##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-Q

(Mark One)



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |   | For the quarterly period ended March 31, 2004                                              

OR



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

Commission File No. 0-24425

King Pharmaceuticals, Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area
code:     (423) 989-8000

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

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

Number of shares outstanding of Registrants
common stock as of May 7, 2004: 241,383,201



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TABLE OF CONTENTS



|                                              |                                                                                               |                                                                                                     |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION              
|                                              | Item 1. Financial Statements                                                                 
|                                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                                              
|                                              |                                                                                               | 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                                               
|PART I -- FINANCIAL INFORMATION              
|                                              | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|RISK FACTORS                                 
|                                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                            
|                                              | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                 
|                                              | Item 1. Legal Proceedings                                                                    
|                                              | Item 5. Other Information                                                                    
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                   
|EX-31.1  SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2  SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1  SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2  SECTION 906 CERTIFICATION OF THE CFO



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


(Unaudited)


(In thousands)


|                                                                |                                                                                       |                                            |           |              |           |  |           |         |           | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- |  | --------- | ------- | --------- | 
|                                                                |                                                                                       | March 31,                                  |           | December 31,
|                                                                |                                                                                       | 2004                                       |           | 2003        
|                                                                |                                                                                       |                                            |           |             
|ASSETS                                                         
|Current Assets:                                                 |                                                                                       |                                            |           |              |           |  |           |        
|                                                                | Cash and cash equivalents                                                             |                                            | $         | 161,326      |           |  | $         | 146,053 |          
|                                                                | Restricted cash                                                                       |                                            |           | 147,410      |           |  |           | 133,969 |          
|                                                                | Accounts receivable, net of allowance for
    doubtful accounts of $9,295 and $11,055 |                                            |           | 193,002      |           |  |           | 246,417 |          
|                                                                | Inventories                                                                           |                                            |           | 251,193      |           |  |           | 260,886 |          
|                                                                | Deferred income taxes                                                                 |                                            |           | 127,589      |           |  |           | 124,930 |          
|                                                                | Prepaid expenses and other current assets                                             |                                            |           | 46,048       |           |  |           | 30,036  |          
|                                                                | Assets related to discontinued operations                                             |                                            |           | 1,530        |           |  |           | 4,012   |          
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total current assets                       |           |              | 928,098   |  |           |         | 946,303   | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Property, plant and equipment, net                              |                                                                                       |                                            | 263,216   |              |           |  | 257,659   |        
|Goodwill                                                        |                                                                                       |                                            | 134,892   |              |           |  | 121,355   |        
|Intangible assets, net                                          |                                                                                       |                                            | 1,484,708 |              |           |  | 1,552,492 |        
|Other assets (includes restricted cash of $660
    and $30,265) |                                                                                       |                                            | 45,988    |              |           |  | 76,117    |        
|Deferred income taxes                                           |                                                                                       |                                            | 62,215    |              |           |  | 19,307    |        
|Assets related to discontinued operations                       |                                                                                       |                                            | 30,469    |              |           |  | 204,501   |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total assets                               |           | $            | 2,949,586 |  |           | $       | 3,177,734 | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                       
|Current Liabilities:                                            |                                                                                       |                                            |           |              |           |  |           |        
|                                                                | Accounts payable                                                                      |                                            | $         | 49,306       |           |  | $         | 83,078  |          
|                                                                | Accrued expenses                                                                      |                                            |           | 480,589      |           |  |           | 506,033 |          
|                                                                | Income taxes payable                                                                  |                                            |           | 51,530       |           |  |           | 79,641  |          
|                                                                | Notes payable                                                                         |                                            |           | 7,437        |           |  |           |        |          
|                                                                | Current portion of long-term debt                                                     |                                            |           | 4            |           |  |           | 97      |          
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total current liabilities                  |           |              | 588,866   |  |           |         | 668,849   | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Long-term debt                                                  |                                                                                       |                                            | 345,000   |              |           |  | 345,000   |        
|Other liabilities                                               |                                                                                       |                                            | 83,585    |              |           |  | 121,705   |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total liabilities                          |           |              | 1,017,451 |  |           |         | 1,135,554 | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Commitments and contingencies
    (Note 9)                      |                                                                                       |                                            |           |              |           |  |           |        
|Shareholders equity                                            |                                                                                       |                                            | 1,932,135 |              |           |  | 2,042,180 |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total liabilities and shareholders equity |           | $            | 2,949,586 |  |           | $       | 3,177,734 | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        

See accompanying notes.

1



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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                     
|                                                                 |                                                                            | March 31,                              
|                                                                 |                                                                            |                                        
|                                                                 |                                                                            | 2004                                    |                                                    | 2003    
|                                                                 |                                                                            |                                         |                                                    |         
|Revenues:                                                        |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Net sales                                                                  |                                         | $                                                  | 273,887  |       |          | $      | 322,997 |      
|                                                                 | Royalty revenue                                                            |                                         |                                                    | 16,757   |       |          |        | 15,424  |      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total revenues                                     |          |       | 290,644  |        |         |       | 338,421 |  
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Operating costs and expenses:                                    |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Cost of revenues, exclusive of depreciation shown
    below                |                                         |                                                    | 87,714   |       |          |        | 79,441  |      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Selling, general and administrative, exclusive of
    co-promotion fees    |                                         |                                                    | 86,602   |       |          |        | 44,115  |      
|                                                                 | Co-promotion fees                                                          |                                         |                                                    | 27,504   |       |          |        | 61,700  |      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total selling, general and administrative expenses |          |       | 114,106  |        |         |       | 105,815 |  
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Research and development                                                   |                                         |                                                    | 16,023   |       |          |        | 9,636   |      
|                                                                 | Research and development-in process upon
    acquisition                   |                                         |                                                    |         |       |          |        | 18,000  |      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total research and development                     |          |       | 16,023   |        |         |       | 27,636  |  
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Depreciation and amortization                                              |                                         |                                                    | 39,318   |       |          |        | 17,637  |      
|                                                                 | Intangible asset impairment                                                |                                         |                                                    | 34,936   |       |          |        | 110,970 |      
|                                                                 | Gain on sale of intangible assets                                          |                                         |                                                    | (858     | )     |          |        |        |      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total operating costs and expenses                 |          |       | 291,239  |        |         |       | 341,499 |  
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Operating loss                                                             |                                         |                                                    | (595     | )     |          |        | (3,078  | )    
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Other income (expense):                                          |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Interest income                                                            |                                         |                                                    | 1,054    |       |          |        | 2,494   |      
|                                                                 | Interest expense                                                           |                                         |                                                    | (3,105   | )     |          |        | (3,034  | )    
|                                                                 | Valuation (charge) benefit 
    convertible notes receivable              |                                         |                                                    | (49      | )     |          |        | 7,967   |      
|                                                                 | Other, net                                                                 |                                         |                                                    | (703     | )     |          |        | (83     | )    
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total other (expense) income                       |          |       | (2,803   | )      |         |       | 7,344   |  
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|(Loss) income from continuing operations before
    income taxes |                                                                            |                                         | (3,398                                             | )        |       |          | 4,266  |        
|Income tax (benefit) expense                                     |                                                                            |                                         | (1,048                                             | )        |       |          | 8,676  |        
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Loss from continuing operations                                  |                                                                            |                                         | (2,350                                             | )        |       |          | (4,410 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Discontinued operations:                                         |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Loss from discontinued operations, including
    expected loss on disposal |                                         |                                                    | (171,242 | )     |          |        | (4,382  | )    
|                                                                 | Income tax benefit                                                         |                                         |                                                    | (62,532  | )     |          |        | (1,599  | )    
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            |                                         | Total loss from discontinued operations            |          |       | (108,710 | )      |         |       | (2,783  | )
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Net loss                                                         |                                                                            | $                                       | (111,060                                           | )        |       | $        | (7,193 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|Loss per common share:                                           |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Basic:                                                                     |                                         |                                                    |          |       |          |        |         |      
|                                                                 |                                                                            | Loss from continuing operations         |                                                    | $        | (0.01 | )        |        | $       | (0.02 | )      
|                                                                 |                                                                            | Total loss from discontinued operations |                                                    |          | (0.45 | )        |        |         | (0.01 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            | Net loss                                |                                                    | $        | (0.46 | )        |        | $       | (0.03 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 | Diluted:                                                                   |                                         |                                                    |          |       |          |        |         |      
|                                                                 |                                                                            | Loss from continuing operations         |                                                    | $        | (0.01 | )        |        | $       | (0.02 | )      
|                                                                 |                                                                            | Total loss from discontinued operations |                                                    |          | (0.45 | )        |        |         | (0.01 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        
|                                                                 |                                                                            | Net loss                                |                                                    | $        | (0.46 | )        |        | $       | (0.03 | )      
|                                                                 |                                                                            |                                         |                                                    |          |       |          |        |        

See accompanying notes.

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KING PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |          |          |  
|---------------------------- | --------------------------------------------------------------------- | ------------------------ | ----------- | -------- |  | ------------- | --------- | ------ |  | ----- | ------- | -------- | - | - | ----- | --- | - | - | --------- | -------- | -------- | -
|                             |                                                                       |                          |             |          |  | Accumulated   |           |       
|                             |                                                                       | Common Stock             |             |          |  | Other         |           |       
|                             |                                                                       |                          |             | Retained |  | Comprehensive |           |       
|                             |                                                                       | Shares                   |             | Amount   |  | Earnings      |           | Income |  | Total
|                             |                                                                       |                          |             |          |  |               |           |        |  |      
|Balance at December 31, 2002 |                                                                       |                          | 240,624,751 |          |  | $             | 1,201,897 |        |  | $     | 729,241 |          |   | $ | 45    |     |   | $ | 1,931,183 |         
|Comprehensive income:        |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|                             | Net loss                                                              |                          |             |         |  |               |           |       |  |       |         | (7,193   | ) |   |       |    |   |   |           | (7,193   | )       
|                             | Net unrealized gain on marketable securities, net
    of tax of $137  |                          |             |         |  |               |           |       |  |       |         |          |   |   |       | 254 |   |   |           | 254      |         
|                             | Foreign currency translation, net of tax of $(28)                     |                          |             |         |  |               |           |       |  |       |         |         |   |   |       | (52 | ) |   |           | (52      | )       
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|                             |                                                                       | Total comprehensive loss |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |          | (6,991   | )
|Stock option activity        |                                                                       |                          | 266,319     |          |  |               | 1,883     |        |  |       |        |          |   |   |      |     |   |   | 1,883     |         
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|Balance at March 31, 2003    |                                                                       |                          | 240,891,070 |          |  | $             | 1,203,780 |        |  | $     | 722,048 |          |   | $ | 247   |     |   | $ | 1,926,075 |         
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|Balance at December 31, 2003 |                                                                       |                          | 241,190,852 |          |  | $             | 1,205,970 |        |  | $     | 835,097 |          |   | $ | 1,113 |     |   | $ | 2,042,180 |         
|Comprehensive income:        |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|                             | Net loss                                                              |                          |             |         |  |               |           |       |  |       |         | (111,060 | ) |   |       |    |   |   |           | (111,060 | )       
|                             | Net unrealized loss on marketable securities, net
    of tax of $(16) |                          |             |         |  |               |           |       |  |       |         |          |   |   |       | (30 | ) |   |           | (30      | )       
|                             | Foreign currency translation, net of tax of $56                       |                          |             |         |  |               |           |       |  |       |         |         |   |   |       | 99  |   |   |           | 99       |         
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|                             |                                                                       | Total comprehensive loss |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |          | (110,991 | )
|Stock option activity        |                                                                       |                          | 177,792     |          |  |               | 946       |        |  |       |        |          |   |   |      |     |   |   | 946       |         
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         
|Balance at March 31, 2004    |                                                                       |                          | 241,368,644 |          |  | $             | 1,206,916 |        |  | $     | 724,037 |          |   | $ | 1,182 |     |   | $ | 1,932,135 |         
|                             |                                                                       |                          |             |          |  |               |           |        |  |       |         |          |   |   |       |     |   |   |           |         

See accompanying notes.

3



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KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


(In thousands)


|                                                                   |                                                                             |                                                                        |         |         |         |   |         |          |         |  
|------------------------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             | Three Months Ended                                                    
|                                                                   |                                                                             | March 31,                                                             
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             | 2004                                                                   |         | 2003   
|                                                                   |                                                                             |                                                                        |         |        
|Cash flows from operating activities of
    continuing operations  |                                                                             | $                                                                      | 60,318  |         |         | $ | 79,425  |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|Cash flows from investing activities of
    continuing operations: |                                                                             |                                                                        |         |         |         |   |         |         
|                                                                   | Transfer to restricted cash                                                 |                                                                        |         | (351    | )       |   |         |         |        
|                                                                   | Purchases of marketable securities                                          |                                                                        |         |        |         |   |         | (25,903  | )      
|                                                                   | Proceeds from sale of marketable securities                                 |                                                                        |         |        |         |   |         | 253,097  |        
|                                                                   | Proceeds from loan receivable                                               |                                                                        |         | 248     |         |   |         | 3,711    |        
|                                                                   | Purchases of property, plant and equipment                                  |                                                                        |         | (12,585 | )       |   |         | (12,842  | )      
|                                                                   | Proceeds from sale of property and equipment                                |                                                                        |         |        |         |   |         | 12       |        
|                                                                   | Payment of contingent consideration                                         |                                                                        |         | (36,000 | )       |   |         |         |        
|                                                                   | Investment in Meridian Medical
    Technologies, Inc., net of cash acquired |                                                                        |         |        |         |   |         | (237,682 | )      
|                                                                   | Purchases of product rights                                                 |                                                                        |         |        |         |   |         | (9,000   | )      
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|                                                                   |                                                                             | Net cash used in investing activities of
    continuing operations     |         |         | (48,688 | ) |         |          | (28,607 | )
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|Cash flows from financing activities of
    continuing operations: |                                                                             |                                                                        |         |         |         |   |         |         
|                                                                   | Proceeds from exercise of stock options, net                                |                                                                        |         | 946     |         |   |         | 1,864    |        
|                                                                   | Payments on other long-term debt and capital
    lease obligations          |                                                                        |         | (93     | )       |   |         | (50      | )      
|                                                                   | Debt issuance costs                                                         |                                                                        |         |        |         |   |         | (214     | )      
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|                                                                   |                                                                             | Net cash provided by financing activities of
    continuing operations |         |         | 853     |   |         |          | 1,600   |  
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|Net cash provided by (used in) discontinued
    operations         |                                                                             |                                                                        | 2,790   |         |         |   | (1,738  | )       
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|Increase in cash and cash equivalents                              |                                                                             |                                                                        | 15,273  |         |         |   | 50,680  |         
|Cash and cash equivalents, beginning of period                     |                                                                             |                                                                        | 146,053 |         |         |   | 588,225 |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         
|Cash and cash equivalents, end of period                           |                                                                             | $                                                                      | 161,326 |         |         | $ | 638,905 |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |         |         

See accompanying notes.

4



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##### Table of Contents



KING PHARMACEUTICALS, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


March 31, 2004 and 2003


(Unaudited)


(In thousands)




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

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

These consolidated financial statements include
the accounts of King and all of its wholly owned subsidiaries.
All intercompany transactions and balances have been eliminated
in consolidation.

Certain amounts from prior consolidated financial
statements have been reclassified to conform to the presentation
in 2004.



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

The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock
Based Compensation. Accordingly, since options were
granted at fair value, no compensation cost has been recognized
for stock options granted to date. Had compensation cost for
these plans been determined for options granted, consistent with
SFAS No. 123, the Companys net income and
diluted income per common share would have decreased to the
following pro forma amounts:

|                                 |                                        |                    |   |          |   |  |   |        |  
|-------------------------------- | -------------------------------------- | ------------------ | - | -------- | - |  | - | ------ | -
|                                 |                                        |                   
|                                 |                                        | Three Months Ended
|                                 |                                        | March 31,         
|                                 |                                        |                   
|                                 |                                        | 2004               |   | 2003    
|                                 |                                        |                    |   |         
|Net income:                      |                                        |                    |   |          |   |  |   |       
|                                 | As reported                            |                    | $ | (111,060 | ) |  | $ | (7,193 | )
|                                 | Compensation costs for options granted |                    |   | (1,191   | ) |  |   | (157   | )
|                                 |                                        |                    |   |          |   |  |   |       
|                                 | Pro forma                              |                    | $ | (112,251 | ) |  | $ | (7,350 | )
|                                 |                                        |                    |   |          |   |  |   |       
|Diluted income per common share: |                                        |                    |   |          |   |  |   |       
|Net income:                      |                                        |                    |   |          |   |  |   |       
|                                 | As reported                            |                    | $ | (0.46    | ) |  | $ | (0.03  | )
|                                 |                                        |                    |   |          |   |  |   |       
|                                 | Pro forma                              |                    | $ | (0.47    | ) |  | $ | (0.03  | )
|                                 |                                        |                    |   |          |   |  |   |       

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

5



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

|                               |                                |                    |  |         |  |  |  |         | 
|------------------------------ | ------------------------------ | ------------------ |  | ------- |  |  |  | ------- | 
|                               |                                |                   
|                               |                                | Three Months Ended
|                               |                                | March 31,         
|                               |                                |                   
|                               |                                | 2004               |  | 2003   
|                               |                                |                    |  |        
|Basic loss per common share:   |                                |                    |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,300 |  |  |  | 240,777 | 
|                               |                                |                    |  |         |  |  |  |        
|Diluted loss per common share: |                                |                    |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,300 |  |  |  | 240,777 | 
|                               | Effect of stock options        |                    |  |        |  |  |  |        | 
|                               |                                |                    |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,300 |  |  |  | 240,777 | 
|                               |                                |                    |  |         |  |  |  |        

For the three months ended March 31, 2004
and March 31, 2003, options to purchase 915 and
1,406 shares of common stock, respectively, were not
included in the computation of diluted earnings per share
because their inclusion would have been antidilutive and would
have reduced the loss per share. The Companys convertible
debentures could also be converted into 6,878 shares of
common stock in the future, subject to certain contingencies
outlined in the indenture. Because such contingencies were not
fulfilled, the convertible debentures were not considered in the
calculation of diluted income per common share.



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

Inventories consist of the following:

|                                                                                     |  |           |         |              |  |   |         |  
|------------------------------------------------------------------------------------ |  | --------- | ------- | ------------ |  | - | ------- | -
|                                                                                     |  | March 31, |         | December 31,
|                                                                                     |  | 2004      |         | 2003        
|                                                                                     |  |           |         |             
|Raw materials                                                                        |  | $         | 139,706 |              |  | $ | 139,675 |  
|Work-in-process                                                                      |  |           | 18,431  |              |  |   | 11,508  |  
|Finished goods (including $17,654 and $18,252 of
    sample inventory, respectively) |  |           | 153,682 |              |  |   | 140,307 |  
|                                                                                     |  |           |         |              |  |   |         |  
|                                                                                     |  |           | 311,819 |              |  |   | 291,490 |  
|Inventory valuation allowance                                                        |  |           | (60,626 | )            |  |   | (30,604 | )
|                                                                                     |  |           |         |              |  |   |         |  
|                                                                                     |  | $         | 251,193 |              |  | $ | 260,886 |  
|                                                                                     |  |           |         |              |  |   |         |  



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

The Companys Rochester facility
manufactures products for the Company and various third parties.
At March 31, 2004, the net carrying value of the property,
plant and equipment at the Rochester facility and the intangible
assets considered part of the Rochester asset group were $83,392
and $27,430, respectively. Overall production volume at this
facility has been declining. The Company currently has plans to
transfer to this facility the manufacture of certain products
that are currently manufactured for the Company by third
parties. This should increase production and cash flow at the
Rochester facility. Management currently believes that these
long-term assets are not impaired based on estimated
undiscounted future cash flows. However, if production volumes
continue to decline and or if the Company is not successful in
transferring additional production to the facility, the Company
may have to write off a portion of the property, plant,
equipment and intangible assets associated with this facility.

6



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|6. | Acquisitions and Dispositions

On June 12, 2003, the Company acquired the
primary care business of Elan Corporation, plc
(Elan) and of some of its subsidiaries in the United
States and Puerto Rico, including the rights to Sonata® and
Skelaxin® and the rights pertaining to potential new
formulations of these products, together with Elans United
States primary care field sales force. On January 8, 2003,
the Company completed its acquisition of Meridian Medical
Technologies, Inc. (Meridian). The following
unaudited pro forma summary presents the financial information
as if the acquisitions of Meridian and the primary care business
of Elan had occurred on January 1, 2003 for the three
months ended March 31, 2003 (including the effects of
charges for in-process research and development). These pro
forma results have been prepared for comparative purposes and do
not purport to be indicative of what would have occurred had the
acquisition been made on January 1, 2003, nor are they
indicative of future results.

|                                          |  |                    |          |  
|----------------------------------------- |  | ------------------ | -------- | -
|                                          |  | Three Months Ended
|                                          |  | March 31, 2003    
|                                          |  |                   
|Total revenues from continuing operations |  | $                  | 391,277  |  
|                                          |  |                    |          |  
|Net loss                                  |  | $                  | (121,275 | )
|                                          |  |                    |          |  
|Basic loss per common share               |  | $                  | (0.50    | )
|                                          |  |                    |          |  
|Diluted loss per common share             |  | $                  | (0.50    | )
|                                          |  |                    |          |  



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

The following table reflects the components of
intangible assets as of March 31, 2004:

|                              |                         |          |           |              |  |   |         |         | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | - | ------- | ------- | 
|                              |                         | Gross    |           |             
|                              |                         | Carrying |           | Accumulated 
|                              |                         | Amount   |           | Amortization
|                              |                         |          |           |             
|Trademarks and product rights |                         | $        | 1,488,925 |              |  | $ | 181,706 |        
|Patents                       |                         |          | 258,300   |              |  |   | 82,549  |        
|Other intangibles             |                         |          | 9,470     |              |  |   | 7,732   |        
|                              |                         |          |           |              |  |   |         |        
|                              | Total intangible assets |          | $         | 1,756,695    |  |   | $       | 271,987 | 
|                              |                         |          |           |              |  |   |         |        

Amortization expense for the three months ended
March 31, 2004 and 2003 was $32,847 and $13,408,
respectively. Estimated annual amortization expense as of
March 31, 2004 for each of the five succeeding fiscal years
is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount
|                               |  |       
|2004                           |  | $      | 133,035 | 
|2005                           |  |        | 107,435 | 
|2006                           |  |        | 88,106  | 
|2007                           |  |        | 85,532  | 
|2008                           |  |        | 78,505  | 

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

7



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value of the Florinef® intangible assets.
The additional intangible asset impairment charge pertaining to
Florinef® recorded in the first quarter of 2004 reflects a
further reduction in the fair value of the Florinef intangible
assets due to a decline in prescriptions for the product which
is in excess of the Companys original estimate. The
Company determined the fair value of the intangible assets
associated with Florinef® and Tapazole® based on
managements discounted cash flow projections for these
products. Florinef® and Tapazole® are included in the
Companys branded pharmaceuticals segment.

