | --------- | -
|                                                             |                                                                              | Nine Months Ended September 30, 2005 |         |           | Nine Months Ended September 30, 2004 | 
|                                                             |                                                                              |                                      |         |           |                                      | 
|                                                             |                                                                              |                                      |         | Non       |                                      |  |           |              |           |  | Non          |       |        |             
|                                                             |                                                                              |                                      |         | Guarantor |                                      |  | Guarantor |              |           |  |              | King  |        |              |          |          | Guarantor |   |         | Guarantor    |           |   |              |          | King     |             
|                                                             |                                                                              | King                                 |         |           | Subsidiaries                         |  |           | Subsidiaries |           |  | Eliminations |       |        | Consolidated |          |          | King      |   |         | Subsidiaries |           |   | Subsidiaries |          |          | Eliminations |          |          | Consolidated |  
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Revenues:                                                    |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |   |      |       |       |   |         |          |          |   |         |         
|                                                             | Net sales                                                                    |                                      | $       | 396,709   |                                      |  | $         | 1,287,531    |           |  | $            | 805   |        |              | $        | (395,426 | )         |   | $       | 1,289,619    |           |   | $            | 405,319  |          |              | $        | 901,428  |              |   | $    | 1,310 |       |   | $       | (404,440 | )        |   | $       | 903,617  |          
|                                                             | Royalty revenue                                                              |                                      |         |          |                                      |  |           | 59,977       |           |  |              |      |        |              |          |         |           |   |         | 59,977       |           |   |              |         |          |              |          | 58,128   |              |   |      |      |       |   |         |         |          |   |         | 58,128   |          
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|                                                             |                                                                              | Total revenues                       |         |           | 396,709                              |  |           |              | 1,347,508 |  |              |       | 805    |              |          |          | (395,426  | ) |         |              | 1,349,596 |   |              |          | 405,319  |              |          |          | 959,556      |   |      |       | 1,310 |   |         |          | (404,440 | ) |         |          | 961,745   |  
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Operating costs and expenses:                                |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |   |      |       |       |   |         |          |          |   |         |         
|                                                             | Cost of revenues                                                             |                                      |         | 106,187   |                                      |  |           | 544,478      |           |  |              | 438   |        |              |          | (395,426 | )         |   |         | 255,677      |           |   |              | 99,102   |          |              |          | 570,997  |              |   |      | 428   |       |   |         | (404,440 | )        |   |         | 266,087  |          
|                                                             | Selling, general and administrative                                          |                                      |         | 151,341   |                                      |  |           | 315,477      |           |  |              | 1,681 |        |              |          |         |           |   |         | 468,499      |           |   |              | 132,454  |          |              |          | 238,286  |              |   |      | 1,044 |       |   |         |         |          |   |         | 371,784  |          
|                                                             | Medicaid related charges                                                     |                                      |         |          |                                      |  |           |             |           |  |              |      |        |              |          |         |           |   |         |             |           |   |              | 65,000   |          |              |          |         |              |   |      |      |       |   |         |         |          |   |         | 65,000   |          
|                                                             | Mylan transaction costs                                                      |                                      |         | 3,898     |                                      |  |           |             |           |  |              |      |        |              |          |         |           |   |         | 3,898        |           |   |              | 5,913    |          |              |          |         |              |   |      |      |       |   |         |         |          |   |         | 5,913    |          
|                                                             | Research and development                                                     |                                      |         | 466       |                                      |  |           | 52,555       |           |  |              |      |        |              |          |         |           |   |         | 53,021       |           |   |              | 375      |          |              |          | 66,550   |              |   |      |      |       |   |         |         |          |   |         | 66,925   |          
|                                                             | Depreciation and amortization                                                |                                      |         | 11,768    |                                      |  |           | 100,431      |           |  |              | 499   |        |              |          |         |           |   |         | 112,698      |           |   |              | 12,997   |          |              |          | 103,304  |              |   |      | 326   |       |   |         |         |          |   |         | 116,627  |          
|                                                             | Intangible asset impairment                                                  |                                      |         |          |                                      |  |           | 126,923      |           |  |              |      |        |              |          |         |           |   |         | 126,923      |           |   |              | 4,400    |          |              |          | 127,857  |              |   |      |      |       |   |         |         |          |   |         | 132,257  |          
|                                                             | Restructuring charges                                                        |                                      |         | 322       |                                      |  |           | 2,281        |           |  |              |      |        |              |          |         |           |   |         | 2,603        |           |   |              | 7,611    |          |              |          | 3,217    |              |   |      |      |       |   |         |         |          |   |         | 10,828   |          
|                                                             | Gain on sale of products                                                     |                                      |         |          |                                      |  |           | (1,458       | )         |  |              |      |        |              |          |         |           |   |         | (1,458       | )         |   |              | (4,022   | )        |              |          | (5,502   | )            |   |      |      |       |   |         |         |          |   |         | (9,524   | )        
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|                                                             |                                                                              | Total operating costs and expenses   |         |           | 273,982                              |  |           |              | 1,140,687 |  |              |       | 2,618  |              |          |          | (395,426  | ) |         |              | 1,021,861 |   |              |          | 323,830  |              |          |          | 1,104,709    |   |      |       | 1,798 |   |         |          | (404,440 | ) |         |          | 1,025,897 |  