In March 2003, the Company also became aware that
an ANDA for Cortisporin® ophthalmic suspension which was
previously inactive had been reactivated by the FDA with a new
sponsor. The Company understands the sponsor entered the market
as of April 14, 2003 with a generic equivalent for
Cortisporin® ophthalmic suspension. The entry of the
generic has negatively affected the Companys market share
for this product. At March 31, 2004, the Company had net
intangible assets related to Cortisporin® of $18,008.
Management currently believes that this asset is not impaired
based on estimated undiscounted cash flows, however, if
prescription declines exceed current expectations, we may have
to write-off a portion or all of the intangible assets
associated with those products.

Prescriptions for Neosporin®, Septra®,
and another small branded pharmaceutical product have continued
to decline over the past two years. At March 31, 2004,
these products have net intangible assets associated with them
totaling $19,201. Management currently believes that these
assets are not impaired based on estimated undiscounted future
cash flows. However, if prescription declines exceed current
expectations, the Company may have to write-off a portion or all
of the intangible assets associated with these products.

During the first quarter of 2004, the Company
performed its annual review of intangible asset lives for
amortization purposes. As a result of this review, the Company
reduced the lives of some of its branded pharmaceutical
products, to reflect managements current view of such
intangibles future utilization.

Goodwill at December 31, 2003 and
March 31, 2004 is as follows:

|                                                                    |  |         |        |          |  |       |         |  |  |   |         | 
|------------------------------------------------------------------- |  | ------- | ------ | -------- |  | ----- | ------- |  |  | - | ------- | 
|                                                                    |  | Branded |        | Meridian |  |      
|                                                                    |  | Segment |        | Segment  |  | Total
|                                                                    |  |         |        |          |  |      
|Goodwill at December 31, 2003                                       |  | $       | 12,742 |          |  | $     | 108,613 |  |  | $ | 121,355 | 
|Goodwill associated with Elan primary care
    business acquisition |  |         | 13,537 |          |  |       |        |  |  |   | 13,537  | 
|                                                                    |  |         |        |          |  |       |         |  |  |   |         | 
|Goodwill at March 31, 2004                                          |  | $       | 26,279 |          |  | $     | 108,613 |  |  | $ | 134,892 | 
|                                                                    |  |         |        |          |  |       |         |  |  |   |         | 

During the first quarter of 2004, the Company
paid a $25,000 milestone payment to Elan relating to the
continued exclusivity of Skelaxin® and an $11,000 milestone
payment to Elan in connection with the development of new
formulations of Sonata®. These milestone payments increased
goodwill to the extent they were not accrued by the Company at
the time of purchase.

8. Discontinued Operations

An ongoing clinical trial, the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone therapy and the oral estrogen therapy
markets including the Companys products Prefest® and
Menest®. Prescriptions for some of the Companys other
womens health products have also continued to decline over
the past few years primarily due to the availability of
generics. Accordingly, during the first quarter of 2004, the
Companys Board of Directors approved managements
decision to market for divestiture many of the Companys
womens health products, including Prefest®,
Nordette®, and Menest®. The Company is now actively
marketing these assets to potential purchasers and plans to
divest such assets within the next year.

8



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Prefest® and Nordette® product
rights held for sale have identifiable cash flows that are
largely independent of the cash flows of other groups of assets
and liabilities and have been classified as discontinued
operations in the accompanying financial statements. The Company
wrote down intangible assets by the amount of $169,591 to reduce
the carrying value of the intangible assets associated with
these products to their estimated fair value less costs to sell.
The Company determined the fair value of these intangible assets
based on managements discounted cash flow projections for
the products less expected selling costs. Prefest® and
Nordette® are included in the Companys branded
pharmaceuticals segment.

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

|                       |              |           |        |              |  |   |         |         | 
|---------------------- | ------------ | --------- | ------ | ------------ |  | - | ------- | ------- | 
|                       |              | March 31, |        | December 31,
|                       |              | 2004      |        | 2003        
|                       |              |           |        |             
|Inventories            |              | $         | 1,530  |              |  | $ | 4,012   |        
|Intangible assets, net |              |           | 30,469 |              |  |   | 204,501 |        
|                       |              |           |        |              |  |   |         |        
|                       | Total assets |           | $      | 31,999       |  |   | $       | 208,513 | 
|                       |              |           |        |              |  |   |         |        

Summarized financial information for the
discontinued operations are as follows:

|                                                        |  |                    |          |           |  |   |        |  
|------------------------------------------------------- |  | ------------------ | -------- | --------- |  | - | ------ | -
|                                                        |  |                   
|                                                        |  | Three Months Ended
|                                                        |  |                   
|                                                        |  | March 31,          |          | March 31,
|                                                        |  | 2004               |          | 2003     
|                                                        |  |                    |          |          
|Total revenues                                          |  | $                  | 6,998    |           |  | $ | 5,422  |  
|Operating loss, including expected loss on
    disposal |  |                    | (171,242 | )         |  |   | (4,382 | )
|Net loss                                                |  |                    | (108,710 | )         |  |   | (2,783 | )



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



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

Many distributors, marketers and manufacturers of
anorexigenic drugs have been subject to claims relating to the
use of these drugs. Generally, the lawsuits allege that the
defendants (1) misled users of the products with respect to
the dangers associated with them, (2) failed to adequately
test the products and (3) knew or should have known about
the negative effects of the drugs, and should have informed the
public about the risks of such negative effects. The actions
generally have been brought by individuals in their own right
and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things,
compensatory and punitive damages and/or court supervised
medical monitoring of persons who have ingested the product. The
Company is one of many defendants in no more than 10 lawsuits
that claim damages for personal injury arising from the
Companys production of the anorexigenic drug phentermine
under contract for GlaxoSmithKline.

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

In addition, Jones Pharma, Incorporated
(Jones), a wholly owned subsidiary of the Company,
is a defendant in approximately 861 multi-defendant lawsuits
involving the manufacture and sale of dexfen-

9



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fluramine, fenfluramine and phentermine. These
suits have been filed in various jurisdictions throughout the
United States, and in each of these suits Jones is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones has not at any time manufactured
dexfenfluramine, fenfluramine, or phentermine, Jones was a
distributor of a generic phentermine product and, after the
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®, its branded phentermine product. The plaintiffs in
these cases claim injury as a result of ingesting a combination
of these weight-loss drugs and are seeking compensatory and
punitive damages as well as medical care and court supervised
medical monitoring. The plaintiffs claim liability based on a
variety of theories including but not limited to, product
liability, strict liability, negligence, breach of warranty, and
misrepresentation.

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

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



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

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

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

The Companys product liability insurance
carrier has been given proper notice of all of these matters and
defense counsel is vigorously defending the Companys
interests. The Company has filed motions to dismiss due, among
other things, to lack of product identity in the
plaintiffs complaints. In 2001, the Company was dismissed
on this basis in a similar case. The Company intends to defend
these lawsuits vigorously but is unable currently to predict the
outcome or reasonably estimate the range of potential loss, if
any.



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

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. The Company received
SEC subpoenas relating to, among other topics, sales of
Kings products to VitaRx and Prison Health Services, the
Companys best price lists, the pricing of the
Companys pharmaceutical products provided to governmental
Medicaid agencies, the accrual and payment of rebates on the
product Altace®, the products Fluogen® and
Lorabid®, the King Benevolent Fund, Inc., the
Companys calculations related to Medicaid rebates, and the
Audit Committees internal review of issues raised by the
SEC investigation. As also

10



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

previously reported, on November 13, 2003,
the Company received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to the Companys
sales, marketing and other business practices for Altace®,
Aplisol® and Levoxyl®.

In March 2003, upon the recommendation of
management and with the assistance of independent counsel and an
independent accounting firm, the Audit Committee of the
Companys Board of Directors initiated an assessment and
internal review of issues raised by the SEC investigation. In
connection with the internal review, King estimated that it had
underpaid amounts due under Medicaid and other governmental
pricing programs, and recorded an adjustment of $46,500 to net
sales and accrued expenses in the fourth quarter of 2002. This
amount represented the Companys best estimate as of July
2003 of the extent to which we had underpaid amounts due under
Medicaid and other governmental pricing programs during the
period from 1998 to 2002.

The July 2003 estimate was based upon an
extensive sample of available data supporting the calculation of
Medicaid rebates paid from 1998 to 2002, and was generated with
the assistance of outside consultants. Subsequent to that time,
Kings outside consultants conducted a comprehensive audit
to determine the actual amount of underpayments under Medicaid
during the period from 1998 to 2002. As a result of that audit,
King determined that its accrual for estimated amounts due under
Medicaid and other governmental pricing programs through
December 31, 2002, should be increased by $18,000. In
addition, based on the results of the comprehensive audit for
the period from 1998 through 2002, the Company estimated that it
underpaid amounts due Medicaid by $900 during the period from
1994 through 1997. Accordingly, results for the fourth quarter
of 2003 included an adjustment of $18,900 to net sales and
accrued expenses.

Following the accrual adjustment recorded in the
fourth quarter of 2002, the Company recovered on a pre-tax basis
approximately $9,500 in fees it previously paid under its
Co-Promotion Agreement for Altace® and recognized this
amount in the fourth quarter of 2003. In addition, fees under
the Companys Co-Promotion Agreement for Altace® in
the fourth quarter of 2003 were reduced on a pre-tax basis by
approximately $5,700 as a result of the accrual adjustment
recorded in that quarter.

Under generally accepted accounting principles,
the $18,000 adjustment in the Companys accrual for
Medicaid rebates for the period from 1998 through 2002
constituted a change in an accounting estimate effective as of
December 31, 2003. The change resulted principally from two
factors. First, the Medicaid audit included additional data that
was used to refine the July 2003 estimate. Second, the Company
received legal advice that, in calculating amounts payable under
Medicaid, it should revise the methodology it had previously
been advised to use for calculating best price in
respect of a complex issue concerning rebates to pharmacy
benefit managers. The $900 adjustment in the Companys
accrual for Medicaid rebates for the period from 1994 through
1997 reflected the correction of immaterial errors that occurred
during that period.

The Medicaid audit did not result in any changes
to the Companys accruals for programs other than Medicaid.
King is currently in the process of conducting detailed audits
of its compliance with the requirements of several other
governmental pricing programs, but its obligations under these
programs are substantially smaller than its obligations under
Medicaid, and the Company does not expect the audits to result
in material adjustments to its accruals.

Although the amounts described above constitute
the Companys best estimate of amounts owed in respect of
Medicaid and other governmental pricing programs, its
calculations are subject to review and challenge by the
applicable government agencies. In connection with the pending
governmental investigations, the Company has continued to engage
in discussions with representatives of the Office of Inspector
General of the Department of Health and Human Services, the
Department of Justice, the Department of Veterans Affairs, the
Centers for Medicare and Medicaid Services, and the Public
Health Service. The Company expects that these discussions will
include a detailed review of its calculations by the appropriate
agencies, and

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

it is possible that this review could result in
material changes. The accruals described above relate solely to
Kings estimated underpayments and exclude any interest,
fines, penalties or other amounts that might be owed in
connection with the underpayments, as the Company cannot predict
or reasonably estimate their likelihood or magnitude at this
time.

Pending determination of the precise amount of
its obligations, the Company has placed a total of $65,500 in an
interest-bearing escrow account ($46,500 during 2003 and $19,000
during 2004).

The governmental investigations of King described
above are continuing. The SEC, the Office of Inspector General
of the Department of Health and Human Services, the Department
of Justice, the Department of Veterans Affairs, the Public
Health Service, the Centers for Medicare and Medicaid Services
and other governmental agencies that might be investigating or
might commence an investigation of King could impose, based on a
claim of a violation of fraud and false claims laws or
otherwise, civil and/or criminal sanctions, including fines,
penalties and possible exclusion from federal health care
programs (including Medicaid and Medicare). Some of these laws
may impose liability even in the absence of specific intent to
defraud. The Company cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time.

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

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of the Companys officers and directors. The derivative
cases in state court were consolidated and are currently stayed.
The stay will remain in place at least until the motion to
dismiss the federal securities class action are decided. The
derivative case in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act
(ERISA). As amended, the complaint alleges that the
Company and certain of its executive officers, former executive
officers, directors, former directors and an employee of the
Company violated fiduciary duties that they allegedly owed the
Companys 401(k) Retirement Savings Plans
participants and beneficiaries under ERISA. The allegations
underlying each of these additional lawsuits are similar in many
respects to those in the class action litigation described
above. The Company filed a motion to dismiss the ERISA action on
March 5, 2004; this motion to dismiss is currently pending.
The Company intends to defend all of these lawsuits vigorously
but is unable currently to predict the outcome or reasonably
estimate the range of potential loss, if any.

12



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



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

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

Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, has filed an ANDA with the FDA
seeking permission to market a generic version of Altace®.
The following U.S. patents are listed for Altace® in
the FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations(the Orange Book):
U.S. Patent Nos. 4,587,258 (the 258
patent) and 5,061,722 (the 722 patent),
two composition of matter patents related to Altace®, and
U.S. Patent No. 5,403,856 (the 856
patent), a method-of-use patent related to Altace®,
with expiration dates of January 2005, October 2008, and April
2012, respectively. Under the federal Hatch-Waxman Act of 1984,
any generic manufacturer may file an ANDA with a certification
(a Paragraph IV certification) challenging the
validity or infringement of a patent listed in the FDAs
Orange Book four years after the pioneer company obtains
approval of its NDA. Cobalt has filed a Paragraph IV
certification alleging invalidity of the 722 patent, and
the Company filed suit on March 14, 2003 to enforce its
rights under that patent. Pursuant to the Hatch-Waxman Act, the
filing of that suit provides the Company an automatic stay of
FDA approval of Cobalts ANDA for 30 months from no
earlier than February 5, 2003. In March 2004, Cobalt
stipulated to infringement of the 722 patent. Should the
court find in favor of a Cobalt summary judgment motion on the
validity of the 722 patent, however, the Company would not
receive the full benefit of that 30 month stay. Subsequent
to filing its original complaint, the Company amended its
complaint to add an allegation of infringement of the 856
patent. In its answer to the amended complaint, Cobalt denied
infringement and alleged that the 856 patent is invalid.
Pursuant to FDA regulations, however, Cobalt is not required to
certify against the 856 patent. The Company intends to
vigorously enforce its rights under the 722 and 856
patents. Regardless of the outcome of the lawsuit involving the
722 and 856 patents, however, Cobalt has not
challenged the validity of the 258 patent and, therefore,
cannot market a generic version of Altace® prior to the
expiration of that patent in January 2005.

Eon Labs, Inc. (Eon Labs),
CorePharma, LLC (CorePharma) and Mutual
Pharmaceutical Co., Inc. (Mutual) have each
filed an ANDA with the FDA seeking permission to market a
generic version of Skelaxin®. United States Patent Nos.
6,407,128 (the 128 patent) and 6,683,102 (the
102 patent) two method-of-use patents relating
to Skelaxin®, are listed in the FDAs Orange Book and
do not expire until December 3, 2021. Eon Labs and
CorePharma have each filed Paragraph IV certifications
alleging noninfringement and invalidity of the 128 and
102 patents. Mutual has filed a Paragraph IV
certification alleging noninfringement and invalidity of the
102 patent. The Company filed separate suits against Eon
Labs on January 2, 2003 and CorePharma on March 7,
2003 and is currently assessing its right to bring suit against
Mutual. Pursuant to the Hatch-Waxman Act, the filing of the
suits against Core and Eon provides the

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company with an automatic stay of FDA approval of
Eons ANDA for 30 months from no earlier than
November 18, 2002 and an automatic stay of FDA approval of
Cores ANDA for 30 months from no earlier than
January 24, 2003. The Company intends to vigorously enforce
its rights under the 128 and 102 patents to the full
extent of the law.

On March 9, 2004, the Company received a
copy of a letter from the FDA to all ANDA applicants for
Skelaxin® stating that the use listed in the FDAs
Orange Book for the 128 patent may be deleted from the
ANDA applicants product labeling. The Company believes
that this decision is arbitrary, capricious, and inconsistent
with the FDAs previous position on this issue. On
March 18, 2004, the Company filed a Citizens Petition
with the FDA requesting reinstatement of the FDAs previous
policy on this issue and a requirement that all ANDA applicants
include this use in their product labeling. If the
Companys Citizens Petition is rejected, there is a
substantial likelihood that a generic version of Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected.

Mylan Pharmaceuticals, Inc.
(Mylan) and KV Pharmaceutical Company
(KV) have each filed an ANDA with the FDA seeking
permission to market a generic version of Levoxyl®. United
States Patent No. 6,555,581 (the 581
patent), a utility patent with formulation claims relating
to Levoxyl®, was issued to the Company on April 29,
2003. The 581 patent is listed in the FDAs Orange
Book and does not expire until February 15, 2022. No
earlier than April 30, 2003, the Company received notice of
Mylans Paragraph IV certification, which alleges
noninfringement of the 581 patent. The Company filed suit
against Mylan on June 13, 2003 in the Eastern District of
Pennsylvania and on June 16, 2003 in the Northern District
of West Virginia; these suits have been consolidated in the
Northern District of West Virginia and trial is currently
scheduled in June 2005. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Mylan provides the Company with an
automatic stay of FDA approval of Mylans ANDA for
30 months from no earlier than April 30, 2003. On
June 24, 2003, the Company received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. The Company filed suit
against KV on August 7, 2003 and the trial is currently
scheduled to begin on December 6, 2004. Pursuant to the
Hatch-Waxman Act, the filing of the suit against KV provides the
Company with an automatic stay of FDA approval of KVs ANDA
for 30 months from no earlier than June 24, 2003. The
Company intends to vigorously enforce its rights under the
581 patent to the full extent of the law.

Barr Laboratories Inc. (Barr) has
filed an ANDA, which included a Paragraph IV certification,
with the FDA seeking permission to market a generic version of
Prefest®. United States Patent No. 5,108,995 (the
995 patent), a utility patent with method of
treatment claims relating to Prefest®, and United States
Patent No. 5,382,573 (the 573 patent), a
utility patent with pharmaceutical preparation claims relating
to Prefest®, were issued on April 28, 1992, and
January 17, 1995, respectively. The 995 patent and
the 573 patent are both listed in the FDAs Orange
Book and do not expire until April 28, 2009, and
January 17, 2012, respectively. On October 15, 2003,
the Company received notice of Barrs Paragraph IV
certification, which alleges noninfringement and invalidity of
the 995 patent and the 573 patent. On
November 26, 2003, the Company filed a Complaint against
Barr in the Southern District of New York for infringement
of the 995 and 573 patents. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides the Company
an automatic stay of FDA approval of Barrs ANDA for
30 months from no earlier than October 15, 2003. The
Company intends to vigorously enforce its rights under both
patents.

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



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

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). In December 2003, the
FASB revised FIN 46 to

14



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

discuss certain FIN 46 implementation
issues. The revised provisions are applicable no later than the
first reporting period ending after March 15, 2004.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is required to absorb
a majority of the variable interest entitys expected
losses or entitled to receive a majority of the entitys
residual returns or both. The Company has evaluated its
relationship with Novavax and determined that Novavax is not
currently a variable interest entity that is required to be
consolidated in the Companys financial statements under
FIN 46.

During the period from December 2000 through June
2002, the Company provided $40.0 million in financing to
Novavax in the form of notes receivable convertible to common
stock of Novavax. In addition, during 2001, the Company obtained
an exclusive worldwide license to promote, market, distribute
and sell EstrasorbTM and AndrosorbTM,
following approval, except in the United States and Puerto Rico,
where King and Novavax will co-market the products. Following
regulatory approval, the Company will pay Novavax a royalty
based on a percentage of net sales of the products outside of
the United States and Puerto Rico. Novavax will pay King a
co-promotion fee equal to 50% of net sales less cost of revenues
of the products within the United States and Puerto Rico. The
New Drug Application for EstrasorbTM was approved by
the U.S. Food and Drug Administration during October 2003.
King owns approximately 0.9% of Novavax common stock. The
Companys estimate of maximum exposure to loss as a result
of its contractual relationships with Novavax is $32,309.

Novavax is a fully-integrated specialty
biopharmaceutical company focused on research, development and
commercialization of products utilizing its drug delivery and
vaccine technologies for large and growing markets,
concentrating on the areas of womens health and infectious
diseases. At December 31, 2003, Novavax reported total
assets of $84.2 million, total liabilities of
$48.2 million, revenues for the year ended
December 31, 2003 of $11.8 million, and a net loss of
$17.3 million for the year ended December 31, 2003.



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

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

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

15



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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                |                                   |                                                         |   |          |         |   |   |         |         |  
|--------------- | --------------------------------- | ------------------------------------------------------- | - | -------- | ------- | - | - | ------- | ------- | -
|                |                                   |                                                        
|                |                                   | Three Months Ended                                     
|                |                                   | March 31,                                              
|                |                                   |                                                        
|                |                                   | 2004                                                    |   | 2003    
|                |                                   |                                                         |   |         
|Total revenues: |                                   |                                                         |   |          |         |   |   |        
|                | Branded pharmaceuticals           |                                                         | $ | 233,208  |         |   | $ | 290,963 |        
|                | Meridian Medical Technologies     |                                                         |   | 34,501   |         |   |   | 25,640  |        
|                | Royalties                         |                                                         |   | 16,757   |         |   |   | 15,424  |        
|                | Contract manufacturing            |                                                         |   | 132,892  |         |   |   | 92,262  |        
|                | Eliminations                      |                                                         |   | (126,714 | )       |   |   | (85,868 | )      
|                |                                   |                                                         |   |          |         |   |   |        
|                |                                   | Consolidated total net revenues                         |   | $        | 290,644 |   |   | $       | 338,421 |  
|                |                                   |                                                         |   |          |         |   |   |        
|Segment profit: |                                   |                                                         |   |          |         |   |   |        
|                | Branded pharmaceuticals           |                                                         | $ | 171,031  |         |   | $ | 237,710 |        
|                | Meridian Medical Technologies     |                                                         |   | 19,454   |         |   |   | 7,948   |        
|                | Royalties                         |                                                         |   | 14,177   |         |   |   | 12,416  |        
|                | Contract manufacturing            |                                                         |   | (1,732   | )       |   |   | 906     |        
|                |                                   |                                                         |   |          |         |   |   |        
|                |                                   | Consolidated segment profit, excluding
    depreciation |   | $        | 202,930 |   |   | $       | 258,980 |  
|                |                                   |                                                         |   |          |         |   |   |        
|                | Other operating costs and expense |                                                         |   | 203,525  |         |   |   | 262,058 |        
|                |                                   |                                                         |   |          |         |   |   |        
|                |                                   | Operating loss                                          |   | $        | (595    | ) |   | $       | (3,078  | )
|                |                                   |                                                         |   |          |         |   |   |        

The March 31, 2003 segment profit amounts
reflect a reclassification of $5,165, decreasing the branded
pharmaceuticals segment profit and increasing the contract
manufacturing segment profit, from amounts previously reported
as a result of the reclassification of certain expenses.

|              |                               |                           |   |              |           |  |   |           |           | 
|------------- | ----------------------------- | ------------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|              |                               | As of                     |   | As of       
|              |                               | March 31,                 |   | December 31,
|              |                               | 2004                      |   | 2003        
|              |                               |                           |   |             
|Total assets: |                               |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals       |                           | $ | 2,659,962    |           |  | $ | 2,897,137 |          
|              | Meridian Medical Technologies |                           |   | 260,344      |           |  |   | 250,935   |          
|              | Royalties                     |                           |   | 17,734       |           |  |   | 20,032    |          
|              | Contract manufacturing        |                           |   | 92,908       |           |  |   | 90,992    |          
|              | All other                     |                           |   | 10           |           |  |   | 10        |          
|              | Eliminations                  |                           |   | (81,372      | )         |  |   | (81,372   | )        
|              |                               |                           |   |              |           |  |   |          
|              |                               | Consolidated total assets |   | $            | 2,949,586 |  |   | $         | 3,177,734 | 
|              |                               |                           |   |              |           |  |   |          

16



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                              |                                              |   |        |         |  |   |         |         | 
|--------------- | ---------------------------- | -------------------------------------------- | - | ------ | ------- |  | - | ------- | ------- | 
|                |                              |                                             
|                |                              | Three Months Ended                          
|                |                              | March 31,                                   
|                |                              |                                             
|                |                              | 2004                                         |   | 2003  
|                |                              |                                              |   |       
|Total revenues: |                              |                                              |   |        |         |  |   |        
|                | Cardiovascular               |                                              | $ | 79,865 |         |  | $ | 156,817 |        
|                | Anti-infective               |                                              |   | 9,929  |         |  |   | 31,678  |        
|                | Critical care                |                                              |   | 39,502 |         |  |   | 35,363  |        
|                | Endocrinology/womens health |                                              |   | 34,003 |         |  |   | 48,505  |        
|                | Respiratory                  |                                              |   | 9,128  |         |  |   | 11,633  |        
|                | Neuroscience                 |                                              |   | 62,429 |         |  |   |        |        
|                | Other branded                |                                              |   | (1,648 | )       |  |   | 6,967   |        
|                |                              |                                              |   |        |         |  |   |        
|                |                              | Consolidated branded pharmaceutical revenues |   | $      | 233,208 |  |   | $       | 290,963 | 
|                |                              |                                              |   |        |         |  |   |        



|    |                               
|--- | ------------------------------
|12. | Guarantor Financial Statements

Each of the Companys subsidiaries, except
Monarch Pharmaceuticals Ireland Limited, formed in January, 2003
(the Guarantor Subsidiaries), has guaranteed, on a
full, unconditional and joint and several basis, the
Companys performance under the $345,000,
2 3/4% Convertible Debentures due 2021 and under the
$400,000 Senior Secured Revolving Credit Facility on a joint and
several basis. There are no restrictions under the
Companys financing arrangements on the ability of the
Guarantor Subsidiaries to distribute funds to the Company in the
form of cash dividends, loans or advances. The following
combined financial data provides information regarding the
financial position, results of operations and cash flows of the
Guarantor Subsidiaries (condensed consolidating financial data).
Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management
has determined that such information would not be material to
the holders of the debt.

17



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS


|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | -------------- | --------- | ------------ |  | --------------- | --------- | ------------ |  | ------- | ---------- | ----------- | - | ------------ | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                                          |                                            |               
|                                          |                                            | March 31, 2004
|                                          |                                            |               
|                                          |                                            |                |           | King         |  |                
|                                          |                                            |                |           | Consolidated |  | Monarch         |           |             
|                                          |                                            |                |           | with         |  | Pharmaceuticals |           |             
|                                          |                                            |                |           | Guarantor    |  | Eliminating     |           | Guarantor    |  | Ireland |            | Eliminating |   | King        
|                                          |                                            | King           |           | Subsidiaries |  | Entries         |           | Subsidiaries |  | Limited |            | Entries     |   | Consolidated
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |             
|ASSETS                                    |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current assets:                           |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Cash and cash equivalents                 |                                            | $              | 151,433   |              |  | $               | 7,854     |              |  | $       |           |             |   | $            | 159,287   |           |  | $ | 2,039 |        |  | $ |       |        |   | $ | 161,326   |          
|Restricted cash                           |                                            |                | 67,331    |              |  |                 | 80,079    |              |  |         |           |             |   |              | 147,410   |           |  |   |      |        |  |   |       |        |   |   | 147,410   |          
|Accounts receivable, net                  |                                            |                | 6,028     |              |  |                 | 185,580   |              |  |         |           |             |   |              | 191,608   |           |  |   | 1,394 |        |  |   |       |        |   |   | 193,002   |          
|Inventories                               |                                            |                | 209,109   |              |  |                 | 41,810    |              |  |         |           |             |   |              | 250,919   |           |  |   | 274   |        |  |   |       |        |   |   | 251,193   |          
|Deferred income tax assets                |                                            |                | 38,731    |              |  |                 | 88,858    |              |  |         |           |             |   |              | 127,589   |           |  |   |       |        |  |   |       |        |   |   | 127,589   |          
|Prepaid expenses and other current assets |                                            |                | 17,396    |              |  |                 | 28,652    |              |  |         |           |             |   |              | 46,048    |           |  |   |       |        |  |   |       |        |   |   | 46,048    |          
|Assets related to discontinued operations |                                            |                | 1,530     |              |  |                 |          |              |  |         |           |             |   |              | 1,530     |           |  |   |       |        |  |   |        |        |   |   | 1,530     |          
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current assets                       |                |           | 491,558      |  |                 |           | 432,833      |  |         |            |            |   |              |           | 924,391   |  |   |       | 3,707  |  |   |        |       |   |   |           | 928,098   | 
|Property, plant, and equipment, net       |                                            |                | 115,142   |              |  |                 | 148,074   |              |  |         |           |             |   |              | 263,216   |           |  |   |      |        |  |   |       |        |   |   | 263,216   |          
|Goodwill                                  |                                            |                |          |              |  |                 | 134,892   |              |  |         |           |             |   |              | 134,892   |           |  |   |      |        |  |   |       |        |   |   | 134,892   |          
|Intangible assets, net                    |                                            |                | 6,181     |              |  |                 | 1,471,131 |              |  |         |           |             |   |              | 1,477,312 |           |  |   | 7,396 |        |  |   |       |        |   |   | 1,484,708 |          
|Other assets                              |                                            |                | 45,988    |              |  |                 |          |              |  |         |           |             |   |              | 45,988    |           |  |   |      |        |  |   |       |        |   |   | 45,988    |          
|Deferred income tax assets                |                                            |                | (4,395    | )            |  |                 | 66,610    |              |  |         |           |             |   |              | 62,215    |           |  |   |      |        |  |   |       |        |   |   | 62,215    |          
|Investment in subsidiaries                |                                            |                | 2,183,214 |              |  |                 |          |              |  |         | (2,177,697 | )           |   |              | 5,517     |           |  |   |      |        |  |   | (5,517 | )      |   |   |          |          
|Assets related to discontinued operations |                                            |                |          |              |  |                 | 30,469    |              |  |         |           |             |   |              | 30,469    |           |  |   |      |        |  |   |       |        |   |   | 30,469    |          
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total assets                               |                | $         | 2,837,688    |  |                 | $         | 2,284,009    |  |         | $          | (2,177,697  | ) |              | $         | 2,944,000 |  |   | $     | 11,103 |  |   | $      | (5,517 | ) |   | $         | 2,949,586 | 
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current liabilities:                      |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Accounts payable                          |                                            | $              | 20,116    |              |  | $               | 28,363    |              |  | $       |           |             |   | $            | 48,479    |           |  | $ | 827   |        |  | $ |       |        |   | $ | 49,306    |          
|Accrued expenses                          |                                            |                | (7,074    | )            |  |                 | 487,663   |              |  |         |           |             |   |              | 480,589   |           |  |   |      |        |  |   |       |        |   |   | 480,589   |          
|Income taxes payable                      |                                            |                | 55,251    |              |  |                 | (3,915    | )            |  |         |           |             |   |              | 51,336    |           |  |   | 194   |        |  |   |       |        |   |   | 51,530    |          
|Notes payable                             |                                            |                | 7,437     |              |  |                 |          |              |  |         |           |             |   |              | 7,437     |           |  |   |      |        |  |   |       |        |   |   | 7,437     |          
|Current portion of long-term debt         |                                            |                | 4         |              |  |                 |          |              |  |         |           |             |   |              | 4         |           |  |   |      |        |  |   |       |        |   |   | 4         |          
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current liabilities                  |                |           | 75,734       |  |                 |           | 512,111      |  |         |            |            |   |              |           | 587,845   |  |   |       | 1,021  |  |   |        |       |   |   |           | 588,866   | 
|Long-term debt                            |                                            |                | 345,000   |              |  |                 |          |              |  |         |           |             |   |              | 345,000   |           |  |   |      |        |  |   |       |        |   |   | 345,000   |          
|Other liabilities                         |                                            |                | 51,049    |              |  |                 | 32,536    |              |  |         |           |             |   |              | 83,585    |           |  |   |      |        |  |   |       |        |   |   | 83,585    |          
|Intercompany (receivable) payable         |                                            |                | 434,592   |              |  |                 | (438,434  | )            |  |         |           |             |   |              | (3,842    | )         |  |   | 3,842 |        |  |   |       |        |   |   |          |          
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities                          |                |           | 906,375      |  |                 |           | 106,213      |  |         |            |            |   |              |           | 1,012,588 |  |   |       | 4,863  |  |   |        |       |   |   |           | 1,017,451 | 
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Shareholders equity                      |                                            |                | 1,931,313 |              |  |                 | 2,177,796 |              |  |         | (2,177,697 | )           |   |              | 1,931,412 |           |  |   | 6,240 |        |  |   | (5,517 | )      |   |   | 1,932,135 |          
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities and shareholders equity |                | $         | 2,837,688    |  |                 | $         | 2,284,009    |  |         | $          | (2,177,697  | ) |              | $         | 2,944,000 |  |   | $     | 11,103 |  |   | $      | (5,517 | ) |   | $         | 2,949,586 | 
|                                          |                                            |                |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          

[Additional columns below]

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

|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ----------------- | --------- | ------------ |  | --------------- | --------- | ------------ |  | ------- | ---------- | ----------- | - | ------------ | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                                          |                                            |                  
|                                          |                                            | December 31, 2003
|                                          |                                            |                  
|                                          |                                            |                   |           | King         |  |                
|                                          |                                            |                   |           | Consolidated |  | Monarch         |           |             
|                                          |                                            |                   |           | with         |  | Pharmaceuticals |           |             
|                                          |                                            |                   |           | Guarantor    |  | Eliminating     |           | Guarantor    |  | Ireland |            | Eliminating |   | King        
|                                          |                                            | King              |           | Subsidiaries |  | Entries         |           | Subsidiaries |  | Limited |            | Entries     |   | Consolidated
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |             
|ASSETS                                    |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current assets:                           |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Cash and cash equivalents                 |                                            | $                 | 140,617   |              |  | $               | 3,641     |              |  | $       |           |             |   | $            | 144,258   |           |  | $ | 1,795 |        |  | $ |       |        |   | $ | 146,053   |          
|Restricted cash                           |                                            |                   | 67,199    |              |  |                 | 66,770    |              |  |         |           |             |   |              | 133,969   |           |  |   |      |        |  |   |       |        |   |   | 133,969   |          
|Accounts receivable, net                  |                                            |                   | 4,529     |              |  |                 | 240,574   |              |  |         |           |             |   |              | 245,103   |           |  |   | 1,314 |        |  |   |       |        |   |   | 246,417   |          
|Inventories                               |                                            |                   | 224,081   |              |  |                 | 36,554    |              |  |         |           |             |   |              | 260,635   |           |  |   | 251   |        |  |   |       |        |   |   | 260,886   |          
|Deferred income tax assets                |                                            |                   | 16,428    |              |  |                 | 108,502   |              |  |         |           |             |   |              | 124,930   |           |  |   |      |        |  |   |       |        |   |   | 124,930   |          
|Prepaid expenses and other current assets |                                            |                   | 5,249     |              |  |                 | 24,787    |              |  |         |           |             |   |              | 30,036    |           |  |   |      |        |  |   |       |        |   |   | 30,036    |          
|Assets related to discontinued operations |                                            |                   | 4,012     |              |  |                 |          |              |  |         |           |             |   |              | 4,012     |           |  |   |      |        |  |   |       |        |   |   | 4,012     |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current assets                       |                   |           | 462,115      |  |                 |           | 480,828      |  |         |            |            |   |              |           | 942,943   |  |   |       | 3,360  |  |   |        |       |   |   |           | 946,303   | 
|Property, plant, and equipment, net       |                                            |                   | 115,442   |              |  |                 | 142,217   |              |  |         |           |             |   |              | 257,659   |           |  |   |      |        |  |   |       |        |   |   | 257,659   |          
|Goodwill                                  |                                            |                   |          |              |  |                 | 121,355   |              |  |         |           |             |   |              | 121,355   |           |  |   |      |        |  |   |       |        |   |   | 121,355   |          
|Intangible assets, net                    |                                            |                   | 6,955     |              |  |                 | 1,538,035 |              |  |         |           |             |   |              | 1,544,990 |           |  |   | 7,502 |        |  |   |       |        |   |   | 1,552,492 |          
|Other assets                              |                                            |                   | 45,410    |              |  |                 | 30,707    |              |  |         |           |             |   |              | 76,117    |           |  |   |      |        |  |   |       |        |   |   | 76,117    |          
|Deferred income tax assets                |                                            |                   | 14,831    |              |  |                 | 4,476     |              |  |         |           |             |   |              | 19,307    |           |  |   |      |        |  |   |       |        |   |   | 19,307    |          
|Investment in subsidiaries                |                                            |                   | 2,307,745 |              |  |                 |          |              |  |         | (2,302,228 | )           |   |              | 5,517     |           |  |   |      |        |  |   | (5,517 | )      |   |   |          |          
|Assets related to discontinued operations |                                            |                   |          |              |  |                 | 204,501   |              |  |         |           |             |   |              | 204,501   |           |  |   |      |        |  |   |       |        |   |   | 204,501   |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total assets                               |                   | $         | 2,952,498    |  |                 | $         | 2,522,119    |  |         | $          | (2,302,228  | ) |              | $         | 3,172,389 |  |   | $     | 10,862 |  |   | $      | (5,517 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Current liabilities:                      |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Accounts payable                          |                                            | $                 | 51,924    |              |  | $               | 31,135    |              |  | $       |           |             |   | $            | 83,059    |           |  | $ | 19    |        |  | $ |       |        |   | $ | 83,078    |          
|Accrued expenses                          |                                            |                   | 55,764    |              |  |                 | 450,269   |              |  |         |           |             |   |              | 506,033   |           |  |   |      |        |  |   |       |        |   |   | 506,033   |          
|Income taxes payable                      |                                            |                   | 78,363    |              |  |                 | 838       |              |  |         |           |             |   |              | 79,201    |           |  |   | 440   |        |  |   |       |        |   |   | 79,641    |          
|Notes payable                             |                                            |                   |          |              |  |                 |          |              |  |         |           |             |   |              |          |           |  |   |      |        |  |   |       |        |   |   |          |          
|Current portion of long-term debt         |                                            |                   | 97        |              |  |                 |          |              |  |         |           |             |   |              | 97        |           |  |   |      |        |  |   |       |        |   |   | 97        |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total current liabilities                  |                   |           | 186,148      |  |                 |           | 482,242      |  |         |            |            |   |              |           | 668,390   |  |   |       | 459    |  |   |        |       |   |   |           | 668,849   | 
|Long-term debt                            |                                            |                   | 345,000   |              |  |                 |          |              |  |         |           |             |   |              | 345,000   |           |  |   |      |        |  |   |       |        |   |   | 345,000   |          
|Other liabilities                         |                                            |                   | 50,953    |              |  |                 | 70,752    |              |  |         |           |             |   |              | 121,705   |           |  |   |      |        |  |   |       |        |   |   | 121,705   |          
|Intercompany (receivable) payable         |                                            |                   | 329,396   |              |  |                 | (333,103  | )            |  |         |           |             |   |              | (3,707    | )         |  |   | 3,707 |        |  |   |       |        |   |   |          |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities                          |                   |           | 911,497      |  |                 |           | 219,891      |  |         |            |            |   |              |           | 1,131,388 |  |   |       | 4,166  |  |   |        |       |   |   |           | 1,135,554 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|Shareholders equity                      |                                            |                   | 2,041,001 |              |  |                 | 2,302,228 |              |  |         | (2,302,228 | )           |   |              | 2,041,001 |           |  |   | 6,696 |        |  |   | (5,517 | )      |   |   | 2,042,180 |          
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          
|                                          | Total liabilities and shareholders equity |                   | $         | 2,952,498    |  |                 | $         | 2,522,119    |  |         | $          | (2,302,228  | ) |              | $         | 3,172,389 |  |   | $     | 10,862 |  |   | $      | (5,517 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                   |           |              |  |                 |           |              |  |         |            |             |   |              |           |           |  |   |       |        |  |   |        |        |   |   |           |          