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Operating income (loss)                                      |                                                                              |                                      | 122,727 |           |                                      |  | 206,821   |              |           |  | (1,813       | )     |        |              |         |          |           |   | 327,735 |              |           |   | 81,489       |          |          |              | (145,153 | )        |              |   | (488 | )     |       |   |        |          |          |   | (64,152 | )       
|Other income (expense):                                      |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |   |      |       |       |   |         |          |          |   |         |         
|                                                             | Interest income                                                              |                                      |         | 10,966    |                                      |  |           | 497          |           |  |              |      |        |              |          |         |           |   |         | 11,463       |           |   |              | 2,691    |          |              |          | 568      |              |   |      |      |       |   |         |         |          |   |         | 3,259    |          
|                                                             | Interest expense                                                             |                                      |         | (8,827    | )                                    |  |           | (49          | )         |  |              |      |        |              |          |         |           |   |         | (8,876       | )         |   |              | (9,425   | )        |              |          | (93      | )            |   |      |      |       |   |         |         |          |   |         | (9,518   | )        
|                                                             | Valuation charge  convertible notes receivable                              |                                      |         |          |                                      |  |           |             |           |  |              |      |        |              |          |         |           |   |         |             |           |   |              | (2,887   | )        |              |          |         |              |   |      |      |       |   |         |         |          |   |         | (2,887   | )        
|                                                             | Gain (loss) on investment                                                    |                                      |         | (6,182    | )                                    |  |           |             |           |  |              |      |        |              |          |         |           |   |         | (6,182       | )         |   |              | (6,520   | )        |              |          |         |              |   |      |      |       |   |         |         |          |   |         | (6,520   | )        
|                                                             | Other, net                                                                   |                                      |         | (494      | )                                    |  |           | (1,178       | )         |  |              | (375  | )      |              |          |         |           |   |         | (2,047       | )         |   |              | (709     | )        |              |          | 603      |              |   |      | (69   | )     |   |         |         |          |   |         | (175     | )        
|                                                             | Equity in earnings (loss) of subsidiaries                                    |                                      |         | 172,344   |                                      |  |           |             |           |  |              |      |        |              |          | (172,344 | )         |   |         |             |           |   |              | (184,371 | )        |              |          |         |              |   |      |      |       |   |         | 184,371  |          |   |         |         |          
|                                                             | Intercompany interest (expense) income                                       |                                      |         | (47,942   | )                                    |  |           | 48,412       |           |  |              | (470  | )      |              |          |         |           |   |         |             |           |   |              | (24,895  | )        |              |          | 24,895   |              |   |      |      |       |   |         |         |          |   |         |         |          
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|                                                             |                                                                              | Total other income (expense)         |         |           | 119,865                              |  |           |              | 47,682    |  |              |       | (845   | )            |          |          | (172,344  | ) |         |              | (5,642    | ) |              |          | (226,116 | )            |          |          | 25,973       |   |      |       | (69   | ) |         |          | 184,371  |   |         |          | (15,841   | )
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Income (loss) from continuing operations before income taxes |                                                                              |                                      | 242,592 |           |                                      |  | 254,503   |              |           |  | (2,658       | )     |        |              | (172,344 | )        |           |   | 322,093 |              |           |   | (144,627     | )        |          |              | (119,180 | )        |              |   | (557 | )     |       |   | 184,371 |          |          |   | (79,993 | )       
|Income tax expense (benefit)                                 |                                                                              |                                      | 30,183  |           |                                      |  | 82,049    |              |           |  | (930         | )     |        |              |         |          |           |   | 111,302 |              |           |   | 30,300       |          |          |              | (44,477  | )        |              |   | (195 | )     |       |   |        |          |          |   | (14,372 | )       
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Income (loss) from continuing operations                     |                                                                              |                                      | 212,409 |           |                                      |  | 172,454   |              |           |  | (1,728       | )     |        |              | (172,344 | )        |           |   | 210,791 |              |           |   | (174,927     | )        |          |              | (74,703  | )        |              |   | (362 | )     |       |   | 184,371 |          |          |   | (65,621 | )       
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|Discontinued operations:                                     |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |   |      |       |       |   |         |          |          |   |         |         
|                                                             | Income (loss) from discontinued operations, including loss on
    impairment |                                      |         |          |                                      |  |           | 2,607        |           |  |              |      |        |              |          |         |           |   |         | 2,607        |           |   |              | (139     | )        |              |          | (172,171 | )            |   |      |      |       |   |         |         |          |   |         | (172,310 | )        
|                                                             | Income tax expense (benefit)                                                 |                                      |         |          |                                      |  |           | 989          |           |  |              |      |        |              |          |         |           |   |         | 989          |           |   |              | (50      | )        |              |          | (62,865  | )            |   |      |      |       |   |         |         |          |   |         | (62,915  | )        
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|                                                             | Income (loss) from discontinued operations, net                              |                                      |         |          |                                      |  |           | 1,618        |           |  |              |      |        |              |          |         |           |   |         | 1,618        |           |   |              | (89      | )        |              |          | (109,306 | )            |   |      |      |       |   |         |         |          |   |         | (109,395 | )        
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  
|                                                             |                                                                              | Net income (loss)                    |         | $         | 212,409                              |  |           | $            | 174,072   |  |              | $     | (1,728 | )            |          | $        | (172,344  | ) |         | $            | 212,409   |   |              | $        | (175,016 | )            |          | $        | (184,009     | ) |      | $     | (362  | ) |         | $        | 184,371  |   |         | $        | (175,016  | )
|                                                             |                                                                              |                                      |         |           |                                      |  |           |              |           |  |              |       |        |              |          |          |           |   |         |              |           |   |              |          |          |              |          |          |              |  