18



---



##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |         |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | -------------- | --------------------------------- | -------- | --------------- | ------- | ------------ | -------- | ------- | ------- | ------------ | -------- | -------- | ------ | ------------ | -------- | ----------- | ---- | ------------ | ----- | ------- | ------ | ------------ | -------- | ------- | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | -- | --- | --- | --- | ------ | ------- | ------- | ------- | 
|                                                                 |                                                     |                                    |                |                                  
|                                                                 |                                                     | Three Months Ended March 31, 2004  |                | Three Months Ended March 31, 2003
|                                                                 |                                                     |                                    |                |                                  
|                                                                 |                                                     |                                    |                | King                              |          |                 |         |              |          | King    |         |             
|                                                                 |                                                     |                                    |                | Consolidated                      |          | Monarch         |         |              |          |         |         | Consolidated |          |         
|                                                                 |                                                     |                                    |                | with                              |          | Pharmaceuticals |         |              |          |         |         | with         |          |         
|                                                                 |                                                     |                                    |                | Guarantor                         |          | Eliminating     |         | Guarantor    |          | Ireland |         | King         |          |          |        | Guarantor    |          | Eliminating |      | Guarantor    |       |         |        | King        
|                                                                 |                                                     | King                               |                | Subsidiaries                      |          | Entries         |         | Subsidiaries |          | Limited |         | Consolidated |          | King     |        | Subsidiaries |          | Entries     |      | Subsidiaries |       | Ireland |        | Consolidated
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |             
|Revenues:                                                        |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 | Net sales                                           |                                    | $              | 106,502                           |          |                 | $       | 273,347      |          |         | $       | (106,380     | )        |          | $      | 273,469      |          |             | $    | 418          |       |         | $      | 273,887      |          |         | $      | 66,018  |         |        | $       | 322,804 |         |         | $      | (66,018 | )       |         | $      | 322,804 |         |         | $  | 193 |     |     | $      | 322,997 |        
|                                                                 | Royalty revenue                                     |                                    |                |                                  |          |                 |         | 16,757       |          |         |         |             |          |          |        | 16,757       |          |             |      |             |       |         |        | 16,757       |          |         |        |        |         |        |         | 15,424  |         |         |        |        |         |         |        | 15,424  |         |         |    |    |     |     |        | 15,424  |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 |                                                     |                                    | Total revenues |                                   |          | 106,502         |         |              |          | 290,104 |         |              |          | (106,380 | )      |              |          | 290,226     |      |              |       | 418     |        |              |          | 290,644 |        |         |         | 66,018 |         |         |         | 338,228 |        |         |         | (66,018 | )      |         |         | 338,228 |    |     |     | 193 |        |         |         | 338,421 | 
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|Operating costs and expenses:                                    |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 | Costs of revenues                                   |                                    |                | 31,997                            |          |                 |         | 161,980      |          |         |         | (106,380     | )        |          |        | 87,597       |          |             |      | 117          |       |         |        | 87,714       |          |         |        | 24,588  |         |        |         | 120,822 |         |         |        | (66,018 | )       |         |        | 79,392  |         |         |    | 49  |     |     |        | 79,441  |        
|                                                                 | Selling, general and administrative                 |                                    |                | 36,695                            |          |                 |         | 76,560       |          |         |         |             |          |          |        | 113,255      |          |             |      | 851          |       |         |        | 114,106      |          |         |        | 5,161   |         |        |         | 100,653 |         |         |        |        |         |         |        | 105,814 |         |         |    | 1   |     |     |        | 105,815 |        
|                                                                 | Depreciation and amortization                       |                                    |                | 4,340                             |          |                 |         | 34,872       |          |         |         |             |          |          |        | 39,212       |          |             |      | 106          |       |         |        | 39,318       |          |         |        | 1,904   |         |        |         | 15,659  |         |         |        |        |         |         |        | 17,563  |         |         |    | 74  |     |     |        | 17,637  |        
|                                                                 | Research and development                            |                                    |                | 110                               |          |                 |         | 15,913       |          |         |         |             |          |          |        | 16,023       |          |             |      |             |       |         |        | 16,023       |          |         |        | 225     |         |        |         | 27,411  |         |         |        |        |         |         |        | 27,636  |         |         |    |    |     |     |        | 27,636  |        
|                                                                 | Intangible asset impairment                         |                                    |                |                                  |          |                 |         | 34,936       |          |         |         |             |          |          |        | 34,936       |          |             |      |             |       |         |        | 34,936       |          |         |        |        |         |        |         | 110,970 |         |         |        |        |         |         |        | 110,970 |         |         |    |    |     |     |        | 110,970 |        
|                                                                 | Gain on sale of product lines                       |                                    |                |                                  |          |                 |         | (858         | )        |         |         |             |          |          |        | (858         | )        |             |      |             |       |         |        | (858         | )        |         |        |        |         |        |         |        |         |         |        |        |         |         |        |        |         |         |    |    |     |     |        |        |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 |                                                     | Total operating costs and expenses |                |                                   | 73,142   |                 |         |              | 323,403  |         |         |              | (106,380 | )        |        |              | 290,165  |             |      |              | 1,074 |         |        |              | 291,239  |         |        |         | 31,878  |        |         |         | 375,515 |         |        |         | (66,018 | )       |        |         | 341,375 |         |    |     | 124 |     |        |         | 341,499 |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|Operating (loss) income                                          |                                                     |                                    | 33,360         |                                   |          |                 | (33,299 | )            |          |         |        |              |          |          | 61     |              |          |             | (656 | )            |       |         | (595   | )            |          |         | 34,140 |         |         |        | (37,287 | )       |         |         |       |         |         |         | (3,147 | )       |         |         | 69 |     |     |     | (3,078 | )      
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|Other income (expense):                                          |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 | Interest income                                     |                                    |                | 894                               |          |                 |         | 160          |          |         |         |             |          |          |        | 1,054        |          |             |      |             |       |         |        | 1,054        |          |         |        | 2,396   |         |        |         | 98      |         |         |        |        |         |         |        | 2,494   |         |         |    |    |     |     |        | 2,494   |        
|                                                                 | Interest expense                                    |                                    |                | (3,100                            | )        |                 |         | (5           | )        |         |         |             |          |          |        | (3,105       | )        |             |      |             |       |         |        | (3,105       | )        |         |        | (3,032  | )       |        |         | (2      | )       |         |        |        |         |         |        | (3,034  | )       |         |    |    |     |     |        | (3,034  | )      
|                                                                 | Valuation change  convertible notes
    receivable |                                    |                | (49                               | )        |                 |         |             |          |         |         |             |          |          |        | (49          | )        |             |      |             |       |         |        | (49          | )        |         |        | 7,967   |         |        |         |        |         |         |        |        |         |         |        | 7,967   |         |         |    |    |     |     |        | 7,967   |        
|                                                                 | Other, net                                          |                                    |                | (325                              | )        |                 |         | (331         | )        |         |         |             |          |          |        | (656         | )        |             |      | (47          | )     |         |        | (703         | )        |         |        | (64     | )       |        |         | (19     | )       |         |        |        |         |         |        | (83     | )       |         |    |    |     |     |        | (83     | )      
|                                                                 | Equity in loss of subsidiaries                      |                                    |                | (124,529                          | )        |                 |         |             |          |         |         | 124,529      |          |          |        |             |          |             |      |             |       |         |        |             |          |         |        | (31,380 | )       |        |         |        |         |         |        | 31,380  |         |         |        |        |         |         |    |    |     |     |        |        |        
|                                                                 | Intercompany interest income (expense)              |                                    |                | (7,166                            | )        |                 |         | 7,166        |          |         |         |             |          |          |        |             |          |             |      |             |       |         |        |             |          |         |        | 1,391   |         |        |         | (1,391  | )       |         |        |        |         |         |        |        |         |         |    |    |     |     |        |        |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 |                                                     | Total other income (expense)       |                |                                   | (134,275 | )               |         |              | 6,990    |         |         |              | 124,529  |          |        |              | (2,756   | )           |      |              | (47   | )       |        |              | (2,803   | )       |        |         | (22,722 | )      |         |         | (1,314  | )       |        |         | 31,380  |         |        |         | 7,344   |         |    |     |    |     |        |         | 7,344   |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|(Loss) income from continuing operations before
    income taxes |                                                     |                                    | (100,915       | )                                 |          |                 | (26,309 | )            |          |         | 124,529 |              |          |          | (2,695 | )            |          |             | (703 | )            |       |         | (3,398 | )            |          |         | 11,418 |         |         |        | (38,601 | )       |         |         | 31,380 |         |         |         | 4,197  |         |         |         | 69 |     |     |     | 4,266  |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|Income tax expense (benefit)                                     |                                                     |                                    | 9,688          |                                   |          |                 | (10,490 | )            |          |         |        |              |          |          | (802   | )            |          |             | (246 | )            |       |         | (1,048 | )            |          |         | 18,680 |         |         |        | (10,004 | )       |         |         |       |         |         |         | 8,676  |         |         |         |   |     |     |     | 8,676  |        
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|Loss from continuing operations                                  |                                                     |                                    | (110,603       | )                                 |          |                 | (15,819 | )            |          |         | 124,529 |              |          |          | (1,893 | )            |          |             | (457 | )            |       |         | (2,350 | )            |          |         | (7,262 | )       |         |        | (28,597 | )       |         |         | 31,380 |         |         |         | (4,479 | )       |         |         | 69 |     |     |     | (4,410 | )      
|Discontinued operations:                                         |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 | Loss from discontinued operations                   |                                    |                |                                  |          |                 |         | (171,242     | )        |         |         |             |          |          |        | (171,242     | )        |             |      |             |       |         |        | (171,242     | )        |         |        |        |         |        |         | (4,382  | )       |         |        |        |         |         |        | (4,382  | )       |         |    |    |     |     |        | (4,382  | )      
|                                                                 | Income tax benefit                                  |                                    |                |                                  |          |                 |         | (62,532      | )        |         |         |             |          |          |        | (62,532      | )        |             |      |             |       |         |        | (62,532      | )        |         |        |        |         |        |         | (1,599  | )       |         |        |        |         |         |        | (1,599  | )       |         |    |    |     |     |        | (1,599  | )      
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        
|                                                                 |                                                     | Net (loss) income                  |                | $                                 | (110,603 | )               |         | $            | (124,529 | )       |         | $            | 124,529  |          |        | $            | (110,603 | )           |      | $            | (457  | )       |        | $            | (111,060 | )       |        | $       | (7,262  | )      |         | $       | (31,380 | )       |        | $       | 31,380  |         |        | $       | (7,262  | )       |    | $   | 69  |     |        | $       | (7,193  | )      
|                                                                 |                                                     |                                    |                |                                   |          |                 |         |              |          |         |         |              |          |          |        |              |          |             |      |              |       |         |        |              |          |         |        |         |         |        |         |         |         |         |        |         |         |         |        |         |         |         |    |     |     |     |        |        

19



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##### Table of Contents



GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands)


|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |          |  
|---------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------- | --------------------------------- | - | --------------- | -------- | -------- | - | ------------ | ------- | ------------ | - | ------------ | ----- | ------------ |  | --------------- | ------- | ------------ | - | - | ------- | -------- | - |  | ------- | ------- | - |  | ------- | -------- | - |  | - | --- |  | - | ------- | -------- | -
|                                                           |                                              |                                   |         |                                  
|                                                           |                                              | Three Months Ended March 31, 2004 |         | Three Months Ended March 31, 2003
|                                                           |                                              |                                   |         |                                  
|                                                           |                                              |                                   |         | King                              |   |                 |          |          |   | King         |         |             
|                                                           |                                              |                                   |         | Consolidated                      |   | Monarch         |          |          |   |              |         | Consolidated |   |             
|                                                           |                                              |                                   |         | with                              |   | Pharmaceuticals |          |          |   |              |         | with         |   | Monarch      |       |             
|                                                           |                                              |                                   |         | Guarantor                         |   | Guarantor       |          | Ireland  |   | King         |         |              |   | Guarantor    |       | Guarantor    |  | Pharmaceuticals |         | King        
|                                                           |                                              | King                              |         | Subsidiaries                      |   | Subsidiaries    |          | Limited  |   | Consolidated |         | King         |   | Subsidiaries |       | Subsidiaries |  | Ireland         |         | Consolidated
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |             
|Cash flows from operating activities                       |                                              | $                                 | (91,452 | )                                 |   |                 | 151,661  |          |   |              | 60,209  |              |   |              | 109   |              |  | $               | 60,318  |              |   | $ | 50,540  |          |   |  | 28,885  |         |   |  | 79,425  |          |   |  |  |     |  | $ | 79,425  |         
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Cash flows from investing activities:                      |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|                                                           | Transfer to restricted cash                  |                                   |         |                                  |   |                 |          | (351     | ) |              |         | (351         | ) |              |       |             |  |                 |         | (351         | ) |   |         |         |   |  |         |        |   |  |         |         |   |  |   |    |  |   |         |         |  
|                                                           | Purchases of marketable securities           |                                   |         |                                   |   |                 |          |         |   |              |         |             |   |              |       |             |  |                 |         |             |   |   |         | (25,903  | ) |  |         |        |   |  |         | (25,903  | ) |  |   |    |  |   |         | (25,903  | )
|                                                           | Proceeds from sale of marketable securities  |                                   |         |                                   |   |                 |          |         |   |              |         |             |   |              |       |             |  |                 |         |             |   |   |         | 253,097  |   |  |         |        |   |  |         | 253,097  |   |  |   |    |  |   |         | 253,097  |  
|                                                           | Proceeds from loans receivable               |                                   |         |                                  |   |                 |          | 248      |   |              |         | 248          |   |              |       |             |  |                 |         | 248          |   |   |         |         |   |  |         | 3,711   |   |  |         | 3,711    |   |  |   |    |  |   |         | 3,711    |  
|                                                           | Purchases of property, plant and equipment   |                                   |         | (3,477                            | ) |                 |          | (9,108   | ) |              |         | (12,585      | ) |              |       |             |  |                 |         | (12,585      | ) |   |         | (2,118   | ) |  |         | (10,724 | ) |  |         | (12,842  | ) |  |   |    |  |   |         | (12,842  | )
|                                                           | Proceeds from sale of property and equipment |                                   |         |                                  |   |                 |          |         |   |              |         |             |   |              |       |             |  |                 |         |             |   |   |         | 12       |   |  |         |        |   |  |         | 12       |   |  |   |    |  |   |         | 12       |  
|                                                           | Acquisition of Primary Care from Elan        |                                   |         |                                  |   |                 |          | (36,000  | ) |              |         | (36,000      | ) |              |       |             |  |                 |         | (36,000      | ) |   |         |         |   |  |         |        |   |  |         |         |   |  |   |   |  |   |         |         |  
|                                                           | Investment in Meridian                       |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         | (253,092 | ) |  |         | 15,410  |   |  |         | (237,682 | ) |  |   |    |  |   |         | (237,682 | )
|                                                           | Purchases of product rights                  |                                   |         |                                   |   |                 |          |         |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         | (9,000   | ) |  |         |        |   |  |         | (9,000   | ) |  |   |    |  |   |         | (9,000   | )
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Net cash used in investing activities                      |                                              |                                   | (3,477  | )                                 |   |                 | (45,211  | )        |   |              | (48,688 | )            |   |              |      |              |  |                 | (48,688 | )            |   |   | (37,004 | )        |   |  | 8,397   |         |   |  | (28,607 | )        |   |  |  |     |  |   | (28,607 | )       
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Cash flows from financing activities:                      |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|                                                           | Proceeds from exercise of stock options, net |                                   |         | 946                               |   |                 |          |         |   |              |         | 946          |   |              |       |             |  |                 |         | 946          |   |   |         | 1,864    |   |  |         |        |   |  |         | 1,864    |   |  |   |    |  |   |         | 1,864    |  
|                                                           | Payments on other long-term debt             |                                   |         | (93                               | ) |                 |          |         |   |              |         | (93          | ) |              |       |             |  |                 |         | (93          | ) |   |         | (50      | ) |  |         |        |   |  |         | (50      | ) |  |   |    |  |   |         | (50      | )
|                                                           | Other                                        |                                   |         |                                  |   |                 |          |         |   |              |         |             |   |              |       |             |  |                 |         |             |   |   |         | (214     | ) |  |         |        |   |  |         | (214     | ) |  |   |    |  |   |         | (214     | )
|                                                           | Intercompany                                 |                                   |         | 104,892                           |   |                 |          | (105,027 | ) |              |         | (135         | ) |              |       | 135          |  |                 |         |             |   |   |         | 37,187   |   |  |         | (37,187 | ) |  |         |         |   |  |   |    |  |   |         |         |  
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Net cash provided by (used in) financing
    activities    |                                              |                                   | 105,745 |                                   |   |                 | (105,027 | )        |   |              | 718     |              |   |              | 135   |              |  |                 | 853     |              |   |   | 38,787  |          |   |  | (37,187 | )       |   |  | 1,600   |          |   |  |  |     |  |   | 1,600   |         
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Net cash provided by (used in) discontinued
    operations |                                              |                                   |        |                                   |   |                 | 2,790    |          |   |              | 2,790   |              |   |              |      |              |  |                 | 2,790   |              |   |   |        |          |   |  | (1,738  | )       |   |  | (1,738  | )        |   |  |  |     |  |   | (1,738  | )       
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Increase (decrease) in cash and cash equivalents           |                                              |                                   | 10,816  |                                   |   |                 | 4,213    |          |   |              | 15,029  |              |   |              | 244   |              |  |                 | 15,273  |              |   |   | 52,323  |          |   |  | (1,643  | )       |   |  | 50,680  |          |   |  |  |     |  |   | 50,680  |         
|Cash and cash equivalents, beginning of period             |                                              |                                   | 140,617 |                                   |   |                 | 3,641    |          |   |              | 144,258 |              |   |              | 1,795 |              |  |                 | 146,053 |              |   |   | 594,385 |          |   |  | (6,160  | )       |   |  | 588,225 |          |   |  |  |     |  |   | 588,225 |         
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         
|Cash and cash equivalents, end of period                   |                                              | $                                 | 151,433 |                                   |   |                 | 7,854    |          |   |              | 159,287 |              |   |              | 2,039 |              |  | $               | 161,326 |              |   | $ | 646,708 |          |   |  | (7,803  | )       |   |  | 638,905 |          |   |  |  |     |  |   | 638,905 |         
|                                                           |                                              |                                   |         |                                   |   |                 |          |          |   |              |         |              |   |              |       |              |  |                 |         |              |   |   |         |          |   |  |         |         |   |  |         |          |   |  |   |     |  |   |         |         

20



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

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, 2003, 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, 2003; and (c) our unaudited consolidated
financial statements and related notes which are included in
this report on Form 10-Q. Please see the sections entitled
Risk Factors and A Warning About
Forward-Looking Statements for a discussion of the
uncertainties, risks and assumptions associated with these
statements.

Overview of Financial Results

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



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

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

|                              |       |                      |         |         |  |   |         |         | 
|----------------------------- | ----- | -------------------- | ------- | ------- |  | - | ------- | ------- | 
|                              |       |                     
|                              |       | For the Three Months
|                              |       | Ended March 31,     
|                              |       |                     
|                              |       | 2004                 |         | 2003   
|                              |       |                      |         |        
|Branded pharmaceuticals       |       | $                    | 233,208 |         |  | $ | 290,963 |        
|Meridian Medical Technologies |       |                      | 34,501  |         |  |   | 25,640  |        
|Royalties                     |       |                      | 16,757  |         |  |   | 15,424  |        
|Contract manufacturing        |       |                      | 6,178   |         |  |   | 6,394   |        
|                              |       |                      |         |         |  |   |         |        
|                              | Total |                      | $       | 290,644 |  |   | $       | 338,421 | 
|                              |       |                      |         |         |  |   |         |        

Results of Operations



| |                                               
| | ----------------------------------------------
| | Three Months Ended March 31, 2004 and
    2003



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

Total net revenue decreased $47.8 million,
or 14.1%, to $290.6 million in 2004 from
$338.4 million in 2003, primarily due to dramatically lower
net sales from our branded pharmaceuticals segment during 2004,
partially offset by increased revenues from our Meridian Medical
Technologies segment during the same period. Due to our decision
to market Prefest® and Nordette® for divestiture as
discussed more fully below, net sales associated with these
products are classified as part of discontinued operations and
are not included in total revenues for the periods presented.

Net sales from branded pharmaceutical products
decreased $57.8 million, or 19.9%, to $233.2 million
in 2004 from $291.0 million in 2003. This decrease was
primarily the result of wholesale channel inventory reductions
of some of our branded pharmaceutical products during 2004 which
occurred while we were actively negotiating inventory management
agreements with our three key wholesale customers, partially
offset by net sales of Skelaxin® and Sonata® which we
acquired in June 2003. Accordingly, net sales of our branded
pharmaceutical products during 2004 were well below the level
that prescription demand for such products would indicate.
Prescription demand estimates are inherently imprecise and rely
on third-party information which itself is subject to
uncertainties and limitations. Net sales of Altace® were
particularly negatively affected during 2004, as wholesale
channel inventories of this product were reduced well over one

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month of current prescription demand for this
product. Returns of branded pharmaceuticals increased
significantly in the first quarter of 2004, reflecting high
levels of returns primarily by wholesalers that purchased in
excess of prescription demand, as well as reduced prescriptions
for certain products due to competition. Additionally, we
believe our announced plans to enter into inventory management
agreements with certain wholesalers has also contributed to the
increase in returns of products. Under the agreements, we expect
to, among other things, reduce the amount of inventory in the
wholesale pipeline and reduce the variability of customer
ordering patterns. While we believe the first quarter rate of
returns is not indicative of future returns, we are closely
monitoring returns. As a result of the unusually high return
levels in the first quarter of 2004, we supplemented our normal
returns reserve to address specific products with higher levels
of returns and/or declining sales. The impact of returns on net
sales increased from $12.9 million in the first quarter of
2003 to $41.3 million in the first quarter of 2004,
$7.2 million of which was due to the supplemental reserve.


On March 9, 2004, we received a copy of a
letter from the FDA that was addressed to all applicants that
have filed an abbreviated new drug application, which we refer
to as an ANDA, in order to obtain permission to
market a generic version of Skelaxin®. The letter stated
that the use listed in the FDAs Orange Book for the
128 patent may be deleted from the ANDA applicants
product labeling. This FDA decision may explain some of the
wholesale inventory reduction that negatively affected net sales
of Skelaxin® during 2004. We believe that this decision is
arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. On March 18, 2004, the
Company filed a Citizen Petition with the FDA requesting
reinstatement of the FDAs previous policy on this issue
and a requirement that all ANDA applicants include this use in
their product labeling. If our Citizen Petition is rejected,
there is a substantial likelihood that a generic version of
Skelaxin® will enter the market, and our business,
financial condition, results of operations and cash flows could
be materially adversely affected.

Since the conclusion of the first quarter ended
March 31, 2004, we have entered into an inventory
management agreement with each of our three key wholesale
customers in order to facilitate improved management of
wholesale channel inventory levels of all of our branded
pharmaceutical products. Accordingly, although we believe net
sales of our branded products, particularly including but not
limited to Altace®, will be significantly adversely
affected by wholesale inventory reductions during the second
quarter of 2004. We anticipate that net sales of our branded
pharmaceuticals during the remainder of fiscal year 2004 should
begin to return to levels that are more consistent with
prescription demand for such products.

An ongoing clinical trial, the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone therapy and the oral estrogen therapy
markets including our products Prefest® and Menest®.
Prescriptions for some of our other womens health products
have also continued to decline over the past few years primarily
due to the availability of generics. Accordingly, during the
first quarter of 2004, our Board of Directors approved
managements decision to market many of our womens
health products, including Prefest®, Nordette®, and
Menest®, for divestiture. We are now actively marketing
such assets to potential purchasers.

Revenues from Meridian Medical Technologies
increased $8.9 million, or 34.8%, to $34.5 million in
2004 from $25.6 million in 2003 primarily due to increased
unit sales of EpiPen® under our supply agreement with Dey
L.P. who markets the product. Although demand for EpiPen®
continues to be strong due to increased awareness of the health
risks associated with allergic reactions, we expect competition
to intensify. The increase in the first quarter of 2004 is not
necessarily indicative of future results.

Revenues from royalties is derived from payments
we receive based on sales of Adenoscan® and
Adenocard®. Revenue from royalties increased
$1.4 million, or 9.1%, to $16.8 million in 2004 from
$15.4 million in 2003 primarily due to an increase in sales
of Adenoscan®. While we anticipate continued growth from
royalty revenues, we are not responsible for the marketing of
Adenoscan® and Adenocard® and, thus, are not able to
predict whether growth will continue, if at all, at the rate
experienced in the first quarter of 2004.

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Net revenues from contract manufacturing were
$6.2 million in 2004 compared to $6.4 million in 2003.



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

Total operating costs and expenses decreased
$50.3 million, or 14.7%, to $291.2 million in 2004
from $341.5 million in 2003. The decrease was primarily due
to a $89.3 million reduction in the net charge associated
with special items included in total operating costs and
expenses during 2004 compared to 2003. Other variables which
affected total operating costs and expenses during 2004 and 2003
are discussed in more detail below.

Special items are those particular income or
expense items that our management believes are not related to
our ongoing, underlying business, are non-recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and one-time inventory valuation adjustment
charges; charges resulting from the early extinguishment of
debt; asset impairment charges; expenses of drug recalls;
revenues and expenses associated with discontinued operations;
and gains and losses resulting from the divestiture of assets.
We believe the identification of special items enhances an
analysis of our ongoing, underlying business and of our
financial results when comparing those results to that of a
previous or subsequent like period. However, it should be noted
that the determination of whether to classify an item as a
special item involves judgments by us.

Cost of revenues increased $8.3 million, or
10.5%, to $87.7 million in 2004 from $79.4 million in
2003. This increase was primarily due to a charge during 2004 in
the amount of $17.2 million for the write-off of excess
inventory associated with our branded pharmaceuticals segment
which is to some extent attributable to dramatically reduced net
sales of branded pharmaceutical products during 2004 for the
reasons discussed above, partially offset by a reduction in cost
of revenues due to lower unit sales of our pharmaceutical
products during the same period. Additionally, cost of revenue
in 2004 includes a special item resulting in a charge of
$4.2 million which represents that portion of our remaining
minimum purchase commitments under our supply agreement for
Procanbid® that exceeds our expected demand for the
product. Accordingly, as a percentage of total revenues, cost of
revenues increased to 30.2% in 2004 from 23.5% in 2003. During
the remainder of calendar year 2004, we anticipate that cost of
revenues as a percentage of total revenues should return to a
level that is more consistent with that which we experienced in
2003.

Cost of revenues from branded pharmaceutical
products increased $8.9 million, or 16.7%, to
$62.2 million in 2004 from $53.3 million in 2003. This
increase was primarily due to a charge in the amount of
$17.2 million for the write-off of excess branded
pharmaceutical products inventory discussed above and a special
item resulting in a charge of $4.2 million which represents
that portion of our remaining minimum purchase commitments under
our supply agreement for Procanbid® that exceeds our
expected demand for the product. Due to our decision to market
Prefest® and Nordette® for divestiture, cost of
revenues associated with these products is classified as part of
discontinued operations and is not included in cost of revenues
from branded pharmaceutical products for the periods presented.

Cost of revenues from Meridian Medical
Technologies decreased $2.7 million, or 15.3%, to
$15.0 million in 2004 from $17.7 million in 2003
primarily due to a special item consisting of a one-time
inventory valuation adjustment in 2003 associated with our
acquisition of Meridian on January 8, 2003, resulting in a
charge of $2.2 million, and the mix of products sold in the
respective periods.

Cost of revenues from royalties decreased
$0.4 million to $2.6 million in 2004 from
$3.0 million in 2003.

Cost of revenues associated with contract
manufacturing increased $2.4 million, or 43.6%, to
$7.9 million in 2004 from $5.5 million in 2003
primarily due to an increase in fixed overhead costs.

Total selling, general and administrative
expenses increased $8.3 million, or 7.8%, to
$114.1 million in 2004 from $105.8 million in 2003.
This increase was primarily attributable to operating expenses
associated with the expansion of our sales force, special items
resulting in a charge equaling $5.7 million for
professional fees that are primarily related to the ongoing
investigations of our company by the Securities and Exchange
Commission and the Office of Inspector General of the Department
of Health and Human Services offset by

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decreases in co-promotion fees paid under our
Co-Promotion Agreement with Wyeth Pharmaceuticals due to lower
sales of Altace® during 2004, as compared to 2003, for the
reasons discussed above. As a percentage of total revenues,
total selling, general, and administrative expenses increased to
39.3% in 2004 compared to 31.3% in 2003. We anticipate that
total selling, general and administrative expense, as a
percentage of total revenues, should be less than the percentage
experienced in the first quarter of 2004. Due to our decision to
market Prefest® and Nordette® for divestiture as
discussed more fully below, selling, general and administrative
expense associated with these products is classified as part of
discontinued operations and is not included in total selling,
general and administrative expense for the periods presented.


Depreciation and amortization expense increased
$21.7 million, or 123.3%, to $39.3 million in 2004
from $17.6 million in 2003. This increase was primarily
attributable to the amortization of the intangible assets
associated with our acquisitions of Sonata® and
Skelaxin® on June 12, 2003. For more information
regarding estimated future amortization expense, please see Note
7 to our condensed consolidated financial statements included in
this report. Due to our decision to market Prefest® and
Nordette® for divesture, amortization expense associated
with these products is classified as part of discontinued
operations and is not included in depreciation and amortization
expense for the periods presented.

Other special items that also affected operating
costs and expenses during 2004 resulted in a net intangible
asset impairment charge totaling $34.9 million which is
primarily related to a greater than expected decline in
prescriptions for Florinef® and Tapazole® due to
availability of generics for these products. These special items
were recorded in order to adjust the carrying value of the
intangible assets on our balance sheet associated with these
products so as to reflect the estimated fair value of such
assets. During January 2003, we were notified of the approval by
the FDA of a second generic fludrocortisone acetate, USP, a
product that represents additional competition for our
Florinef® (fludrocortisone acetate, USP) product. We
recorded an impairment charge in the amount of $111.0 million
during 2003 reflecting the reduction in the fair value of the
Florinef® intangible assets. The additional intangible
asset impairment charge pertaining to Florinef® recorded in
2004 reflects a further reduction in the fair value of the
intangible assets associated with this product due to a decline
in prescriptions for the product that is in excess of our
original estimate. We determined the fair value of the
intangible assets associated with Florinef® and
Tapazole® based on our estimated discounted cash flows for
these products.

Prescriptions for Neosporin®, Septra®
and another small pharmaceutical product have continued to
decline over the past two years. At March 31, 2004, these
products have net intangible assets associated with them
totaling $19.2 million. We currently believe that these assets
are not impaired based on estimated undiscounted future cash
flows. However, if prescription declines exceed current
expectations, we may have to write-off a portion or all of the
intangible assets associated with these products.

Total research and development expense decreased
$11.6 million, to $16.0 million in 2004 from
$27.6 million in 2003. This decrease was primarily due to a
special item that resulted in a charge of $18.0 million
during 2003 due to acquired in-process research and development
associated with our acquisition of Meridian, offset by an
increase in expenses associated with ongoing research and
development programs that have progressed to later stages of
clinical development and an expansion in the number of these
programs.



| |               
| | --------------
| | Operating Loss

Due to the factors discussed above, we had an
operating loss equaling $0.6 million during 2004 compared
to an operating loss of $3.1 million in 2003.



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

Interest income decreased $1.4 million to
$1.1 million in 2004 from $2.5 million in 2003
primarily due to reduced cash balances in 2004.

Interest expense was $3.1 million in 2004
compared to $3.0 million in 2003.

Special items affecting other income (expense)
include a charge in the amount of $49 thousand during 2004
to reflect an increase in the valuation allowance for the
convertible notes receivable from Novavax, Inc.

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compared to income in the amount of
$8.0 million during 2003 to reflect a decrease in the
valuation allowance for the convertible notes receivable from
Novavax. Statement of Financial Accounting Standards, which we
refer to as SFAS, No. 114, Accounting by
Creditors for Impairment of a Loan  an amendment of
FASB Statements No. 5 and 15 requires that we treat
the Novavax convertible notes as an impaired loan because of the
decline in the share price of Novavax common stock to levels
below that established by our common stock conversion options
associated with the convertible notes. We will adjust the amount
of the valuation allowance in future periods until the loan is
no longer considered to be impaired. If the Novavax common stock
price declines, we may incur additional charges related to the
investment in the convertible notes.


Discontinued
Operations

An ongoing clinical trial, the Womens
Health Initiative, is being conducted by the National Institutes
of Health. Data from the trial released in July 2002 indicated
that an increase in certain health risks may result from the
long-term use of a competitors combination hormone
replacement therapy for women. News of this data and the
perception it has created have negatively affected the entire
combination hormone therapy and the oral estrogen therapy
markets including our products Prefest® and Menest®.
Prescriptions for some of our other womens health products
have also continued to decline over the past few years primarily
due to the availability of generics. Accordingly, during the
first quarter of 2004, our Board of Directors approved
managements decision to market for divestiture many of our
womens health products, including Prefest®,
Nordette®, and Menest®. We are now actively marketing
these assets to potential purchasers.

The Prefest® and Nordette® product
rights held for sale have identifiable cash flows that are
largely independent of the cash flows of other groups of assets
and liabilities and have been classified as discontinued
operations in the accompanying financial statements.
Accordingly, all net sales, cost of revenues, selling, general
and administrative costs and amortization associated with
Prefest® and Nordette® are included in discontinued
operations in 2004 and 2003.

Special items include a loss from discontinued
operations in the amount of $171.2 million during 2004 or $108.7
million net of tax benefit primarily due to an intangible asset
write-down to reduce the carrying value of the intangible assets
associated with these products to their estimated fair value
less anticipated costs to sell. We determined the fair value of
these intangible assets based on managements discounted
cash flow projections for the products. Prefest® and
Nordette® are included in our branded pharmaceuticals
segment. Special items during 2003 include a loss from
discontinued operations in the amount of $4.4 million, or $2.8
million net of tax benefit.



| |                   
| | ------------------
| | Income Tax Benefit

The effective tax rate of 30.8% (benefit) in 2004
is less than the federal statutory rate of 35% (benefit) due
primarily to certain permanent book-tax differences, state
taxes, and a valuation allowance established against certain
state deferred tax assets. The effective tax rate in 2003 was
higher than the federal statutory rate due primarily to certain
permanent book-tax differences, state income taxes, and
non-deductible in-process research and development charges
incurred with the acquisition of Meridian Medical Technologies.



| |         
| | --------
| | Net Loss

Due to the factors discussed above, we had a net
loss equaling $111.1 million during 2004 compared to a net
loss of $7.2 million in 2003

Liquidity and Capital Resources

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

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On June 12, 2003, we acquired the primary
care business of Elan and of some of its subsidiaries in the
United States and Puerto Rico, which includes the rights to two
branded prescription pharmaceutical products, including the
rights pertaining to potential new formulations, of Sonata®
and Skelaxin®, together with Elans United States
primary care field sales force. Product rights subject to the
agreement include those related to Sonata®, a
nonbenzodiazepine treatment for insomnia, and Skelaxin®, a
muscle relaxant, in the United States, its territories and
possessions, and Puerto Rico. Under the terms of the agreement,
Elans sale of Skelaxin® included the related NDAs,
copyrights, trademarks, patents and rights pertaining to
potential new formulations of Skelaxin®. Elans sale
of Sonata® included its rights to the product, as well as
certain related copyrights. We also acquired certain
intellectual property, regulatory, and other assets relating to
Sonata® directly from Wyeth. Under the terms of the
agreement, we secured an exclusive license to the intellectual
property rights, in this territory, of both Wyeth and Elan to
the extent they relate to new formulations of Sonata®,
other than for use in animals. The total estimated purchase
price of $814.4 million includes the cost of acquisition,
assumed liabilities and a portion of contingent liabilities. The
purchase price also includes the transfer of inventory with a
value of approximately $40.4 million. In connection with
this acquisition, we placed $163.4 million into escrow to
satisfy the deferred obligations to Wyeth that we assumed. In
addition to the initial purchase price, we paid
$25.0 million during January 2004, as a milestone payment
to Elan relating to the continued exclusivity of Sonata®
and we paid $11.0 million during March 2004, as a milestone
payment to Elan in connection with the development of new
formulations of Sonata®. We will also



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay royalties on the current formulation of
    Skelaxin® from the date of closing,                                                                       
|
| |  | pay up to an additional $60.0 million if
    Elan achieves certain milestones in connection with the
    development of a reformulated version of Sonata®,
|
| |  | pay $15.0 million as a milestone payment if
    annual net sales of a reformulated version of Sonata®
    exceed $100.0 million and                       
|
| |  | pay for costs associated with the development of
    a reformulated version of Sonata®.                                                                   

We drew down a total of $125.0 million on
our $400.0 million senior secured revolving credit facility
on June 3 and June 6, 2003, the proceeds of which were
used to fund a portion of the Elan acquisition on June 12,
2003. During the third quarter of 2003, we paid off the
principal balance then owing under our $400.0 million
senior secured revolving credit facility and have no outstanding
balance owing under this facility as of March 31, 2004.

As additional consideration for Synercid®,
an injectable antibiotic acquired on December 30, 2002, we
agreed to potential milestone payments. We will potentially pay
Aventis milestone payments totaling $39.6 million over the
next two years, payable in annual installments of
$21.2 million and $18.6 million on December 31,
2004 and December 31, 2005, respectively, which relate to
the continued recognition of Synercid® as an effective
treatment for vancomycin-resistant enterococcus faecium. An
additional $25.0 million milestone is payable to Aventis if
Synercid® should receive FDA approval to treat methicillin
resistant staphylococcus aureus, or we will pay Aventis a
one-time payment of $5.0 million the first time during any
twelve-month period net sales of Synercid® exceed
$60.0 million, and a one-time payment of $20.0 million
the first time during any twelve-month period net sales of
Synercid® exceed $75.0 million

SEC
Investigation and Securities Litigation

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. We received SEC
subpoenas relating to, among other topics, sales of our products
to VitaRx and Prison Health Services, our best price
lists, the pricing of our pharmaceutical products provided to
governmental Medicaid agencies, the accrual and payment of
rebates on the product Altace®, the products Fluogen®
and Lorabid®, the King Benevolent Fund, Inc., our
calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, we received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to our sales,
marketing and other business practices for Altace®,
Aplisol® and Levoxyl®.

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In connection with our determination that we have
underpaid amounts due to Medicaid and other governmental pricing
programs, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
by the appropriate agencies of our calculations of our
underpayments, and it is possible that this review could result
in material changes. The SEC, the Office of Inspector General,
the Department of Justice, the Department of Veterans Affairs,
the Public Health Service, the Centers for Medicare and Medicaid
Services and other governmental agencies that might be
investigating or might commence an investigation of us could
impose, based on a claim of a violation of fraud and false
claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time. For
additional information, please see the section entitled
Risk Factors under the heading 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 and the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment,
and Related Matters in our 2003 Form 10-K.

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

Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. The derivative cases in state
court were consolidated and are currently stayed. The stay will
remain in place at least until the motions to dismiss the
consolidated federal class securities action are decided. The
derivative cases in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act, which we
refer to as ERISA. As amended, the complaint alleges that we and
certain of our executive officers, former executive officers,
directors, former directors and an employee violated fiduciary
duties that were allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We filed a motion to dismiss the ERISA action
on March 5, 2004; this motion to dismiss is currently
pending.

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

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



| |                                      
| | -------------------------------------
| | Three Months Ended March 31,
    2004

We generated net cash from continuing operations
of $60.3 million for the three months ended March 31,
2004. Our net cash provided from operations was primarily the
result of a $2.4 million net loss from continuing
operations, adjusted for non-cash depreciation and amortization
from continuing operations of $39.3 million, a decrease in
accounts receivable of $52.9 million, a decrease in
inventory from continuing operations of $12.2 million, a
change in deferred taxes from continuing operations of
$17.0 million, and an intangible asset impairment charge
from continuing operations of $34.9 million. Primary uses
of cash within operations included a decrease in accounts
payable of $33.6 million, a decrease in accrued expenses of
$23.8 million, and a decrease in other liabilities of
$20.1 million.

Investing activities reduced cash flow by
$48.7 million primarily due to milestone payments related
to the acquisition of the primary care business of Elan of
$36.0 million and the purchase of property, plant and
equipment of $12.6 million.

Financing activities contributed
$0.9 million to cash flow due to the exercise of employee
stock options.

Discontinued operations provided
$2.8 million in cash flows. This was primarily the result
of a $108.7 total loss from discontinued operations, adjusted
for non-cash depreciation and amortization of $4.4 million,
a change in deferred taxes of $62.5 million, and an
intangible asset impairment charge of $169.6 million.



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

As of March 31, 2004, we had
$345.0 million of long-term debt (including current
portion) outstanding, up to $388.4 million available under
our revolving credit facility, and $616.0 million available
under our universal shelf registration.

On September 20, 2001, we registered a
$1.3 billion universal shelf registration statement on
Form S-3 with the Securities and Exchange Commission. This
universal shelf registration statement allows us to sell any
combination of debt and/or equity securities in one or more
offerings up to a total of $1.3 billion. During November
2001, we completed the sale of 17,992,000 newly issued shares of
common stock for $38.00 per share ($36.67 per share
net of commissions and expenses) resulting in net proceeds of
$659.8 million. Additionally, during November 2001, we
issued $345.0 million of 2 3/4% Convertible
Debentures due November 15, 2021 in a private placement.
Holders may require us to repurchase for cash all or part of
these debentures on November 15, 2006, November 15,
2011 or November 15, 2016 at a price equal to 100% of the
principal amount of the debentures plus accrued interest up to
but not including the date of repurchase.

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

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fiscal quarter after April 23, 2002,
excluding any fiscal quarter for which consolidated income is
negative; an EBITDA to interest expense ratio of no less than
3.00 to 1.00; and a funded debt to EBITDA ratio of no greater
than 3.50 to 1.00 prior to April 24, 2004 and of no greater
than 3.00 to 1.00 on or after April 24, 2004. As of
March 31, 2004, we have complied with these covenants. As
described above, on June 3 and June 6, 2003, we drew
down a total of $125.0 million under our senior secured
revolving credit facility to fund a portion of our acquisition
of Elans primary care business on June 12, 2003.
During the third quarter of 2003, we repaid the principal
balance owed on our senior secured revolving credit facility.


As of March 31, 2004, there were no
outstanding borrowings under this facility, however, we had
$11.6 million outstanding for letters of credit under this
facility.



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

Capital expenditures, including capital lease
obligations, were $12.6 million and $12.8 million for
the three months ended March 31, 2004 and 2003,
respectively. The principal capital expenditures during the
three months ended March 31, 2004 included property and
equipment purchases, new information technology system
implementation costs and building improvements for facility
upgrades and increased capacity.



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board, which we refer to as FASB, issued
Interpretation No. 46, Consolidation of Variable
Interest Entities, which we refer to as
FIN 46. In December 2003, FASB revised
FIN 46 to discuss certain FIN 46 implementation
issues. The revised provisions are applicable no later than the
first reporting period ending after March 15, 2004.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is required to absorb
a majority of the variable interest entitys expected
losses or entitled to receive a majority of the entitys
residual returns or both. We have evaluated our relationship
with Novavax and determined that Novavax is not currently a
variable interest entity that is required to be consolidated in
our financial statements under FIN 46.

During the period from December 2000 through
June 2002, we provided $40.0 million in financing to
Novavax in the form of notes receivable convertible to common
stock of Novavax. In addition, during 2001, we obtained an
exclusive worldwide license to promote, market, distribute and
sell EstrasorbTM and AndrosorbTM,
following approval, except in the United States and Puerto Rico,
where we and Novavax will co-market the products. Following
regulatory approval, we will pay Novavax a royalty based on a
percentage of net sales of the products outside of the United
States and Puerto Rico. Novavax will pay us a co-promotion fee
equal to 50% of net sales less cost of revenues of the products
within the United States and Puerto Rico. The NDA for
EstrasorbTM was approved by the FDA during
October 2003. As of March 31, 2004, we owned
approximately 0.9% of Novavax common stock. Our estimate of
maximum exposure to loss as a result of our contractual
relationships with Novavax is $32.3 million.

Novavax is a fully-integrated specialty
biopharmaceutical company focused on research, development and
commercialization of products utilizing their drug delivery and
vaccine technologies for large and growing markets,
concentrating on the areas of womens health and infectious
diseases. At December 31, 2003, Novavax reported total
assets of $84.2 million, total liabilities of
$48.2 million, revenues for the year ended
December 31, 2003 of $11.8 million, and a net loss of
$17.3 million for the year ended December 31, 2003.