24



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##### Table of Contents





KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


GUARANTOR SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |         |   |   |       |       |   |   |          |            |  
|-------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------ | -------- | ---------- | ------------------ | - | --------- | ------------ | - | ---- | ------------ | ----- |  | ---- | --------- | ---------- | ------------ | --------- | ------- | ------------ | ---- | - | ------------ | ------- | - | - | ----- | ----- | - | - | -------- | ---------- | -
|                                                                                 |                                                                | Nine Months Ended  |          |            | Nine Months Ended  |  
|                                                                                 |                                                                | September 30, 2005 |          |            | September 30, 2004 |  
|                                                                                 |                                                                |                    |          |            |                    |  
|                                                                                 |                                                                |                    |          | 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                    |                                                                | $                  | 122,662  |            |                    | $ | 282,310   |              |   | $    | (149         | )     |  | $    | 404,823   |            |              | $         | 58,772  |              |      | $ | 100,453      |         |   | $ | (932  | )     |   | $ | 158,293  |           
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Cash flows from investing activities of continuing operations:                   |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |         |   |   |       |       |   |   |          |           
|                                                                                 | Transfers (to) from restricted cash                            |                    |          | (75,126    | )                  |   |           | 1,582        |   |      |              |      |  |      |           | (73,544    | )            |           |         | 1,115        |      |   |              | (771    | ) |   |       |      |   |   |          | 344        |  
|                                                                                 | Investments in debt securities                                 |                    |          | (2,499,779 | )                  |   |           |             |   |      |              |      |  |      |           | (2,499,779 | )            |           |         | (1,477,077   | )    |   |              |        |   |   |       |      |   |   |          | (1,477,077 | )
|                                                                                 | Purchases of property, plant and equipment                     |                    |          | (6,941     | )                  |   |           | (25,393      | ) |      |              |      |  |      |           | (32,334    | )            |           |         | (10,032      | )    |   |              | (31,882 | ) |   |       | (2    | ) |   |          | (41,916    | )
|                                                                                 | Purchases of product rights                                    |                    |          |           |                    |   |           |             |   |      |              |      |  |      |           |           |              |           |         |             |      |   |              | (50     | ) |   |       | (950  | ) |   |          | (1,000     | )
|                                                                                 | Proceeds from debt securities                                  |                    |          | 2,091,272  |                    |   |           |             |   |      |              |      |  |      |           | 2,091,272  |              |           |         | 1,431,544    |      |   |              |        |   |   |       |      |   |   |          | 1,431,544  |  
|                                                                                 | Proceeds from the sale of products                             |                    |          |           |                    |   |           |             |   |      |              |      |  |      |           |           |              |           |         | 27,336       |      |   |              | 52      |   |   |       |      |   |   |          | 27,388     |  
|                                                                                 | Proceeds from sale of assets                                   |                    |          | 1          |                    |   |           |             |   |      |              |      |  |      |           | 1          |              |           |         | 171          |      |   |              | (56     | ) |   |       |      |   |   |          | 115        |  
|                                                                                 | Proceeds from sale of marketable securities                    |                    |          | 6,453      |                    |   |           |             |   |      |              |      |  |      |           | 6,453      |              |           |         |             |      |   |              |        |   |   |       |      |   |   |          |           |  
|                                                                                 | Acquisition of Primary Care from Elan                          |                    |          |           |                    |   |           |             |   |      |              |      |  |      |           |           |              |           |         |             |      |   |              | (36,000 | ) |   |       |      |   |   |          | (36,000    | )
|                                                                                 | Palatin collaboration                                          |                    |          | (10,000    | )                  |   |           |             |   |      |              |      |  |      |           | (10,000    | )            |           |         | (20,000      | )    |   |              |        |   |   |       |      |   |   |          | (20,000    | )
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Net cash used in investing activities of continuing operations                   |                                                                |                    | (494,120 | )          |                    |   | (23,811   | )            |   |      |             |       |  |      | (517,931  | )          |              |           | (46,943 | )            |      |   | (68,707      | )       |   |   | (952  | )     |   |   | (116,602 | )         
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Cash flows from financing activities of continuing operations:                   |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |         |   |   |       |       |   |   |          |           
|                                                                                 | Proceeds from exercise of stock options, net                   |                    |          | 682        |                    |   |           |             |   |      |              |      |  |      |           | 682        |              |           |         | 4,220        |      |   |              |        |   |   |       |      |   |   |          | 4,220      |  
|                                                                                 | Payments on other long-term debt and capital lease obligations |                    |          |           |                    |   |           |             |   |      |              |      |  |      |           |           |              |           |         | (97          | )    |   |              |        |   |   |       |      |   |   |          | (97        | )
|                                                                                 | Intercompany                                                   |                    |          | 284,575    |                    |   |           | (285,717     | ) |      |              | 1,142 |  |      |           |           |              |           |         | 28,843       |      |   |              | (30,010 | ) |   |       | 1,167 |   |   |          |           |  
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Net cash provided by (used in) financing activities of
    continuing operations |                                                                |                    | 285,257  |            |                    |   | (285,717  | )            |   |      | 1,142        |       |  |      | 682       |            |              |           | 32,966  |              |      |   | (30,010      | )       |   |   | 1,167 |       |   |   | 4,123    |           
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Net cash provided by discontinued operations                                     |                                                                |                    |         |            |                    |   |          |              |   |      |             |       |  |      |          |            |              |           | 3,206   |              |      |   | 7,545        |         |   |   |      |       |   |   | 10,751   |           
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|(Decrease) increase in cash and cash equivalents                                 |                                                                |                    | (86,201  | )          |                    |   | (27,218   | )            |   |      | 993          |       |  |      | (112,426  | )          |              |           | 48,001  |              |      |   | 9,281        |         |   |   | (717  | )     |   |   | 56,565   |           
|Cash and cash equivalents, beginning of period                                   |                                                                |                    | 164,451  |            |                    |   | 27,035    |              |   |      | 1,170        |       |  |      | 192,656   |            |              |           | 37,692  |              |      |   | 3,641        |         |   |   | 1,795 |       |   |   | 43,128   |           
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        
|Cash and cash equivalents, end of period                                         |                                                                | $                  | 78,250   |            |                    | $ | (183      | )            |   | $    | 2,163        |       |  | $    | 80,230    |            |              | $         | 85,693  |              |      | $ | 12,922       |         |   | $ | 1,078 |       |   | $ | 99,693   |           
|                                                                                 |                                                                |                    |          |            |                    |   |           |              |   |      |              |       |  |      |           |            |              |           |         |              |      |   |              |        

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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, 2004, which
are supplemented by the discussion which follows; (b) our
audited consolidated financial statements which are included in
our Annual Report on Form 10-K for the year ended
December 31, 2004; and (c) our unaudited consolidated
financial statements and related notes which are included in
this report on Form 10-Q. Please see the sections entitled
Risk Factors and A Warning About
Forward-Looking Statements for a discussion of the
uncertainties, risks and assumptions associated with these
statements.




|   |         
|-- | --------
|I. | OVERVIEW



| |             
| | ------------
| | Introduction





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



|                                 |       |                    |         |         |                   |   |         |         |  |   |           |           |  |   |         |         | 
|-------------------------------- | ----- | ------------------ | ------- | ------- | ----------------- | - | ------- | ------- |  | - | --------- | --------- |  | - | ------- | ------- | 
|                                 |       | For the            |         |         | For the           |  
|                                 |       | Three Months Ended |         |         | Nine Months Ended |  
|                                 |       | September 30,      |         |         | September 30,     |  
|                                 |       |                    |         |         |                   |  
|                                 |       | 2005               |         |         | 2004              |   |         | 2005    |  |   | 2004      |          
|                                 |       |                    |         |         |                   |   |         |         |  |   |           |          
|Branded pharmaceuticals          |       | $                  | 454,548 |         |                   | $ | 334,839 |         |  | $ | 1,176,627 |           |  | $ | 788,912 |        
|Meridian Medical Technologies    |       |                    | 38,366  |         |                   |   | 33,934  |         |  |   | 96,998    |           |  |   | 96,115  |        
|Royalties                        |       |                    | 22,344  |         |                   |   | 20,252  |         |  |   | 59,977    |           |  |   | 58,128  |        
|Contract manufacturing and other |       |                    | 2,774   |         |                   |   | 5,659   |         |  |   | 15,994    |           |  |   | 18,590  |        
|                                 |       |                    |         |         |                   |   |         |         |  |   |           |          
|                                 | Total |                    | $       | 518,032 |                   |   | $       | 394,684 |  |   | $         | 1,349,596 |  |   | $       | 961,745 | 
|                                 |       |                    |         |         |                   |   |         |         |  |   |           |          



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



| |                                               
| | ----------------------------------------------
| | Three Months Ended September 30, 2005 and 2004



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





26



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















27



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $4.4 million charge in 2005 and a $3.5 million
    charge in 2004 primarily due to professional fees related to the
    now completed investigation of our company by the Office of
    Inspector General of the Department of Health and Human
    Services, which we refer to as the HHS/ OIG, and the
    partially completed investigation by the U.S. Securities
    and Exchange Commission, which we refer to as the
    SEC. For additional information, please see
    Settlement of Governmental Pricing Investigation and
    SEC Investigation in Liquidity and Capital
    Resources section of this report.
|
| |  | Special charges of $0.5 million in 2005 and
    $2.8 million in 2004 for professional fees and expenses
    related to our terminated merger agreement with Mylan
    Laboratories Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                              











| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A restructuring charge in the amount of $0.6 million and
    $4.7 million during 2005 and 2004, respectively, primarily
    associated with our decision to discontinue some relatively
    insignificant products associated with our Meridian Medical
    Technologies business; and
|
| |  | An intangible asset impairment charge totaling
    $97.3 million during 2004 primarily due to our decision to
    discontinue the Sonata® MR development program;                                                                                                                      
|
| |  | Income in the amount of $5.2 million in 2004 primarily
    related to a gain on the sale of all of our rights to
    Estrasorbtm
    and all convertible notes of Novavax, Inc. that we previously
    held.                                                                           