Critical
Accounting Policies

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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires that management make estimates and
assumptions. Assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities are affected by
such estimates and assumptions. The most significant assumptions
are employed in estimates used in determining values of
inventories and intangible assets, accruals for rebates, returns
and chargebacks, as well as estimates used in applying the

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revenue recognition policy. We are subject to
risks and uncertainties that may cause actual results to differ
from those estimates, such as changes in the healthcare
environment, competition, legislation and regulation. We believe
the following accounting policies are the most critical because
they involve the most significant judgments and estimates used
in preparation of our consolidated financial statements.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories.Our
    inventories are valued at the lower of cost or market value. We
    evaluate all of our inventory for short dated, excess quantities
    or slow moving product and inventory commitments under supply
    agreements based on projections of future demand and market
    conditions. For those units in inventory that are so identified,
    we estimate their market value or net sales value based on
    current realization trends. If the projected net realizable
    value is less than cost, on a specific indentification 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 if our estimated future inventory
    requirements exceed estimated inventory quantities which we will
    be able to sell to our customers, we record a charge in costs of
    revenues.
|
| |  | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We review our property and intangible assets for
    possible impairment whenever events or circumstances indicate
    that the carrying amount of an asset may not be recoverable. We
    review our goodwill for possible impairment annually, or
    whenever events or circumstances indicate that the carrying
    amount may not be recoverable. In evaluating goodwill for
    impairment, we estimate the fair value of our individual
    business reporting units on a discounted cash flow basis.
    Assumptions and estimates used in the evaluation of impairment
    may affect the carrying value of long-lived assets, which could
    result in impairment charges in future periods. Such assumptions
    include projections of future cash flows and, in some cases, the
    current fair value of the asset. In addition, our depreciation
    and amortization policies reflect judgments on the estimated
    useful lives of assets.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accruals for rebates, returns, and
    chargebacks.We establish accruals for
    rebates, returns, and chargebacks in the same period we
    recognize the related sales. The accruals reduce revenues and
    are included in accrued expenses. Accrued rebates include
    amounts due under Medicaid, managed care rebates and other
    commercial contractual rebates. We estimate accrued rebates
    based on a percentage of selling price determined from
    historical experience. With respect to accruals for estimated
    Medicaid rebates, we evaluate our historical rebate payments by
    product as a percentage of historical sales, product pricing and
    current contracts. At the time of rebate payment, which
    generally 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 any differences between estimated
    and actual payments. Due to estimates and assumptions inherent
    in determining the amount of the rebate, rebate payments remain
    subject to retroactive adjustment. Product returns are accrued
    based on historical experience of product return rates and on
    our estimate of inventory in the wholesale and retail pipeline.
    When we identify decreases in demand for products, we further
    analyze these products for potential additional future returns
    due to pipeline contraction. We provide a supplemental reserve
    for these products when it is determined that the decrease in
    demand may result in higher than expected returns. Chargebacks
    are based on the estimated days of unprocessed claims using
    historical experience. In all cases, judgment is required in
    estimating these reserves, and actual claims for rebates,
    returns and chargebacks could be different from the estimates.
    Medicaid and certain other governmental pricing programs involve
    particularly

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

Before you purchase our securities, 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, 2003,
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, 2003 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



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investigations by the SEC and Office of
    Inspector General of the Department of Health and Human
    Services, other possible governmental investigations, and
    securities and ERISA litigation could have a material adverse
    effect on our business.

As previously reported, in March 2003 the SEC
initiated a formal investigation of King. We received SEC
subpoenas relating to, among other topics, sales of our products
to VitaRx and Prison Health Services, our best price
lists, the pricing of our pharmaceutical products provided to
governmental Medicaid agencies, the accrual and payment of
rebates on the product Altace®, the products Fluogen®
and Lorabid®, the King Benevolent Fund, Inc., our
calculations related to Medicaid rebates, and the Audit
Committees internal review of issues raised by the SEC
investigation. As also previously reported, on November 13,
2003, we received a subpoena duces tecum from the Office of
Inspector General at the Department of Health and Human Services
requesting the production of documents relating to some of the
matters being investigated by the SEC and to our sales,
marketing and other business practices for Altace®,
Aplisol® and Levoxyl®.

In connection with our determination that we have
underpaid amounts due to Medicaid and other governmental pricing
programs, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
by the appropriate agencies of our calculations of our
underpayments, and it is possible that this review could result
in material changes. The SEC, the Office of Inspector General,
the Department of Justice, the Department of Veterans Affairs,
the Public Health Service, the Centers for Medicare and Medicaid
Services and other governmental agencies that might be
investigating or might commence an investigation of us could
impose, based on a claim of a violation of fraud and false
claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time. For
additional information, please see the section entitled
Risk Factors under the heading 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 and the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment,
and Related Matters in our 2003 Form 10-K.

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

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


Seven purported shareholder derivative complaints
have also been filed in federal and state courts in Tennessee
alleging a breach of fiduciary duty, among other things, by some
of our officers and directors. The derivative cases in state
court were consolidated and are currently stayed. The stay will
remain in place at least until the motions to dismiss the
consolidated federal class securities action are decided. The
derivative cases in federal court are stayed until there is a
decision on the merits in the state court derivative suits.
Additionally, a class action complaint was filed in the United
States District Court for the Eastern District of Tennessee
under the Employee Retirement Income Security Act, which we
refer to as ERISA. As amended, the complaint alleges that we and
certain of our executive officers, former executive officers,
directors, former directors and an employee violated fiduciary
duties that were allegedly owed our 401(k) Retirement Savings
Plans participants and beneficiaries under ERISA. The
allegations underlying each of these additional lawsuits are
similar in many respects to those in the class action litigation
described above. We filed a motion to dismiss the ERISA action
on March 5, 2004; this motion to dismiss is currently
pending.

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

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



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

Altace®, Skelaxin®, Thrombin-JMI®,
Levoxyl®, Sonata® and royalty revenues for the three
months ended March 31, 2004 accounted for 24.9%, 15.8%,
13.5%, 9.9%, 5.7% and 5.8% of our total revenues from continuing
operations, respectively, or 75.6% in total. We believe that
these sources of revenue may constitute a significant portion of
our revenues for the foreseeable future. Accordingly, any factor
adversely affecting sales of any of these products or products
for which we receive royalty payments could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.

If
we cannot successfully enforce our rights under the patents
relating to three of our largest products, Altace®,
Levoxyl® and Skelaxin®, or relating to our product
Prefest®, against generic drug manufacturers, our results
of operations could be materially adversely
affected.

Cobalt Pharmaceuticals, Inc., a generic drug
manufacturer located in Mississauga, Ontario, Canada, has filed
an ANDA with the FDA seeking permission to market a generic
version of Altace®. The following U.S. patents are listed
for Altace® in the FDAs Orange Book: United States
Patent Nos. 4,587,258, the 258 patent, and
5,061,722, the 722 patent, two composition of matter
patents related to Altace®, and United States Patent
No. 5,403,856, the 856 patent, a method-of-use
patent related to Altace®, with expiration dates of January
2005, October 2008, and April 2012, respectively. Under the
Hatch-Waxman Act, any generic

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manufacturer may file an ANDA with a
certification, known as a Paragraph IV
certification, challenging the validity or infringement of
a patent listed in the FDAs Orange Book four years after
the pioneer company obtains approval of its NDA. Cobalt has
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and we filed suit on March 14,
2003 to enforce our rights under that patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides us an
automatic stay of FDA approval of Cobalts ANDA for
30 months from no earlier than February 5, 2003. In
March 2004, Cobalt stipulated to infringement of the 722
patent. Should the court find in favor of a Cobalt summary
judgment motion on the validity of the 722 patent, we
would not receive the full benefit of that 30 month stay.
Subsequent to filing our original complaint, we amended our
complaint to add an allegation of infringement of the 856
patent. In its answer to the amended complaint, Cobalt denied
infringement and alleged that the 856 patent is invalid.
Pursuant to FDA regulations, however, Cobalt is not required to
certify against the 856 patent. We intend to
vigorously enforce our rights under the 722 and
856 patents. Regardless of the outcome of the lawsuit
involving the 722 and 856 patents, however, Cobalt
has not challenged the validity of the 258 patent and,
therefore, cannot market a generic version of Altace® prior
to the expiration of that patent in January 2005.


Eon Labs, Inc., CorePharma, LLC and Mutual
Pharmaceutical Co., Inc. have each filed an ANDA with the FDA
seeking permission to market a generic version of Skelaxin®
400 mg tablets. United States Patent Nos. 6,407,128,
the 128 patent, and 6,683,102, the 102 patent,
two method-of-use patents relating to Skelaxin®, are listed
in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications alleging noninfringement and
invalidity of the 128 patent. Mutual has filed a
Paragraph IV certification alleging noninfringement and
invalidity of the 102 patent. We filed separate suits
against Eon Labs on January 2, 2003 and CorePharma on
March 7, 2003 and are currently assessing our right to
bring suit against Mutual. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Core and Eon provides us with an
automatic stay of FDA approval of Eons ANDA for
30 months from no earlier than November 18, 2002 and
an automatic stay of FDA approval of Cores ANDA for
30 months from no earlier than January 24, 2003. We
intend to vigorously enforce our rights under the 128 and
102 patents to the full extent of the law. On
March 9, 2004, we received a copy of a letter from the FDA
to all ANDA applicants for Skelaxin® stating that the use
listed in the FDAs Orange Book for the 128 patent
may be deleted from the ANDA applicants product labeling.
We believe that this decision is arbitrary, capricious, and
inconsistent with the FDAs previous position on this
issue. On March 18, 2004, we filed a Citizens
Petition with the FDA requesting reinstatement of the FDAs
previous policy on this issue and a requirement that all ANDA
applicants include this use in their product labeling. If our
Citizens Petition is rejected, there is a substantial
likelihood that a generic version of Skelaxin® will enter
the market, and our business, financial condition, results of
operations and cash flows could be materially adversely affected.

Mylan Pharmaceuticals, Inc. and
KV Pharmaceutical Company have each filed an ANDA with the
FDA seeking permission to market a generic version of
Levoxyl®. United States Patent No. 6,555,581, the
581 patent, a utility patent with formulation claims
relating to Levoxyl®, was issued to us on April 29,
2003. The 581 patent is listed in the FDAs Orange
Book and does not expire until February 15, 2022. No
earlier than April 30, 2003, we received notice of
Mylans Paragraph IV certification, which alleges
noninfringement of the 581 patent. We filed suit
against Mylan on June 13, 2003 in the Eastern District of
Pennsylvania and on June 16, 2003 in the Northern District
of West Virginia; these suits have been consolidated in the
Northern District of West Virginia and trial is currently
scheduled for June 2005. Pursuant to the Hatch-Waxman Act, the
filing of the suits against Mylan provides us with an automatic
stay of FDA approval of Mylans ANDA for 30 months
from no earlier than April 30, 2003. On June 24, 2003,
we received notice of KVs Paragraph IV certification,
which alleges noninfringement and invalidity of the
581 patent. We filed suit against KV on
August 7, 2003 and trial is currently scheduled to begin
December 6, 2004. Pursuant to the Hatch-Waxman Act, the
filing of the suit against KV provides us with an automatic stay
of FDA approval of KVs ANDA for 30 months from no
earlier than June 24, 2003. We intend to vigorously enforce
our rights under the 581 patent to the full extent of
the law.

Barr Laboratories Inc. has filed an ANDA, which
included a Paragraph IV certification, with the FDA seeking
permission to market a generic version of Prefest®. United
States Patent No. 5,108,995, the 995 patent, a
utility patent with method of treatment claims relating to
Prefest®, and United States Patent

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




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

Our charter and bylaws require that we indemnify
our directors and officers to the fullest extent provided by
applicable Tennessee law. Although we have purchased liability
insurance for our directors and officers to fund such
obligations, if our insurance carrier should deny coverage, or
if the indemnification costs exceed the insurance coverage, we
would be forced to bear some or all of these indemnification
costs directly, which could be substantial and may have an
adverse effect on our business, financial condition, results of
operations and cash flows. If the cost of this insurance
continues to increase significantly, or if this insurance
becomes unavailable, we may not be able to maintain or increase
our levels of insurance coverage for our directors and officers,
which could make it difficult to attract or retain qualified
directors and officers.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We may not achieve our intended benefits
    from the Co-Promotion Agreement with Wyeth for the promotion of
    Altace®.

We entered into the Co-Promotion Agreement with
Wyeth for Altace® partially because we believed a larger
pharmaceutical company with more sales representatives and, in
our opinion, with substantial experience in the promotion of
pharmaceutical products to physicians would significantly
increase the sales revenue potential of Altace®. By
effectively co-marketing the new indications for Altace®
that were approved by the FDA on October 4, 2000, we intend
to increase the demand for the product. In the agreement, both
of us have incentives to maximize the sales of Altace® and
to optimize the marketing of the product by coordinating our
promotional activities.

It is possible that we or Wyeth or both of us
will not be successful in effectively promoting Altace® or
in optimizing its sales. The content of agreed-upon promotional
messages for Altace® may not sufficiently convey the merits
of Altace® and may not be successful in convincing
physicians to prescribe Altace® instead of other ACE
inhibitors or competing therapies. The targets for sales force
staffing, the number and frequency of details to physicians and
the physicians who are called upon may be inadequate to realize
our expectations for revenues from Altace®. If disputes
arise between Wyeth and us relating to our respective
obligations under the Co-Promotion Agreement and these disputes
are resolved against us, our business, financial condition,
results of operations and cash flows could be materially
adversely affected.

Neither we nor Wyeth may be able to overcome the
perception by physicians of a class effect, which we discuss
below. Further, developments in technologies, the introduction
of other products or new therapies may make it more attractive
for Wyeth to concentrate on the promotion of a product or
products other than Altace® or to lessen their emphasis on
the marketing of Altace®. Our strategic decisions in
dealing with managed health care organizations may not prove to
be correct and we could consequently lose sales in this market
to competing ACE inhibitor products or alternative therapies. If
any of these situations occurred, they could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.

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| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our Bristol facility and the Aventis
    (USA) facility do not remain FDA-approved manufacturing and
    packaging sites for Altace®or if there is an interruption in the supply of raw
    material for Altace® or of the finished
    product, the distribution, marketing and subsequent sales of the
    product could be adversely affected.

Our Bristol facility is an FDA-approved
manufacturing and packaging site for Altace®. Aventis
(USA) in Kansas City, Missouri, is also an FDA-approved
manufacturing and packaging site for Altace®. Aventis
Pharma Deutscheland GmbH (Germany) is our single supplier of
ramipril, the active ingredient in Altace®. Because the
manufacture of ramipril is a patented process, we cannot secure
the raw material from another source. We have entered into a
long-term supply agreement with Aventis (Germany) for ramipril
and we believe that it adequately protects our supply of raw
material, but there can be no guarantee that there will be no
interruptions or delays in the supply of the raw material. Any
interruptions or delays in manufacturing or receiving the
finished product or raw material used for the future production
of Altace® or the failure to maintain our Bristol facility
and the Aventis (USA) facility as FDA-approved
manufacturing and packaging sites for Altace® could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of
    Altace®may be affected
    by the perception of a class effect, and Altace®
    and our other products may be subject to various sources
    of competition from alternate therapies.

Although the FDA has approved indications for
Altace® that are unique among ACE inhibitors, we may be
unable to meet investors expectations regarding sales of
Altace® due to a perceived class effect or the inability to
market Altace®s differentiating uses and indications
effectively.

All prescription drugs currently marketed by
pharmaceutical companies may be grouped into existing drug
classes, but the criteria for inclusion vary from class to
class. For some classes, specific biochemical properties may be
the defining characteristic. For example, Altace®
(ramipril) is a member of a class of products known as ACE
inhibitors because ramipril is one of several chemicals that
inhibit the production of enzymes that convert angiotensin,
which could otherwise lead to hypertension.

When one drug from a class is demonstrated to
have a particularly beneficial or previously undemonstrated
effect (e.g., the benefit of Altace® as shown by the HOPE
trial), marketers of other drugs in the same class (for example,
other ACE inhibitors) will represent that their products offer
the same benefit simply by virtue of membership in the same drug
class. Consequently, other companies with ACE inhibitors that
compete with Altace® will represent that their products are
equivalent to Altace®. By doing so, these companies will
represent that their products offer the same efficacious results
demonstrated by the HOPE trial. Regulatory agencies do not
decide whether products within a class are quantitatively
equivalent in terms of efficacy or safety. Because comparative
data among products in the same drug class are rare, marketing
forces often dictate a physicians decision to use one ACE
inhibitor over another. We may not be able to overcome other
companies representations that their ACE inhibitors will
offer the same benefits as Altace® as demonstrated by the
HOPE trial. As a result, sales of Altace® may suffer from
the perception of a class effect.

Currently, no generic form of Altace® is
available, although Cobalt Pharmaceuticals has filed a
Paragraph IV certification pertaining to Altace® which
we have described above. That is, there is no product that has
the same active ingredient, ramipril, as Altace®. Although
no generic substitute for Altace® has been approved by the
FDA, there are other ACE inhibitors whose patents have expired
or will expire in the next few years and there are generic forms
of other ACE inhibitors. Also, there are different therapeutic
agents that may be used to treat certain conditions treated by
Altace®. For example, the group of products known as
angiotensin II receptor blockers, which we refer to as an
ARB, beta-blockers, calcium channel blockers and
diuretics, may be prescribed to treat certain conditions that
Altace® is used to treat. New ACE inhibitors or other
anti-hypertensive therapies, increased sales of generic forms of
other ACE inhibitors or of other therapeutic agents that compete
with Altace® may adversely affect the sales of
Altace®. In these events, our business, financial
condition, results of operations and cash flows could be
materially adversely affected.

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| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Co-Promotion Agreement for
    Altace®with Wyeth
    could be terminated before we realize all of the benefits of the
    agreement, it could be assigned to another company by Wyeth or
    Wyeth could market a competing product.

Our exclusive Co-Promotion Agreement for
Altace® with Wyeth could, under some circumstances, be
terminated before we realize all of the benefits of the
agreement. If the Co-Promotion Agreement is terminated for any
reason, we may not realize increased sales which we believe may
result from the expanded promotion of Altace®. If we must
unwind our marketing alliance efforts, there may be a material
adverse effect on the sales of Altace®.

If another company were to acquire, directly or
indirectly, over 50% of the combined voting power of
Wyeths voting securities or more than half of its total
assets, then Wyeth could assign its rights and obligations under
the Altace® Co-Promotion Agreement to a successor without
our prior consent. However, a successor would be required to
first assume in writing the obligations of Wyeth under the
Co-Promotion Agreement before the rights of Wyeth were assigned
to it. Another party might not market Altace® as
effectively or efficiently as Wyeth did. Also, a company that
acquires Wyeth might not place as much emphasis on the
Co-Promotion Agreement, might expend fewer marketing resources,
such as fewer sales representatives, than Wyeth did, or might
have less experience or expertise in marketing pharmaceutical
products to physicians. In any of these cases, there may be a
material adverse effect on the sales of Altace®.

When feasible, Wyeth must give us six
months written notice of its intent to sell, market or
distribute any product competitive with Altace®. Under the
Co-Promotion Agreement, a product competes with Altace® if
it is an ACE inhibitor, an ARB, or an ACE inhibitor or ARB in
combination with other cardiovascular agents in a single
product. However, an ARB alone or in combination with other
cardiovascular agents competes with Altace® only if the
level of promotional effort used by Wyeth for the ARB is greater
than 50% of that applied to Altace®. A product would not
compete with Altace® if in the last 12 months it had
net sales of less than $100.0 million or 15% of net sales of
Altace®, whichever was higher. Also, a product would not
compete with Altace® under the Co-Promotion Agreement if
the product were acquired by Wyeth through a merger with or
acquisition by a third party and the product were no longer
actively promoted by Wyeth or its successor through detailing
the product to physicians.

Once we have been notified in writing of
Wyeths intent to market, sell or distribute a competing
product, then Wyeth has 90 days to inform us as to whether
it intends to divest its interest in the competing product. If
Wyeth elects to divest the competing product, it must try to
identify a purchaser and to enter into a definitive agreement
with the purchaser as soon as practicable. If Wyeth elects not
to divest the competing product or fails to divest the product
within one year of providing notice to us of its plan to divest
the competing product, then both of us must attempt to establish
acceptable terms under which we would co-promote the competing
product for the remaining term of our Altace® Co-Promotion
Agreement. Alternatively, Wyeth and we could agree upon another
commercial relationship, such as royalties payable to us for the
sale of the competing product, or we could agree to adjust the
promotion fee we pay to Wyeth for the co-promotion of
Altace®. If Wyeth and we are unable to establish acceptable
terms under any of these options, then we have the option at our
sole discretion to reacquire all the marketing rights to
Altace® and terminate the Co-Promotion Agreement upon
180 days prior written notice to Wyeth. In the event we
decided to reacquire all the marketing rights to Altace® we
would be obligated to pay Wyeth an amount of cash equal to twice
the net sales of Altace® in the United States for the
12 month period preceding the reacquisition. The foregoing
could have a material effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales of
    Levoxyl®could be
    affected by future actions of the FDA, the possible development
    and approval of a generic substitute for Levoxyl® and our
    ability to maintain effective patent protection for
    Levoxyl®.

On August 14, 1997, the FDA announced in the
Federal Register (62 FR 43535) that orally administered
levothyroxine sodium drug products are new drugs. The notice
stated that manufacturers who wish to continue to market these
products must submit applications as required by the FDC Act by
August 14,

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2000. On April 26, 2000, the FDA issued a
second Federal Register notice extending the deadline for filing
these applications until August 14, 2001.


On May 25, 2001, the FDA approved our NDA
for Levoxyl®, our levothyroxine sodium drug product. Other
manufacturers of levothyroxine sodium drug products have
received FDA approval of NDAs for their levothyroxine
sodium products. The FDA has announced that after
August 14, 2001, it will not accept NDAs for
levothyroxine sodium drug products. However, the FDA has stated
it will continue to review applications which were submitted by
August 14, 2001. Other manufacturers who wish to submit an
application for an equivalent product after August 14, 2001
must submit an ANDA seeking approval of a generic substitute for
a levothyroxine sodium product with an approved NDA. A
manufacturer could submit an ANDA demonstrating in vivo
bioequivalence (in other words, the two products produce
identical effects on the body) to Levoxyl®. If the FDA were
to determine that another levothyroxine sodium product is
bioequivalent to Levoxyl®, generic substitution for
Levoxyl® may become possible which could result in a
decrease in sales of our product Levoxyl® and have a
material adverse effect upon our results of operations and cash
flows.