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



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









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





| |                                         
| | ----------------------------------------
| | Income (loss) from Continuing Operations





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







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





| |                                              
| | ---------------------------------------------
| | Nine Months Ended September 30, 2005 and 2004



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





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









| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Income of $1.6 million in 2005 and a charge of
    $8.9 million in 2004 related to changes in estimates
    regarding the effect of some excess purchase commitments.
|
| |  | A $4.6 million charge in 2004 primarily related to the
    voluntary recall of some lots of Levoxyl®.                                                                









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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $13.3 million and $14.2 million during 2005
    and 2004, 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 and SEC
    Investigation in Liquidity and Capital
    Resources section of this report.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Charges in the amount of $3.9 million and $5.9 million
    in 2005 and 2004, respectively, for professional fees and
    expenses related to the terminated merger agreement with Mylan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | We accrued $65.0 million for a Medicaid related charge in
    the first half of 2004 to cover estimated interest, costs,
    fines, penalties and all other settlement costs in addition to
    the $65.4 million that we previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    We believe that this accrual totaling $130.4 million is
    adequate and sufficient to cover the full cost of all sums owed
    the federal and state governments pursuant to the settlement
    agreements, together with related obligations to reimburse the
    expenses of some of the parties. For additional information,
    please see Settlement of Governmental Pricing
    Investigation in the Liquidity and Capital
    Resources section of this report.











| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Income in the amount of $1.5 million and $9.5 million
    in 2005 and 2004, respectively, due to gains on the sale of some
    of our assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | An intangible asset impairment charge of $126.9 million in
    2005 related to Sonata®. As previously disclosed, a new
    competitor to Sonata® entered the market in April 2005. In
    the second quarter of 2005, prescriptions for Sonata® did
    not meet our expectations. As a result, we lowered our future
    sales forecast which decreased the estimated undiscounted future
    cash flows associated with these assets to a level below the
    carrying value. This special item was recorded in order to
    adjust the carrying value of the Sonata® intangible assets
    on our balance sheet so as to reflect the estimated fair value
    of such assets. We also had an intangible asset impairment
    charge totaling $132.3 million in 2004 that was primarily
    related to our decision to discontinue the Sonata® MR
    development program and a greater than expected decline in
    prescriptions for Florinef® and Tapazole® due to the

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | availability of generics for these products. This special item
    was recorded to adjust the carrying value of the intangible
    assets on our balance sheet associated with these products so as
    to reflect the estimated fair value of such assets. We
    determined the fair value of the intangible assets associated
    with Sonata®, Florinef® and Tapazole® based on
    our estimated discounted future cash flows for these products.                                                               
|
| |  | Restructuring charges in the amount of $2.6 million and
    $10.8 million in 2005 and 2004, respectively. The charge in
    2005 is primarily due to our decision to discontinue some
    relatively insignificant products associated with our Meridian
    Medical Technologies business. The restructuring charge in 2004
    is primarily due to separation agreements with several
    executives and the relocation of our sales and marketing
    operations from Bristol, Tennessee to Princeton, New Jersey.



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





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









| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges of $6.2 million and $6.5 million in 2005 and
    2004, respectively, related to our investment in Novavax. During
    2005 and 2004, we incurred charges to write down our investment
    in Novavax to fair value. During the third quarter of 2005, we
    sold our investment in Novavax.
|
| |  | A charge of $2.9 million during 2004 to reflect an increase
    in the valuation allowance for the convertible notes receivable
    from Novavax. Novavax repurchased the convertible notes from us
    in July 2004.                                                                               



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





| |                                         
| | ----------------------------------------
| | Income (loss) from Continuing Operations





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



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



Liquidity and Capital Resources




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













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



33



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34



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





| |                                
| | -------------------------------
| | Securities and ERISA Litigation





35



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

Approved Drug Products with Therapeutic
Equivalence Evaluations,


36



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



37



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| |                                     
| | ------------------------------------
| | Nine Months Ended September 30, 2005





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

3 4








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



39



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







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













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

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| |  |                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | protection, as we are amortizing both the patent and the
    trademark and product rights, and less amortization after the
    product has the potential for generic competition, as the
    amortization on the patent is eliminated. As the pattern of
    economic benefit cannot be reliably determined, we use the
    straight-line method of amortization for our intangibles.







|                              |                                    |                |               |             |              |           |          |         |        |         |         |         |         |         | 
|----------------------------- | ---------------------------------- | -------------- | ------------- | ----------- | ------------ | --------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | 
|                              |                                    |                |               | Accumulated |              |           | Net Book |        
|                              |                                    | Cost           |               |             | Amortization |           |          | Value   |       
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | (In thousands) |              
|Branded                       |                                    |                |               |             |              |           |          |         |        |         |         |        
|                              | Altace                             |                | $             | 276,150     |              |           | $        | 66,536  |        |         | $       | 209,614 |        
|                              | Other Cardiovascular               |                |               | 94,045      |              |           |          | 21,174  |        |         |         | 72,871  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Cardiovascular |               |             | 370,195      |           |          |         | 87,710 |         |         |         | 282,485 |        
|                              |                                    | Anti-infective |               |             | 221,593      |           |          |         | 59,223 |         |         |         | 162,370 |        
|                              |                                    | Critical care  |               |             | 17,644       |           |          |         | 7,945  |         |         |         | 9,699   |        
|                              |                                    | Endocrinology  |               |             | 28,841       |           |          |         | 13,844 |         |         |         | 14,997  |        
|                              | Skelaxin                           |                |               | 203,015     |              |           |          | 28,744  |        |         |         | 174,271 |        
|                              | Sonata                             |                |               | 54,199      |              |           |          | 21,580  |        |         |         | 32,619  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Neuroscience   |               |             | 257,214      |           |          |         | 50,324 |         |         |         | 206,890 |        
|                              | Intal                              |                |               | 106,192     |              |           |          | 12,961  |        |         |         | 93,231  |        
|                              | Other Respiratory                  |                |               | 12,396      |              |           |          | 3,446   |        |         |         | 8,950   |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    | Respiratory    |               |             | 118,588      |           |          |         | 16,407 |         |         |         | 102,181 |        
|                              |                                    | Other          |               |             | 81,027       |           |          |         | 24,322 |         |         |         | 56,705  |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              |                                    |                | Total Branded |             |              | 1,095,102 |          |         |        | 259,775 |         |         |         | 835,327 | 
|Meridian Medical Technologies |                                    |                | 146,217       |             |              |           | 15,909   |         |        |         | 130,308 |        
|Royalties                     |                                    |                | 2,469         |             |              |           | 2,072    |         |        |         | 397     |        
|Contract manufacturing        |                                    |                |              |             |              |           |         |         |        |         |        |        
|All other                     |                                    |                |              |             |              |           |         |         |        |         |        |        
|                              |                                    |                |               |             |              |           |          |         |       
|                              | Total trademark and product rights |                | $             | 1,243,788   |              |           | $        | 277,756 |        |         | $       | 966,032 |        
|                              |                                    |                |               |             |              |           |          |         |       