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

As noted above, Mylan and KV have each filed an
ANDA with the FDA seeking permission to market a generic version
of Levoxyl®. The 581 patent, a utility patent with
formulation claims relating to Levoxyl®, was issued to us
on April 29, 2003. No earlier than April 30, 2003, we
received notice of Mylans Paragraph IV certification,
which alleges noninfringement of the 581 patent. On
June 24, 2003, we received notice of KVs
Paragraph IV certification, which alleges noninfringement
and invalidity of the 581 patent. We have filed separate
suits against Mylan and KV and intend to vigorously enforce our
rights under the 581 patent to the full extent of the law.
If we are not successful in enforcing our patents, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.

On March 26, 2002, Jerome Stevens filed a
Petition for Stay of Action (assigned Docket No. 02P1035)
with the FDA seeking redress from the FDA for the public
disclosure on the FDAs website of alleged trade secrets
relating to the manufacturing process for Jerome Stevens
orally-administered levothyroxine sodium drug product Unithroid.
While Jerome Stevens does not specifically request that the FDA
stay any action with respect to our levothyroxine sodium drug
product Levoxyl®, Jerome Stevens does request, among other
broad remedies, that the FDA immediately and indefinitely
stay . . . all grants of drug pre-market
authority that used, relied on, or were based on Jerome
confidential and trade secret manufacturing
information . . . . We have filed a
Comment on Jerome Stevens Petition with the FDA, stating
that the NDA for Levoxyl® was filed with the FDA before the
disclosure of Jerome Stevens alleged trade secrets, and
that the approval of the Levoxyl® NDA is unrelated to such
disclosure. Based on these facts, we do not believe that Jerome
Stevens Petition applies to Levoxyl®. However, if the
FDA were to determine that there is a valid legal basis for
suspension or withdrawal of substantial FDA approval of the
Levoxyl® NDA, it could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.

We filed a Citizens Petition with the FDA
on March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any ANDA or supplemental ANDA
for levothyroxine sodium drug products until adequate standards
for establishing bioequivalence for levothyroxine sodium drug
products are adopted in accordance with FDA procedures. A
manufacturer of another major levothyroxine sodium product and
professional endocrinology societies have submitted similar
and/or related comments to the FDA. If the FDA approves an ANDA
for a generic equivalent of Levoxyl® under the current
standards, our business, financial condition, results of
operations and cash flows could be materially adversely affected.

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

As of March 31, 2004, we had
$1.6 billion of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If future sales of a product decline significantly, it
could result in an impairment of the declining products
net book value, resulting in a non-cash impairment charge. Any
impairment of the net book value of any product or combination
of products, depending on the size of the product or products,
could result in a material adverse effect on our business,
financial condition, results of operations and cash flows.



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

Our current strategy is focused on increasing
sales of our existing products and enhancing our competitive
standing through acquisitions of products in development and
FDA-approved products, including through acquisitions of other
companies, that complement our business and enable us to promote
and sell new products through existing marketing and
distribution channels. Moreover, since we engage in limited
proprietary research activity with respect to the development of
new chemical entities, we rely heavily on purchasing products in
development and FDA-approved products from other companies.

Other companies, some of which have substantially
greater financial, marketing and sales resources than we do,
compete with us for the acquisition of products in development,
FDA-approved products or companies. We may not be able to
acquire rights to additional products in development,
FDA-approved products, or companies on acceptable terms, if at
all, or be able to obtain future financing for acquisitions on
acceptable terms, if at all. The inability to effect
acquisitions of additional branded products in development and
FDA-approved products could limit the overall growth of our
business. Furthermore, even if we obtain rights to a
pharmaceutical product or acquire a company, we may not be able
to generate sales sufficient to create a profit or otherwise
avoid a loss.



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

We recently completed several acquisitions
including Intal®, Tilade® and Synercid® from
Aventis in December 2002 and Meridian in January 2003.
Additionally, we acquired a primary care business in the United
States and Puerto Rico from Elan on June 12, 2003, which
includes the products Sonata® and Skelaxin® and a
dedicated primary care field sales force consisting of
approximately 350 individuals. The integration of these
acquisitions into our business requires significant management
attention and may require the further expansion of our existing
sales force or newly-acquired sales force. In order to manage
our acquisitions effectively, we must maintain adequate
operational, financial and management information systems and
motivate and effectively manage an increasing number of
employees. Our acquisitions have significantly expanded our
product offerings, operations and number of employees. Our
future success will also depend in part on our ability to retain
or hire qualified employees to operate our expanding facilities
efficiently in accordance with applicable regulatory standards.
If we cannot integrate our acquisitions successfully, these
changes and acquisitions could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | If we are not able to develop or license
    new products, our business may suffer.

We are engaged in the development and licensing
of new products. For example, we are



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of a modified-release
    formulation of Sonata®;                                                                                                                                                                    
|
| |  | in exclusive license agreements with Novavax to
    promote, market, distribute and sell AndrosorbTM,
    once approved, a topical testosterone replacement therapy for
    testosterone deficient women, and other womens health
    products;

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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engaged in the development of binodenoson, a
    myocardial pharmacologic stress imaging agent; T-62, an
    investigational drug for the treatment of neuropathic pain; and
    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 and a
    diazepam-filled auto-injector, each of which is under FDA
    review; and                                                                                             
|
| |  | in a licensing agreement with SkyePharma to
    develop and commercialize a modified-release formulation of
    Altace® utilizing SkyePharmas patented oral drug
    delivery technology Geomatrix®.                                                                           

We compete with other pharmaceutical companies,
including large pharmaceutical companies with financial
resources and capabilities substantially greater than ours, in
the development and licensing of new products. We cannot assure
you that we will be able to



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

If we are not successful in the development or
licensing of new products already in development, including the
failure to obtain any necessary FDA approval, our business,
financial condition, and results of operations could be
materially adversely affected.

Further, other companies may license or develop
products or may acquire technologies for the development of
products that are the same as or similar to the products we have
in development or that we license. Because there is rapid
technological change in the industry and because many other
companies may have more financial resources than we do, other
companies may



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 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,

and thereby have a negative impact on the sales
of our newly developed or licensed products. Technological
developments or the FDAs approval of new products or of
new therapeutic indications for existing products may make our
existing products or those products we are licensing or
developing obsolete or may make them more difficult to market
successfully, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

Although most of our revenue is generated by
products not subject to competition from generic products, there
is no proprietary protection for most of our branded
pharmaceutical products, and generic substitutes for many of
these products are sold by other pharmaceutical companies. Even
our products that currently have no generic substitute could
face generic competition if generics are developed by other
companies and approved by the FDA. For example, Florinef®
is subject to competition from two generics, one approved by the
FDA in March 2002 and the other approved in
January 2003. We are also aware that an ANDA for
Cortisporin® ophthalmic suspension which was previously
inactive has been reactivated by the FDA with a new sponsor. We
understand the sponsor entered the market as of April 14,
2003 with a generic equivalent for Cortisporin® ophthalmic
suspension. The entry of the generic has negatively affected our
market share for this product. Accordingly, our business,
financial condition, results of operations and cash flows could
be materially adversely affected. In addition, governmental and
other pressure to reduce pharmaceutical costs may result in

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physicians prescribing products for which there
are generic substitutes. Also, our branded products for which
there is no generic form available may face competition from
different therapeutic agents used for the same indications for
which our branded products are used. Increased competition from
the sale of generic pharmaceutical products or from different
therapeutic agents used for the same indications for which our
branded products are used may cause a decrease in revenue from
our branded products and could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.


Due to recent statutory changes, the FDA may
approve generic substitutes of branded pharmaceutical products
in a shorter period of time. Previously, the FDA required that
generic applicants claiming patent invalidity or
non-infringement give us notice each time either an ANDA was
submitted or amended to claim invalidity or non-infringement of
newly listed patents. If we filed a patent infringement suit
against the generic applicant within 45 days of receiving
such notice, the FDA was barred (or stayed) from approving the
ANDA for 30 months unless specific events occurred sooner.
To avoid multiple 30-month stays for the same branded drug, the
recent statutory changes modified the relevant provisions of the
Hatch-Waxman Act (21 U.S.C. §§ 355(j)(2) and
(5)) to indicate that a 30-month stay will only attach to
patents that are listed in the FDAs Orange Book at the
time an ANDA is originally filed. Although the ANDA filer is
still required to certify against a late-listed patent, the NDA
holder can still bring suit based upon infringement of that
patent. Such a suit will no longer trigger an additional
30-month stay of FDA approval of the ANDA. As a result, generic
substitutes of our branded pharmaceutical products could be
approved sooner.

Also, recent regulatory changes significantly
alter patent listing requirements in the FDAs Orange Book.
Only patents listed in the FDAs Orange Book are eligible
for protection by a 30-month stay. We are now required to list
all patents that claim a composition of matter relating to a
drug or a method of using a drug. Previously, this provision was
interpreted broadly, allowing the listing of many drug patents.
The FDAs new regulations prohibit listing of certain types
of patents, including patents claiming certain metabolites (the
active moiety that results from the bodys metabolism of
the drug substance), intermediates (namely, substances not
present in the finished product), certain methods of use, or
patents claiming certain product packaging. As such, some
patents that may issue in the future may not be eligible for
listing in the FDAs Orange Book and thus not eligible for
protection by a 30-month stay.



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

Some of our supply agreements, including those
related to Altace®, require us to purchase certain minimum
levels of active ingredients or finished goods, subject to some
terms and conditions of various supply agreements. If sales of
our products do not increase at the currently anticipated rates,
if we are unable to maintain market exclusivity for our
products, if our product life-cycle management is not
successful, if we fail to sell our products in accordance with
the forecasts we develop as required by our supply agreements or
if we do not terminate supply agreements at optimal times for
us, we may incur losses in connection with the purchase
commitments under the supply agreements. In the event we incur
losses in connection with the purchase commitments under the
supply agreements, there may be a material adverse effect upon
our results of operations and cash flows.

Additionally we purchase raw materials and some
of our finished goods based on our forecast for sales of our
products. We also manufacture many of our finished goods on
these forecasts. If we do not meet expected forecasts for sales,
we could purchase inventory quantities in excess of expected
demand. This purchase of excess inventory could have a material
adverse effect on our results of operations and cash flows.



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

We manufacture many of our products in facilities
we own and operate. These products include Altace®,
Levoxyl® and Thrombin-JMI®, which together represent
approximately 48.3% of our revenues for the last

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twelve months ended March 31, 2004. Many of
our production processes are complex and require specialized and
expensive equipment. Any unforeseen delays or interruptions in
our manufacturing operations may reduce our profit margins and
revenues. If we are unable to resume manufacturing, after
interruption, we may not be able to distribute our products as
planned. Furthermore, growing demand for our products could
exceed our ability to supply the demand. If such situations
occur, it may be necessary for us to seek alternative
manufacturers which could adversely impact our ability to
produce and distribute our products. We cannot assure you that
we would be able to utilize third-party manufacturers for our
products in a timely manner or at all. In addition, our
manufacturing output may decline as a result of power outages,
supply shortages, accidents, natural disasters or other
disruptions of the manufacturing process. Even though we carry
business interruption insurance policies, we may suffer losses
as a result of business interruptions that exceed the coverage
available under our insurance policies.


A portion or all of many of our product lines,
including Altace®, Skelaxin®, Sonata®,
Bicillin®, Prefest®, Intal®, Tilade®,
Synercid® and Cortisporin®, are currently manufactured
by third parties. EstrasorbTM will be manufactured
for us by Novavax. Our dependence upon third parties for the
manufacture of our products may adversely impact our profit
margins or may result in unforeseen delays or other problems
beyond our control. For example, if any of these third parties
are not in compliance with applicable regulations, the
manufacture of our products could be adversely affected. If for
any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be
able to distribute our products as planned. If we encounter
delays or difficulties with contract manufacturers in producing
or packaging our products, the distribution, marketing and
subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon
or sell product lines on unsatisfactory terms. We might not be
able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we utilize will be able to provide us
with sufficient quantities of our products or that the products
supplied to us will meet our specifications.

Our supply agreement for Bicillin® with
Wyeth expires on July 7, 2004. There are limitations on the
number of units over and above current estimated demand for this
product we can order under our supply agreement with Wyeth.
Furthermore, the expiration dating on this product is limited to
24 months. We are in the process of negotiating with Wyeth
to supply Bicillin® for an additional six-month period.
This new agreement will increase our costs and substantially
decrease our margins over the term of the agreement. In
addition, we have begun the process of transferring the
manufacture of Bicillin® to our Rochester facility. If we
are unable to transfer this product to our Rochester facility in
accordance with our plan, our gross margins on the product may
be reduced and/or demand for Bicillin® may eventually
exceed our ability to supply the product. If we are unable to
adequately supply continued demand for Bicillin®, net sales
of the product may be significantly reduced, the market for the
product may be permanently diminished and the carrying value of
our Bicillin® assets could become impaired, any of which
could have a material adverse affect on our business, financial
condition, results of operations, and cash flows. For the three
months ended March 31, 2004, net sales of Bicillin®
were $13.4 million representing 4.6% of total revenues.

We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for us and for third parties with which we have contracted.
Currently, we rely on over 500 suppliers to deliver the
necessary raw materials and components. However, if we are
unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package our
products, we may not be able to distribute our products as
planned.

The occurrence of any of these events could
result in significant backorders for our products which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows and could
adversely affect our market share for the products and the
reputation of our products.

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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.

We develop products and product line extensions
through research and development and through contractual
relationships with third parties that develop new products,
including new product formulations, on our behalf. Our reliance
on third parties for the development of some of our products
exposes us to risks which could cause delays in the development
of new products or reformulated products or could cause other
problems beyond our control. These third-party developers



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | may not be successful in developing the products
    or product line extensions for us;                                                             
|
| |  | may face financial or business related
    difficulties which could make it difficult or impossible for
    them to continue business operations; or
|
| |  | may otherwise breach or terminate their
    agreements with us.                                                                                     

If any of these events occur and we are unable to
successfully develop these products and new product formulations
by other means, our business, financial condition, results of
operations and cash flows could be materially and adversely
affected.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Rochester facility has been the subject
    of FDA concerns. If we cannot adequately address the FDAs
    concerns, we may be unable to operate the Rochester facility
    and, accordingly, our business may suffer.

Our Rochester facility manufactures both drug and
biological pharmaceutical products. The Rochester facility was
one of six Pfizer facilities subject to a consent decree issued
by the U.S. District Court of New Jersey in August 1993 as
a result of FDA concerns about compliance issues within Pfizer
facilities in the period before the decree was entered. The
Rochester facility continues to be subject to the consent decree.

The Rochester facility was inspected by the FDA
in February/ March 2003 and by an FDA Team Biologics inspector
in August 2003. When an FDA inspector completes an authorized
inspection of a manufacturing facility, the inspector typically
provides the owner/operator of the facility with a written
report listing the inspectors observations of
objectionable conditions and practices. This written report is
known as an FDA Form 483 or simply as a
483. The observations in a 483 are reported to the
manufacturer in order to assist the manufacturer in complying
with the FDC Act and the regulations enforced by the FDA. Often
a pharmaceutical manufacturer receives a 483 after an inspection
and our Rochester facility received a 483 following the March
2003 inspection. While no law or regulation requires us to
respond to a 483, we have submitted a written response detailing
our plan of action with respect to each of the observations made
on the 483 and our commitment to correct any objectionable
practice or condition. The risk to us of a 483, if left
uncorrected, could include, among other things, the imposition
of civil monetary penalties, the commencement of actions to
seize or prohibit the sale of unapproved or non-complying
products, or the cessation of manufacturing operations at the
Rochester facility that are not in compliance with cGMPs. While
we believe the receipt of the 483 will not have a material
adverse effect on our business, financial condition, results of
operations and cash flows, we cannot assure you that future
inspections may not result in adverse regulatory actions which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Our Rochester
facility did not receive a 483 following the August 2003
inspection.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We are near maximum capacity at our
    Middleton facility which will limit our ability to increase
    production of Thrombin-JMI®.

We are currently working on long-term strategies
to expand our production capacity for Thrombin-JMI® which
should potentially be completed in approximately two years.
These long-term strategies may further expand our manufacturing
capacity for Thrombin-JMI® upon completion. We cannot
assure you that our plans to expand our production capacity for
Thrombin-JMI® will be successful and/or timely. If we
cannot successfully and timely expand our production capacity
for Thrombin-JMI®, our ability to increase production of
Thrombin-JMI® will be limited, thereby limiting our unit
sales growth for this product.

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| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to secure or enforce
    patent rights, trademarks, trade secrets or other intellectual
    property, our business could be harmed.

We may not be successful in securing or
maintaining proprietary patent protection for our products or
products and technologies we develop or license. In addition,
our competitors may develop products, including generic
products, similar to ours using methods and technologies that
are beyond the scope of our intellectual property protection,
which could reduce our sales. Some of our major branded
pharmaceutical products have proprietary patent protection,
including Altace® with composition of matter patents that
do not expire until January 2005 and October 2008, and a
method-of-use patent that does not expire until April 2012. All
of these patents are listed in the FDAs Orange Book. A
challenge to these patents can be subject to expensive
litigation. As we mentioned earlier, Cobalt has filed an ANDA
seeking permission from the FDA to market a generic version of
Altace® prior to the expiration of the 722 patent,
but not before January 2005, the expiration date of the
258 patent. Additionally, as mentioned above, Mylan and KV
have each filed ANDAs seeking permission from the FDA to market
a generic version of Levoxyl® prior to the expiration of
the 581 patent. As noted above, each of Eon Labs,
CorePharma and Mutual has filed an ANDA with the FDA seeking
permission to market a generic version of Skelaxin® prior
to the expiration of the 128 and 102 patents.
Finally, as noted above, Barr has filed an ANDA with the FDA
seeking permission to market a generic version of Prefest®
prior to the expiration of the 995 patent and the
573 patent.

We also rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation in
order to maintain our competitive position. We cannot assure you
that others will not independently develop substantially
equivalent proprietary technology and techniques or otherwise
gain access to our trade secrets and technology, or that we can
adequately protect our trade secrets and technology.

If we are unable to secure or enforce patent
rights, trademarks, trade secrets or other intellectual
property, our business, financial condition, results of
operations and cash flows could be materially adversely affected.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If the implementation of our new
    information technology system is not successful, our business
    could be disrupted.

In November 2000, we began the process of
implementing a new information technology system which became
operational at our Bristol facilities in July 2003. This system
is supporting many of our business functions, including
manufacturing, warehousing, distribution, logistics, sales
reporting, accounting, inventory, quality control, budgeting and
other company functions. In connection with its implementation,
we have incurred related costs of approximately
$30.8 million. In the event we do not successfully convert
our other sites in a timely manner from their existing
information systems to the new one or in the event the new
system does not operate as expected at these other locations,
our business could be disrupted. This disruption or additional
costs, if required, could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

Our results of operations, including, in
particular, product sales revenue, may vary from quarter to
quarter due to many factors. Wholesalers and distributors
represent a substantial portion of our sales. Buying patterns of
our wholesalers and distributors may vary from time to time. In
the event wholesalers and distributors with whom we do business
determine to limit their purchases of our inventory, sales of
our products could be adversely affected. For example, in
advance of an anticipated price increase, many of our customers
may order pharmaceutical products in larger than normal
quantities. The ordering of excess quantities in any quarter
could cause sales of some of our branded pharmaceutical products
to be lower in subsequent quarters than they would have been
otherwise. As part of our ongoing efforts to facilitate improved
management of wholesale channel inventory levels of our branded
pharmaceutical products, we entered into inventory management
agreements with each of our three key wholesale customers during
the second quarter of 2004. Accordingly, we have not yet
received data pursuant to these agreements over a long enough
period of time to

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implement inventory improvements. Other factors
include expenditures related to the acquisition, sale and
promotion of pharmaceutical products, a changing customer base,
the availability and cost of raw materials, interruptions in
supply by third-party manufacturers, new products introduced by
us or our competitors, the mix of products we sell, sales and
marketing expenditures, product recalls, competitive pricing
pressures and general economic and industry conditions that may
affect customer demand. We cannot assure you that we will be
successful in maintaining or improving our profitability or
avoiding losses in any future period.




| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the stock price of Novavax declines, our
    investment in Novavax convertible notes could result in
    additional special charges related to a valuation allowance for
    these notes.

During the period from December 2000 through June
2002, we provided $40.0 million in financing to Novavax in
the form of notes receivable convertible to common stock of
Novavax. The loan is impaired as defined under Statement of
Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan. We established a
valuation allowance in the second quarter of 2002 which was
adjusted in subsequent quarters. As of March 31, 2004, the
valuation allowance for the Novavax convertible notes equaled
$17.3 million. We will adjust the amount of the valuation
allowance in future periods until the loan is no longer
considered to be impaired. We may incur additional charges
related to our investment in the convertible notes. Accordingly,
these charges may adversely impact our earnings.



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our wholly owned subsidiary, 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.

Our wholly owned subsidiary, Jones Pharma
Incorporated, is a defendant in 861 multi-defendant lawsuits
involving the manufacture and sale of dexfenfluramine,
fenfluramine and phentermine, which is usually referred to as
fen/phen. In 1996, Jones acted as a distributor of
Obenix®, a branded phentermine product. Jones also
distributed a generic phentermine product. We believe that
Jones phentermine products have been identified in less
than 100 of the foregoing cases. The plaintiffs in these cases
claim injury as a result of ingesting a combination of these
weight-loss drugs. They seek compensatory and punitive damages
as well as medical care and court-supervised medical monitoring.
The plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict
liability, negligence, breach of warranties and
misrepresentation. These suits are filed in various
jurisdictions throughout the United States, and in each of these
suits Jones is one of many defendants, including manufacturers
and other distributors of these drugs. Jones denies any
liability incident to the distribution of its phentermine
products and intends to pursue all defenses available to it.
Jones has tendered defense of these lawsuits to its insurance
carriers for handling and they are currently defending Jones in
these suits. In the event that insurance coverage is inadequate
to satisfy any resulting liability, Jones will have to resume
defense of these lawsuits and be responsible for the damages, if
any, that are awarded against it.