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|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |       |        |        |        |       |        |       |        | 
|----------------------------- | ---------------------------------- | ------------------ | ------------- | ------------ | - | - | ------------------ | ------ | ----- | ----------- |  | ------------ | ------- |  | ----- | ------ | ------ | ------ | ----- | ------ | ----- | ------ | 
|                              |                                    | Three Months Ended |               |              |   |   | Three Months Ended |       
|                              |                                    | September 30, 2005 |               |              |   |   | September 30, 2004 |       
|                              |                                    |                    |               |              |   |   |                    |       
|                              |                                    |                    |               | Amortization |   |   | Life               |        |       |             |  | Amortization |        
|                              |                                    | Impairments        |               | Expense      |   |   | (Years)            |        |       | Impairments |  |              | Expense | 
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         | 
|                              |                                    | (In thousands)     |               |              |   |   | (In thousands)     |       
|Branded                       |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |       |        |        |        |       |       
|                              | Altace                             |                    | $             |             |   |   | $                  | 3,225  |       |             |  | 23           |         |  | $     |       |        |        | $     | 2,303  |      
|                              | Other Cardiovascular               |                    |               |             |   |   |                    | 1,667  |       |             |  |              |         |  |       | 3,618  |        |        |       | 1,178  |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      
|                              |                                    | Cardiovascular     |               |              |  |   |                    |        | 4,892 |             |  |              |         |  |       |        | 3,618  |        |       |        | 3,481 |       
|                              |                                    | Anti-infective     |               |              |  |   |                    |        | 2,633 |             |  |              |         |  |       |        | 11,042 |        |       |        | 2,639 |       
|                              |                                    | Critical care      |               |              |  |   |                    |        | 263   |             |  |              |         |  |       |        | 1,080  |        |       |        | 166   |       
|                              |                                    | Endocrinology      |               |              |  |   |                    |        | 238   |             |  |              |         |  |       |        | 1,807  |        |       |        | 287   |       
|                              | Skelaxin                           |                    |               |             |   |   |                    | 3,887  |       |             |  | 13.5         |         |  |       |       |        |        |       | 2,550  |      
|                              | Sonata                             |                    |               |             |   |   |                    | 1,565  |       |             |  | 7.5          |         |  |       | 64,717 |        |        |       | 3,375  |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      
|                              |                                    | Neuroscience       |               |              |  |   |                    |        | 5,452 |             |  |              |         |  |       |        | 64,717 |        |       |        | 5,925 |       
|                              | Intal                              |                    |               |             |   |   |                    | 1,391  |       |             |  | 20           |         |  |       |       |        |        |       | 1,065  |      
|                              | Other respiratory                  |                    |               |             |   |   |                    | 135    |       |             |  |              |         |  |       | 150    |        |        |       | 143    |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      
|                              |                                    | Respiratory        |               |              |  |   |                    |        | 1,526 |             |  |              |         |  |       |        | 150    |        |       |        | 1,208 |       
|                              |                                    | Other              |               |              |  |   |                    |        | 1,131 |             |  |              |         |  |       |        | 10,574 |        |       |        | 968   |       
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      
|                              |                                    |                    | Total Branded |              |   |  |                    |        |       | 16,135      |  |              |         |  |       |        |        | 92,988 |       |        |       | 14,674 | 
|Meridian Medical Technologies |                                    |                    |              |              |   |   | 1,291              |        |       |             |  |              |         |  | 3,120 |        |        |        | 1,531 |       
|Royalties                     |                                    |                    |              |              |   |   | 11                 |        |       |             |  |              |         |  |      |        |        |        | 10    |       
|Contract manufacturing        |                                    |                    |              |              |   |   |                   |        |       |             |  |              |         |  |      |        |        |        |      |       
|All other                     |                                    |                    |              |              |   |   |                   |        |       |             |  |              |         |  |      |        |        |        |      |       
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      
|                              | Total trademark and product rights |                    | $             |             |   |   | $                  | 17,437 |       |             |  |              |         |  | $     | 96,108 |        |        | $     | 16,215 |      
|                              |                                    |                    |               |              |   |   |                    |        |       |             |  |              |         |  |      

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|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |       |         |        |         |       |        |        |        | 
|----------------------------- | ---------------------------------- | ------------------ | ------------- | ------------ | ------- | ------- | ------------------ | ------- | ------ | ------ | ----------- | ------------ |  | ------- | ----- | ------- | ------ | ------- | ----- | ------ | ------ | ------ | 
|                              |                                    | Nine Months Ended  |               |              |         |         | Nine Months Ended  |        
|                              |                                    | September 30, 2005 |               |              |         |         | September 30, 2004 |        
|                              |                                    |                    |               |              |         |         |                    |        
|                              |                                    |                    |               | Amortization |         |         | Life               |         |        |        |             | Amortization | 
|                              |                                    | Impairments        |               |              | Expense |         |                    | (Years) |        |        | Impairments |              |  | Expense |      
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              |                                    | (In thousands)     |               |              |         |         | (In thousands)     |        
|Branded                       |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |       |         |        |         |       |       
|                              | Altace                             |                    | $             |             |         |         | $                  | 9,675   |        |        |             | 23           |  |         | $     |        |        |         | $     | 6,909  |       
|                              | Other Cardiovascular               |                    |               |             |         |         |                    | 4,972   |        |        |             |              |  |         |       | 3,618   |        |         |       | 3,534  |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              |                                    | Cardiovascular     |               |              |        |         |                    |         | 14,647 |        |             |              |  |         |       |         | 3,618  |         |       |        | 10,443 |       
|                              |                                    | Anti-infective     |               |              |        |         |                    |         | 7,900  |        |             |              |  |         |       |         | 11,042 |         |       |        | 7,902  |       
|                              |                                    | Critical care      |               |              |        |         |                    |         | 790    |        |             |              |  |         |       |         | 1,080  |         |       |        | 497    |       
|                              |                                    | Endocrinology      |               |              |        |         |                    |         | 714    |        |             |              |  |         |       |         | 16,169 |         |       |        | 1,229  |       
|                              | Skelaxin                           |                    |               |             |         |         |                    | 11,661  |        |        |             | 13.5         |  |         |       |        |        |         |       | 7,650  |       
|                              | Sonata                             |                    |               | 126,923      |         |         |                    | 7,551   |        |        |             | 7.5          |  |         |       | 64,717  |        |         |       | 10,125 |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              |                                    | Neuroscience       |               |              | 126,923 |         |                    |         | 19,212 |        |             |              |  |         |       |         | 64,717 |         |       |        | 17,775 |       
|                              | Intal                              |                    |               |             |         |         |                    | 4,144   |        |        |             | 20           |  |         |       |        |        |         |       | 3,194  |       
|                              | Other respiratory                  |                    |               |             |         |         |                    | 402     |        |        |             |              |  |         |       | 150     |        |         |       | 430    |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              |                                    | Respiratory        |               |              |        |         |                    |         | 4,546  |        |             |              |  |         |       |         | 150    |         |       |        | 3,624  |       
|                              |                                    | Other              |               |              |        |         |                    |         | 3,450  |        |             |              |  |         |       |         | 30,814 |         |       |        | 3,628  |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              |                                    |                    | Total Branded |              |         | 126,923 |                    |         |        | 51,259 |             |              |  |         |       |         |        | 127,590 |       |        |        | 45,098 | 
|Meridian Medical Technologies |                                    |                    |              |              |         |         | 3,873              |         |        |        |             |              |  |         | 3,120 |         |        |         | 4,593 |       
|Royalties                     |                                    |                    |              |              |         |         | 32                 |         |        |        |             |              |  |         |      |         |        |         | 31    |       
|Contract manufacturing        |                                    |                    |              |              |         |         |                   |         |        |        |             |              |  |         |      |         |        |         |      |       
|All other                     |                                    |                    |              |              |         |         |                   |         |        |        |             |              |  |         |      |         |        |         |      |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      
|                              | Total trademark and product rights |                    | $             | 126,923      |         |         | $                  | 55,164  |        |        |             |              |  |         | $     | 130,710 |        |         | $     | 49,722 |       
|                              |                                    |                    |               |              |         |         |                    |         |        |        |             |              |  |         |      



|         |  |                                      |                  |             |                |  |                   | 
|-------- |  | ------------------------------------ | ---------------- | ----------- | -------------- |  | ----------------- | 
|         |  | Remaining Life at September 30, 2005 |                 
|         |  |                                      |                 
|         |  |                                      |                  | Trademark & |               
|         |  | Patent                               |                  |             | Product Rights | 
|         |  |                                      |                  |             |                | 
|Altace   |  |                                      | 3 years 7 months |             |                |  | 16 years 3 months | 
|Skelaxin |  |                                      |                 |             |                |  | 11 years 3 months | 
|Sonata   |  |                                      | 2 years 9 months |             |                |  | 5 years 3 months  | 
|Intal    |  |                                      |                 |             |                |  | 17 years 2 months | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories. Our inventories are valued at the lower of
    cost or market value. We evaluate all of our inventory for short
    dated or slow moving product and inventory commitments under
    supply agreements based on projections of future demand and
    market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we
    provide a provision to reflect the lower value of that
    inventory. This methodology recognizes projected inventory
    losses at the time such losses are evident rather than at the
    time goods are actually sold. We maintain supply agreements with
    some of our vendors which contain minimum purchase requirements.
    We estimate future inventory requirements based on current facts
    and trends. Should our minimum purchase requirements under
    supply agreements or our estimated

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | future inventory requirements exceed actual inventory quantities
    which we will be able to sell to our customers, we record a
    charge in costs of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Accruals for rebates, returns, and chargebacks. We
    establish accruals for returns, chargebacks and commercial and
    Medicaid rebates in the same period we recognize the related
    sales. The accruals reduce revenues and are included in accrued
    expenses. At the time a rebate or chargeback payment is made or
    a product return is received, which occurs with a delay after
    the related sale, we record a reduction to accrued expenses and,
    at the end of each quarter, adjust accrued expenses for
    differences between estimated and actual payments. Due to
    estimates and assumptions inherent in determining the amount of
    returns, chargebacks and rebates, the actual amount of product
    returns and claims for chargebacks and rebates may be different
    from our estimates.



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



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

|                                                |                                                           |      |         |         |      |   |         |         |  
|----------------------------------------------- | --------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | -
|                                                |                                                           | 2005 |         |         | 2004 |  
|                                                |                                                           |      |         |         |      |  
|Balance at January 1, net of prepaid amounts    |                                                           | $    | 172,161 |         |      | $ | 213,893 |        
|                                                | Current provision related to sales made in current period |      |         | 55,456  |      |   |         | 72,717  |  
|                                                | Current provision related to sales made in prior periods  |      |         | (9,202  | )    |   |         | (1,397  | )
|                                                | Actual rebates                                            |      |         | (77,083 | )    |   |         | (74,701 | )
|                                                |                                                           |      |         |         |      |  
|Balance at March 31, net of prepaid amounts     |                                                           | $    | 141,332 |         |      | $ | 210,512 |        
|                                                |                                                           |      |         |         |      |  
|                                                | Current provision related to sales made in current period |      |         | 81,154  |      |   |         | 75,754  |  
|                                                | Current provision related to sales made in prior periods  |      |         | 1,087   |      |   |         | 9,173   |  
|                                                | Actual rebates                                            |      |         | (75,617 | )    |   |         | (82,826 | )
|                                                |                                                           |      |         |         |      |  
|Balance at June 30, net of prepaid amounts      |                                                           | $    | 147,956 |         |      | $ | 212,613 |        
|                                                |                                                           |      |         |         |      |  
|                                                | Current provision related to sales made in current period |      |         | 83,074  |      |   |         | 73,104  |  
|                                                | Current provision related to sales made in prior periods  |      |         | (24,302 | )    |   |         | 6,093   |  
|                                                | Actual rebates                                            |      |         | (69,196 | )    |   |         | (95,884 | )
|                                                |                                                           |      |         |         |      |  
|Balance at September 30, net of prepaid amounts |                                                           | $    | 137,532 |         |      | $ | 195,926 |        
|                                                |                                                           |      |         |         |      |  

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

|                        |                   |      |         |         |      |   |         |         |  
|----------------------- | ----------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | -
|                        |                   | 2005 |         |         | 2004 |  
|                        |                   |      |         |         |      |  
|Balance at January 1    |                   | $    | 122,863 |         |      | $ | 82,477  |        
|                        | Current provision |      |         | (4,438  | )    |   |         | 36,797  |  
|                        | Actual returns    |      |         | (45,394 | )    |   |         | (30,636 | )
|                        |                   |      |         |         |      |  
|Balance at March 31     |                   | $    | 73,031  |         |      | $ | 88,638  |        
|                        |                   |      |         |         |      |  
|                        | Current provision |      |         | 10,167  |      |   |         | 49,164  |  
|                        | Actual returns    |      |         | (15,009 | )    |   |         | (37,955 | )
|                        |                   |      |         |         |      |  
|Balance at June 30      |                   | $    | 68,189  |         |      | $ | 99,847  |        
|                        |                   |      |         |         |      |  
|                        | Current provision |      |         | (2,971  | )    |   |         | 54,298  |  
|                        | Actual returns    |      |         | (10,335 | )    |   |         | (50,327 | )
|                        |                   |      |         |         |      |  
|Balance at September 30 |                   | $    | 54,883  |         |      | $ | 103,818 |        
|                        |                   |      |         |         |      |  



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

|                        |                    |      |        |         |      |   |        |         |  
|----------------------- | ------------------ | ---- | ------ | ------- | ---- | - | ------ | ------- | -
|                        |                    | 2005 |        |         | 2004 |  
|                        |                    |      |        |         |      |  
|Balance January 1       |                    | $    | 27,953 |         |      | $ | 25,349 |        
|                        | Current provision  |      |        | 33,298  |      |   |        | 27,606  |  
|                        | Actual chargebacks |      |        | (36,788 | )    |   |        | (29,169 | )
|                        |                    |      |        |         |      |  
|Balance at March 31     |                    | $    | 24,463 |         |      | $ | 23,786 |        
|                        |                    |      |        |         |      |  
|                        | Current provision  |      |        | 21,179  |      |   |        | 44,155  |  
|                        | Actual chargebacks |      |        | (31,741 | )    |   |        | (35,319 | )
|                        |                    |      |        |         |      |  
|Balance at June 30      |                    | $    | 13,901 |         |      | $ | 32,622 |        
|                        |                    |      |        |         |      |  
|                        | Current provision  |      | $      | 31,291  |      |   | $      | 18,572  |  
|                        | Actual chargebacks |      |        | (30,518 | )    |   |        | (26,147 | )
|                        |                    |      |        |         |      |  
|Balance at September 30 |                    | $    | 14,674 |         |      | $ | 25,047 |        
|                        |                    |      |        |         |      |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based on data received from our inventory management agreements
    with our three key wholesale customers, during the first quarter
    of 2005 there was a significant reduction of wholesale inventory
    levels of our products. While our calculation for returns
    reserves is based on historical sales and return rates over the
    period which customers have a right of return, we also consider
    the amount of wholesale inventory levels. The significant
    reduction in wholesale inventories of our products during the
    first quarter of 2005 resulted in a decrease of approximately
    $25.0 million in our reserve for returns and a
    corresponding increase in net sales from branded
    pharmaceuticals. In the second quarter of 2005, an additional
    reduction in wholesale inventories resulted in a decrease of
    approximately $5.0 million in our reserve for returns and a
    corresponding increase in net sales from branded
    pharmaceuticals. The 2005 current provision amounts
    in the table Accrual for Returns, above, have
    therefore been reduced by these amounts.                                                                                                                                                                           
|
| | During the third quarter of 2005, our actual returns of branded
    pharmaceutical products continued to decrease significantly on a
    quarterly basis compared to actual returns during the quarterly
    periods in 2004 and the first quarter of 2005. Additionally,
    based on data received pursuant to our inventory management
    agreements with our key wholesale customers, we continued to
    experience normalized wholesale inventory levels of our branded
    pharmaceutical products during the third quarter of 2005.
    Accordingly, we believe that the rate of returns experienced
    during the second and third quarters of 2005 is more indicative
    of what we should expect in future quarters and have adjusted
    our returns reserve accordingly. This change in estimate
    resulted in a decrease of approximately $15.0 million in
    the returns reserve in the third quarter and a corresponding
    increase in net sales from branded pharmaceutical products. The
    2005 current provision amount in the Accrual
    for Returns above, has therefore been reduced by this
    amount. As a result of this increase in net sales, the
    co-promotion expense related to net sales of Altace® in the
    third quarter increased by approximately $5.0 million.

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| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The effect of the change in estimate on third quarter operating
    income was, therefore, approximately $10.0 million.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of our previously disclosed determination that we
    underpaid amounts due to Medicaid and other government pricing
    programs from 1998 through 2002, as further discussed in
    Note 8 to Item 1 Financial Statements, we developed a
    refined calculation to compute the Average Manufacturers
    Price (AMP) and Best Price in compliance with
    federal laws and regulations. During the third quarter of 2005,
    we began reporting to the Centers for Medicare and Medicaid
    Services using our refined calculation for computing AMP and
    Best Price. In addition, during the third quarter of 2005, we
    recalculated rebates due with respect to prior quarters
    utilizing the refined AMP and Best Price calculations. As a
    result of this updated information, during the third quarter of
    2005, we decreased our reserve for estimated Medicaid and other
    government pricing program obligations and increased net sales
    from branded pharmaceutical products by approximately
    $21.0 million, approximately $13.0 million of which
    related to the first and second quarters of 2005 and the balance
    of which related to prior periods. As a result of this increase
    in net sales, the co-promotion expense related to net sales of
    Altace® increased by approximately $6.0 million,
    approximately $2.0 million of which related to the first
    and second quarters of 2005 and the balance of which related to
    prior periods. The effect of the change in estimate on operating
    income was, therefore, approximately $15.0 million,
    approximately $11.0 million of which related to the first
    and second quarters of 2005 and the balance of which related to
    prior periods.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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,
2004, including our audited consolidated financial statements
and related notes. The risks described below are not the only
ones facing our company. Additional risks not presently known to
us or that we currently deem immaterial may also impair our
business operations. If any of the adverse events described in
this Risk Factors section or other sections of this
report or our annual report on Form 10-K for the year ended
December 31, 2004 actually occurs, our business, results of
operations and financial condition could be materially adversely
affected, the trading price, if any, of our securities could
decline and you might lose all or part of your investment.


Risks Related to our Business




| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The securities and derivative litigation, the continuing
    SEC investigation, or an adverse court decision with respect to
    the federal and state settlement agreements could have a
    material adverse effect on our business.









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



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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.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management concluded that we did not have a sufficient
    number of finance and accounting resources performing
    supervisory review and monitoring activities as of year-end 2004
    and, accordingly, that we did not maintain effective controls
    over that period-end financial reporting process. We cannot
    assure you that we will be able to remediate this material
    weakness and conclude that our internal control over financial
    reporting is effective as of the end of 2005 or that the
    material weakness will not result in material misstatements of
    our financial statements.









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



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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 and we may not be able to
    maintain existing levels of coverage, which could make it
    difficult to attract or retain qualified directors and
    officers.





| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are required annually, or on an interim basis as
    needed, to review the carrying value of our intangible assets
    and goodwill for impairment. If events such as generic
    competition or inability to manufacture or obtain sufficient
    supply of product occur that cause the sales of our products to
    decline, the intangible asset value of any declining product
    could become impaired.





| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot implement our strategy to grow our business
    through increased sales, acquisitions, development and
    in-licensing, our business or competitive position in the
    pharmaceutical industry may suffer.







| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of binodenoson, a myocardial
    pharmacologic stress imaging agent;                                                       
|
| |  | engaged in the development of PT-141, an investigational new
    drug for the treatment of erectile dysfunction and female sexual
    dysfunction;    
|
| |  | engaged in the development of T-62, an investigational drug for
    the treatment of neuropathic pain;                                                
|
| |  | engaged in the development of MRE0094, an investigational drug
    for the topical treatment of chronic diabetic foot ulcers;                         
|
| |  | engaged in the development of a new inhaler for Intal®
    using the alternative propellant HFA for which the FDA has
    issued an approvable letter;

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| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | engaged in the development of an Altace®/diuretic
    combination product; and
|
| |  | engaged in the development of a diazepam-filled auto-injector.                





| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products;
|
| |  | successfully develop, license or successfully commercialize new
    products on a timely basis or at all;                         
|
| |  | develop or license new products already in development in a cost
    effective manner; or                                         
|
| |  | obtain any FDA approvals necessary to successfully implement the
    strategies described above.                                  







| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | develop or license their products more rapidly than we can,                          
|
| |  | complete any applicable regulatory approval process sooner than
    we can,          
|
| |  | market or license their products before we can market or license
    our products, or
|
| |  | offer their newly developed or licensed products at prices lower
    than our prices,





| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | If we cannot integrate the business of companies or
    products we acquire, our business may suffer.



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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.



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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, 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;

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





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Wholesaler and distributor buying patterns and other
    factors may cause our quarterly results to fluctuate, and these
    fluctuations may adversely affect our profitability.





| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The insolvency of any of our principal customers,
    wholesale pharmaceutical distributors, could have a material
    adverse effect on our business, financial condition, results of
    operations and cash flows.



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| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our wholly owned subsidiary, King Research and
    Development, successor to Jones Pharma Incorporated, is a
    defendant in litigation which is currently being handled by its
    insurance carriers. Should this coverage be inadequate or
    subsequently denied or were we to lose some of these lawsuits,
    our results of operations could be adversely affected.





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





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

3 4




| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A failure by Dey, L.P. to successfully market the
    EpiPen® auto-injector or an increase in
    competition could have a material adverse effect on our results
    of operations.





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



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| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with our reporting and payment
    obligations under the Medicaid rebate program or other
    governmental pricing programs, we could be subject to additional
    reimbursements, penalties, sanctions and fines which could have
    a material adverse effect on our business.







| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | If our operations were disrupted by a natural disaster or
    other catastrophic event, our business could be harmed.







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



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| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 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®.                                                                                                                                                           







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



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| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | 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 investors purchasing shares.





| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our results of operations;                                                                                               
|
| |  | perceived risks and uncertainties concerning our business;                                                                             
|
| |  | announcements of earnings;                                                                                                             
|
| |  | developments in the governmental investigations or securities
    litigation;                                                          
|
| |  | the commencement of, or adverse developments in, any material
    litigation;                                                          
|
| |  | failure to meet or exceed our own projections for revenue,
    product sales and earnings per share;                                   
|
| |  | failure to meet timelines for product development or other
    projections or forward-looking statements we may make to the
    public;
|
| |  | failure to meet or exceed security analysts financial
    projections for our company;                                                
|
| |  | comments or recommendations made by securities analysts;                                                                               
|
| |  | general market conditions;                                                                                                             
|
| |  | perceptions about market conditions in the pharmaceutical
    industry;                                                                
|
| |  | announcements of technological innovations or the results of
    clinical trials or studies;                                           
|
| |  | 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.                                                      



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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.







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





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




| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will be able to continue to acquire or license commercially
    attractive pharmaceutical products, companies or technologies;                                                                                                  
|
| |  | additional competitors will not enter the market; or                                                                                                                                                                               
|
| |  | competition for acquisition of products in development,
    currently marketed products, companies and technologies will not
    have a material adverse effect on our business, financial
    condition and results of operations.

Product Competition.














| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | detailing and sampling to the primary prescribing physician
    groups, and        
|
| |  | sponsoring physician symposia, including continuing medical
    education seminars.



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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 adequacy of our liquidity and capital resources;                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | anticipated capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the development and approval of binodenoson, our next generation
    cardiac pharmacologic stress-imaging agent; PT-141, an
    investigational new drug for the treatment of erectile
    dysfunction and female sexual dysfunction; T-62, an
    investigational drug for the treatment of neuropathic pain;
    MRE0094, an investigational drug for the topical treatment of
    chronic diabetic foot ulcers; pre- clinical programs; and
    product life-cycle development projects;
|
| |  | the development and approval of a diazepam-filled auto-injector,
    new inhaler for Intal® and Tilade® using the
    alternative propellant HFA, and an Altace®/diuretic
    combination product;                                                                                                                                                                                                                                                                                         
|
| |  | our successful execution of our growth strategies;                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | anticipated developments and expansions of our business;                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | our plans for the manufacture of some of our products, including
    but not limited to, the anticipated expansion of our
    manufacturing capacity for Thrombin-JMI®;                                                                                                                                                                                                                                                                                                                    
|
| |  | anticipated increases in sales of acquired products or royalty
    revenues;                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | the success of our Co-Promotion Agreement with Wyeth;                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | the high cost and uncertainty of research, clinical trials and
    other development activities involving pharmaceutical products;                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the development of product line extensions;                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the unpredictability of the duration or future findings and
    determinations of the FDA, including the pending applications
    related to our diazepam-filled auto-injector and a new
    Intal® inhaler formulation utilizing HFA, and other
    regulatory agencies worldwide;                                                    
|
| |  | the products which we expect to offer;                                                                                                                                                                                                                                                                                                 
|
| |  | the intent, belief or current expectations, primarily with
    respect to our future operating performance;                                                                                                                                                                                                                            
|
| |  | expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;                                                                                                                                                                                                  
|
| |  | expectations regarding the outcome of various pending legal
    proceedings including the Altace® and Skelaxin® patent
    challenges, the SEC and Office of Inspector General
    investigations, other possible governmental investigations,
    securities litigation, and other legal proceedings described in
    this report; and
|
| |  | expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.                                                                                                                                                                                                                            








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














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

Internal Control Over Financial Reporting




Internal Control 
Integrated Framework,


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Remediation of Material Weakness




Changes in Internal Control Over Financial Reporting




Evaluation of Disclosure Controls and Procedures










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PART II  OTHER INFORMATION







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








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

Exhibits


| |    |       |  |   |  |                                                                                                                                                                            
| | -- | ----- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1(1) |  |  |  | Second Amended and Restated Charter of King Pharmaceuticals, Inc.                                                                                                          
| | 3  | .2(1) |  |  |  | Amended and Restated Bylaws of King Pharmaceuticals, Inc.                                                                                                                  
| | 4  | .1(1) |  |  |  | Specimen Common Stock Certificate.                                                                                                                                         
| | 4  | .2(1) |  |  |  | Form of Rights Agreement by and between King Pharmaceuticals,
    Inc. and The Bank of New York (successor in interest to Union
    Planters National Bank).               
| | 10 | .1    |  |  |  | Form of Restricted Stock Certificate and Restricted Stock Grant
    Agreement.                                                                                             
| | 10 | .2    |  |  |  | Form of Option Certificate and Nonstatutory Stock Option
    Agreement.                                                                                                    
| | 31 | .1    |  |  |  | Certification of Brian A. Markison, President and Chief
    Executive Officer of King Pharmaceuticals, Inc., pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.
| | 31 | .2    |  |  |  | Certification of Joseph Squicciarino, Chief Financial Officer of
    King Pharmaceuticals, Inc., pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.            
| | 32 | .1    |  |  |  | Certification of Brian A. Markison, President and Chief
    Executive Officer of King Pharmaceuticals, Inc., pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
| | 32 | .2    |  |  |  | Certification of Joseph Squicciarino, Chief Financial Officer of
    King Pharmaceuticals, Inc., pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.            






|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Kings Registration Statement
    on Form S-1 (Registration No. 333-38753) filed October 24,
    1997.

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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



71