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

The source material for our product
Thrombin-JMI® comes from bovine plasma and lung tissue
which has been certified by the United States Department of
Agriculture for use in the manufacture of pharmaceutical
products. Bovine-sourced materials, particularly those from
outside the United States, may be of some concern because of
potential transmission of bovine spongiform encephalopathy, or
BSE. However, we have taken precautions to minimize
the risks of contamination from BSE in our source materials. Our
principal precaution is the use of bovine materials only from
FDA-approved sources in the United States. Accordingly, all
source animals used in our production of Thrombin-JMI® are
of United States origin. Additionally, source animals used in
production of Thrombin-JMI® are generally less than
18 months of age. (BSE has not been identified in animals
less than 30 months of age).

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We have two approved vendors as sources of supply
of the bovine raw materials but currently receive these
materials from a single vendor. Any interruption or delay in the
supply of these materials could adversely affect the sales of
Thrombin-JMI®. In addition to other actions taken by us and
our vendor to minimize the risk of BSE, we are developing steps
to further purify the material of other potential contaminants.
We will continue surveillance of the source and believe that the
risk of BSE contamination in the source materials for
Thrombin-JMI® is very low. While we believe that our
procedures and those of our vendor for the supply, testing and
handling of the bovine material comply with all federal, state,
and local regulations, we cannot eliminate the risk of
contamination or injury from these materials. There are high
levels of global public concern about BSE. Physicians could
determine not to administer Thrombin-JMI® because of the
perceived risk which could adversely affect our sales of the
product. Any injuries resulting from BSE contamination could
expose us to extensive liability. Also there is currently no
alternative to the bovine-sourced materials for
Thrombin-JMI®. If public concern for the risk of
BSE-infection in the United States should increase, the
manufacture and sale of Thrombin-JMI® and our business,
financial condition, results of operations and cash flows could
be materially and adversely affected.

The FDA expects manufacturers of biological
products to have validated processes capable of removing
extraneous viral contaminants to a high level of assurance. As a
result, many manufacturers of biologics are currently engaged in
developing procedures to remove potential extraneous viral
contaminants from their products. We are in the process of
developing appropriate processing steps to achieve maximum
assurance for the removal of potential extraneous viral
contaminants from Thrombin-JMI®, which does not include BSE
because it is not a viral contaminant. If we are not successful
in gaining FDA approval for these processes, our ability to
manufacture Thrombin-JMI® may be adversely affected. We
cannot assure you that we will be successful in these efforts.
Failure to obtain the FDAs approval for these procedures
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | On November 15, 2006, we may be
    required to repurchase our 2 3/4% Convertible Debentures
    due November 15, 2021.

In February 2002 we issued 2 3/4%
Convertible Debentures due November 15, 2021 in an
aggregate amount of $345.0 million. The price at which the
debentures are convertible into common stock is $50.16, subject
to adjustments spelled out in the documents governing the
debentures. If the price of our stock has not reached that
amount by November 15, 2006, we may be required to
repurchase all or a portion of the debentures representing the
$345.0 million on November 15, 2006 if some or all of
the holders of the debentures request that we repurchase their
debentures. We cannot assure you that a significant repurchase
requirement at that time would not have a material adverse
effect on our business, financial condition, results of
operations or cash flows.



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

Dey L.P. markets our EpiPen® auto-injector
through a supply agreement with us that expires on
December 31, 2010. Under the terms of the agreement, we
grant Dey the exclusive right and license to market, distribute
and sell EpiPen® worldwide. Although demand for
EpiPen® continues to be strong due to increased awareness
of the health risks associated with allergic reactions, we
expect competition to intensify. We understand that a new
competitive product manufactured by Hollister-Stier Laboratories
LLC received FDA approval approximately one year ago. The new
product, TwinJect® Auto-Injector (epinephrine) injection,
is not a therapeutically equivalent product but has the same
indications, same usage and the same route of delivery as
EpiPen®. Users of EpiPen® would have to obtain a new
prescription in order to substitute TwinJect®. The supply
agreement with Dey includes minimum purchase requirements that
are less than Deys purchases in recent years. A failure by
Dey to successfully market and distribute EpiPen® or an
increase in competition could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.

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

All U.S. government contracts provide that
they may be terminated for the convenience of the government as
well as for default. The unexpected termination of one or more
of our significant government contracts could result in a
material adverse effect on our business, financial condition,
results of operations and cash flows. A surge capability
provision allows for the coverage of defense mobilization
requirements in the event of rapid military deployment. If this
surge capability provision becomes operative, we may be required
to devote more of our Meridian Medical Technologies segment
manufacturing capacity to the production of products for the
government which could result in less manufacturing capacity
being devoted to products in this segment with higher profit
margins. Our supply contracts with the Department of Defense are
subject to post-award audit and potential price determination.
These audits may include a review of our performance on the
contract, our pricing practices, our cost structure and our
compliance with applicable laws, regulations and standards. Any
costs found to be improperly allocated to a specific contract
will not be reimbursed, while costs already reimbursed must be
refunded. Therefore, a post-award audit or price redetermination
could result in an adjustment to our revenues. From time to time
the Department of Defense makes claims for pricing adjustments
with respect to completed contracts. If a government audit
uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification
from doing business with the government.

Other risks involved in government sales include
the unpredictability in funding for various government programs
and the risks associated with changes in procurement policies
and priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injectors to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A significant loss in government funding of
these programs could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales depend on payment and
    reimbursement from third-party payors, and if they reduce or
    refuse payment or reimbursement, the use and sales of our
    products will suffer, we may not increase our market share, and
    our revenues and profitability will suffer.

The commercial success of some of our products is
dependent, in part, on whether third-party reimbursement is
available for the use of our products by hospitals, clinics,
doctors and patients. Third-party payors include state and
federal governments, under programs such as Medicaid and other
entitlement programs, managed care organizations, private
insurance plans and health maintenance organizations. Because of
the growing size of the patient population covered by managed
care organizations, it is important to our business that we
market our products to them and to the pharmacy benefit managers
that serve many of these organizations. Payment or reimbursement
of only a portion of the cost of our prescription products could
make our products less attractive, from a net-cost perspective,
to patients, suppliers and prescribing physicians. Managed care
organizations and other third-party payors try to negotiate the
pricing of products to control their costs. Managed care
organizations and pharmacy benefit managers typically develop
formularies to reduce their cost for medications. Formularies
can be based on the prices and therapeutic benefits of the
available products. Due to their lower costs, generics are often
favored. The breadth of the products covered by formularies
varies considerably from one managed care organization to
another, and many formularies include alternative and
competitive products or therapies for treatment of particular
medical conditions. Exclusion of a product from a formulary can
lead to its sharply reduced usage in the managed care
organization patient population. If our products are not
included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies
increasingly favor generic products, our market share and gross
margins could be negatively affected, as could our overall
business and financial condition.

We have expanded our contracts with managed care
organizations in an effort to increase the inclusion of our
products on formularies. To the extent that our products are
purchased by patients through a managed

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care group with which we have a contract, our
average selling price is lower than it would be for a
non-contracted managed care group. We take reserves for the
estimated amounts of rebates we will pay to managed care
organizations each quarter. Any increased usage of our products
through Medicaid or managed care programs will increase the
amount of rebates that we owe. We cannot assure you that our
products will be included on the formulary lists of managed care
organizations or that adverse reimbursement issues will not have
a material effect on our financial condition, results of
operations or cash flows.




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

As discussed in this Risk Factors
section under the heading Investigations by the SEC and
Office of Inspector General at the Department of Health and
Human Services, other possible governmental investigations, and
securities and ERISA litigation could have a material adverse
effect on our business, in the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations, Medicaid Accrual Adjustment
and Related Matters in our 2003 Form 10-K and
elsewhere in that report in connection with our Audit
Committees assessment and internal review of issues raised
by the SEC investigation, we estimated that we had underpaid
amounts due under Medicaid and other governmental pricing
programs, and recorded an adjustment of $46.5 million to
net sales and accrued expenses in the fourth quarter of 2002.
This amount represented our best estimate as of July 2003 of the
extent to which we had underpaid amounts due under Medicaid and
other governmental pricing programs during the period from 1998
to 2002. Subsequent to that time, our outside consultants
conducted a comprehensive audit to determine the actual amount
of underpayments under Medicaid during the period from 1998 to
2002. As a result of that audit, we determined that our accrual
for estimated amounts due under Medicaid and other governmental
pricing programs through December 31, 2002, should be
increased by $18.0 million. In addition, based on the
results of the comprehensive audit for the period from 1998
through 2002, we estimated that we underpaid amounts due
Medicaid by $0.9 million during the period from 1994
through 1997. We are currently in the process of conducting
detailed audits of our compliance with the requirements of
several other governmental pricing programs and there could be
further adjustments to our accruals. Pending determination of
the precise amount of our obligations, we have placed a total of
$65.5 million in an interest-bearing escrow account from
which the requisite payments will be made.

Although the amounts described above constitute
our best estimate of amounts owed in respect of Medicaid and
other governmental pricing programs, our calculations are
subject to review and challenge by the applicable governmental
agencies. In connection with the pending governmental
investigations, we have continued to engage in discussions with
representatives of the Office of Inspector General of the
Department of Health and Human Services, the Department of
Justice, the Department of Veterans Affairs, the Centers for
Medicare and Medicaid Services, and the Public Health Service.
We expect that these discussions will include a detailed review
of our calculations by the appropriate agencies, and it is
possible that this review could result in material changes. In
addition, these agencies and other governmental agencies that
might be investigating or might commence an investigation of
King could impose, based on a claim of violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal
health care programs (including Medicaid and Medicare). Some of
these laws may impose liability even in the absence of specific
intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time.

We have implemented a new information technology
system that is intended to significantly enhance the accuracy of
our calculations for estimating amounts due under Medicaid and
other governmental pricing programs; however, our processes for
these calculations and the judgments involved in making these
calculations will continue to involve subjective decisions and
manual input, and, as a result, these calculations will remain
subject to the risk of errors.

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

Under government regulations, chlorofluorocarbon
compounds are being phased out because of environmental
concerns. Our products Intal® and Tilade® currently
use these compounds as propellants. The FDA has issued an
approvable letter with respect to the NDA covering a new inhaler
for Intal® using the alternative propellant
hydrofluoroalkane, or HFA. The approvable letter
provides that final approval of the NDA for Intal® HFA is
subject to addressing certain FDA comments solely pertaining to
the chemistry, manufacturing, and controls section of the NDA
covering the product. In the event we cannot also obtain final
approval for alternative propellants for Intal® and
Tilade® before the final phase-out date of
chlorofluorocarbon compounds or if we are unable to maintain an
adequate supply of chlorofluorocarbon compounds for the
production of this product prior to this date, our ability to
market this product could be materially adversely affected,
which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | If the operations of our centralized
    distribution facility were interrupted, our business could be
    harmed.

For efficiency purposes, we rely on one
centralized distribution facility in Bristol, Tennessee. An
interruption in this operation could have a material adverse
effect on our business, financial conditions, results of
operations and cash flows.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The loss of our key personnel or an
    inability to attract new personnel could harm our
    business.

We are highly dependent on the principal members
of our management staff, the loss of whose services might impede
the achievement of our strategic objectives. We cannot assure
you that we will be able to attract and retain key personnel in
sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support our continued growth and
integration. The loss of the services of key personnel could
have a material adverse effect on us, especially in light of our
recent growth. We do not maintain key-person life insurance on
any of our employees. In addition, we do not have employment
agreements with any of our key employees.

On February 19, 2004, Jefferson J. Gregory
announced his plan to retire as our Chief Executive Officer. Our
Board of Directors has begun a search for a new Chief Executive
Officer and Mr. Gregory intends to continue to serve in
this capacity until a successor is appointed.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our shareholder rights plan and bylaws
    discourage unsolicited takeover proposals and could prevent
    shareholders from realizing a premium on their common
    stock.

We have a shareholder rights plan that may have
the effect of discouraging unsolicited takeover proposals. The
rights issued under the shareholder rights plan would cause
substantial dilution to a person or group which attempts to
acquire us on terms not approved in advance by our Board of
Directors. In addition, our charter and bylaws contain
provisions that may discourage unsolicited takeover proposals
that shareholders may consider to be in their best interests.
These provisions include:



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

We are also subject to anti-takeover provisions
under Tennessee laws, each of which could delay or prevent a
change of control. Together these provisions and the rights plan
may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for common stock.

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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our stock price is volatile, which could
    result in substantial losses for investors purchasing
    shares.

The trading price of our common stock is likely
to be volatile. The stock market in general and the market for
emerging growth companies, such as King in particular, have
experienced extreme volatility. Many factors contribute to this
volatility, including



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our results of operations;                                                                                               
|
| |  | perceived risks and uncertainties concerning our
    business;                                                                         
|
| |  | announcements of earnings;                                                                                                             
|
| |  | developments in the governmental investigations
    or securities and ERISA litigation;                                                
|
| |  | failure to meet or exceed our own specific
    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.                                                      

This volatility may have a significant impact on
the market price of our common stock. Moreover, the possibility
exists that the stock market (and in particular the securities
of emerging growth companies such as King) could experience
extreme price and volume fluctuations unrelated to operating
performance. The volatility of our common stock imposes a
greater risk of capital losses on our shareholders than would a
less volatile stock. In addition, such volatility makes it
difficult to ascribe a stable valuation to a shareholders
holdings of our common stock.

Risks Related to Our Industry



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

Virtually all aspects of our activities are
regulated by federal and state statutes and government agencies.
The manufacturing, processing, formulation, packaging, labeling,
distribution and advertising of our products, and disposal of
waste products arising from these activities, are subject to
regulation by one or more federal agencies, including the FDA,
the Drug Enforcement Agency, a division of the U.S. Department
of Justice, which we refer to as the DEA, the
Federal Trade Commission, the Consumer Product Safety
Commission, the U.S. Department of Agriculture, the Occupational
Safety and Health Administration, and the Environmental
Protection Agency, which we refer to as the EPA, as
well as by foreign governments in countries where we distribute
some of our products.

Noncompliance with applicable FDA policies or
requirements could subject us to enforcement actions, such as
suspensions of manufacturing or distribution, seizure of
products, product recalls, fines, criminal penalties,
injunctions, failure to approve pending drug product
applications or withdrawal of product marketing approvals.
Similar civil or criminal penalties could be imposed by other
government agencies, such as the DEA, the EPA or various
agencies of the states and localities in which our products are
manufactured, sold or distributed, and could have ramifications
for our contracts with government agencies such as the
Veterans

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Administration or the Department of Defense.
These enforcement actions could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.


All manufacturers of human pharmaceutical
products are subject to regulation by the FDA under the
authority of the Food, Drug and Cosmetic Act, or the Public
Health Service Act or both. New drugs, as defined in the Food,
Drug and Cosmetic Act, and new human biological drugs, as
defined in the Public Health Service Act, must be the subject of
an FDA-approved new drug or biologic license application before
they may be marketed in the United States. Some prescription and
other drugs are not the subject of an approved marketing
application but, rather, are marketed subject to the FDAs
regulatory discretion and/or enforcement policies. Any change in
the FDAs enforcement discretion and/or policies could have
a material adverse effect on our business, financial condition,
results of operations and cash flows.

We manufacture some pharmaceutical products
containing controlled substances and, therefore, are also
subject to statutes and regulations enforced by the DEA and
similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we
manufacture biological drug products for human use and are
subject to regulatory burdens as a result of these aspects of
our business. There are additional FDA and other regulatory
policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting
adverse events associated with our products with which we must
continuously comply. Noncompliance with any of these policies or
requirements could result in enforcement actions which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.

The FDA has the authority and discretion to
withdraw existing marketing approvals and to review the
regulatory status of marketed products at any time. For example,
the FDA may require an approved marketing application for any
drug product marketed if new information reveals questions about
a drugs safety or efficacy. All drugs must be manufactured
in conformity with cGMPs, and drug products subject to an
approved application must be manufactured, processed, packaged,
held and labeled in accordance with information contained in the
approved application.

While we believe that all of our currently
marketed pharmaceutical products comply with FDA enforcement
policies, have approval pending or have received the requisite
agency approvals, our marketing is subject to challenge by the
FDA at any time. Through various enforcement mechanisms, the FDA
can ensure that noncomplying drugs are no longer marketed and
that advertising and marketing materials and campaigns are in
compliance with FDA regulations. In addition, modifications,
enhancements, or changes in manufacturing sites of approved
products are in many circumstances subject to additional FDA
approvals which may or may not be received and which may be
subject to a lengthy FDA review process. Our manufacturing
facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies.
Manufacturing operations could be interrupted or halted in any
of those facilities if a government or regulatory authority is
unsatisfied with the results of an inspection. Any interruptions
of this type could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

We cannot determine what effect changes in
regulations, enforcement positions, statutes or legal
interpretations, when and if promulgated, adopted or enacted,
may have on our business in the future. These changes could,
among other things, require modifications to our manufacturing
methods or facilities, expanded or different labeling, new
approvals, the recall, replacement or discontinuance of certain
products, additional record keeping and expanded documentation
of the properties of certain products and scientific
substantiation. These changes, or new legislation, could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.



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

We face an inherent business risk of exposure to
product liability claims in the event that the use of our
technologies or products are alleged to have resulted in adverse
effects. These risks will exist for those products in clinical
development and with respect to those products that receive
regulatory approval for commercial sale. While we have taken,
and will continue to take, what we believe are appropriate
precautions, we may not be able to avoid significant product
liability exposure. We currently have product liability
insurance in the

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amount of $80.0 million for aggregate annual
claims including a $20.0 million self-insured retention;
however, we cannot assure you that the level or breadth of any
insurance coverage will be sufficient to cover fully all
potential claims. Also, adequate insurance coverage might not be
available in the future at acceptable costs, if at all. For
example, we are not able to obtain product liability insurance
with respect to our products Prefest®, Menest®,
Delestrogen®, Pitocin® and Nordette®, each a
womens healthcare product. With respect to any product
liability claims relating to these products, we would be
responsible for any monetary damages awarded by any court or any
voluntary monetary settlements. Significant judgments against us
for product liability for which we have no insurance could have
a material adverse effect on our business, financial condition,
results of operations and cash flows.


Product recalls or product field alerts may be
issued at our discretion or at the discretion of the FDA, other
government agencies or other companies having regulatory
authority for pharmaceutical product sales. From time to time,
we may recall products for various reasons, including failure of
our products to maintain their stability through their
expiration dates. Any recall or product field alert has the
potential of damaging the reputation of the product. To date,
these recalls have not been significant and have not had a
material adverse effect on our business, financial condition,
results of operations and cash flows. However, we cannot assure
you that the number and significance of recalls will not
increase in the future. Any significant recalls could materially
affect our sales, the prescription trends for the products and
damage the reputation of the products. In these cases, our
business, financial condition, results of operations and cash
flows could be materially adversely affected.

Product returns were approximately 5.7% of gross
sales for the last twelve months ended March 31, 2004. In
the event demand for our products declines or if wholesalers
decide to carry less inventory, we cannot assure you that actual
levels of returns will not increase or significantly exceed the
amounts we have anticipated.



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

Commercial success in producing, marketing and
selling of branded prescription pharmaceutical products depends,
in part, on the availability of adequate reimbursement from
third-party health care payors, such as government and private
health insurers and managed care organizations. Third-party
payors are increasingly challenging the pricing of medical
products and services. For example, many managed health care
organizations limit the pharmaceutical products that are on
their formulary lists. The resulting competition among
pharmaceutical companies to place their products on these
formulary lists has reduced prices across the industry. In
addition, many managed care organizations are considering
formulary contracts primarily with those pharmaceutical
companies that can offer a full line of products for a given
therapy sector or disease state. We cannot assure you that our
products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry
generally will not negatively impact our operations.



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

We are subject to various federal and state laws
pertaining to health care fraud and abuse, including
anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to
include, the referral of business, including the purchase or
prescription of a particular drug. The federal government has
published regulations that identify safe harbors or
exemptions for certain payment arrangements that do not violate
the anti-kickback statutes. We seek to comply with the safe
harbors. Due to the breadth of the statutory provisions and the
absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that
our practices might be challenged under anti-kickback or similar
laws. False claims laws prohibit anyone from knowingly (in the
civil context), or knowingly and willfully (in the criminal
context), presenting, or causing to be presented for payment to
third-party payors (including Medicaid and Medicare) claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services. Our activities
relating to the sale

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and marketing of our products are currently a
subject of the Office of Inspector Generals investigation,
and as such they are likely to be subject to scrutiny under
these laws. As discussed in this Risk Factors
section under the heading The investigations by the SEC
and Office of Inspector General of the Department of Health and
Human Services, other possible governmental investigations, and
securities and ERISA litigation could have a material adverse
effect on our business and elsewhere in this report, we
are in the process of quantifying and reporting to governmental
agencies our underpayment of amounts due under Medicaid and
other governmental pricing programs.


Violations of fraud and abuse laws may be
punishable by civil and/or criminal sanctions, including fines
and civil monetary penalties, as well as the possibility of
exclusion from federal health care programs (including Medicaid
and Medicare). Any such violations could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.



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

From time to time studies or clinical trials on
various aspects of pharmaceutical products are conducted by
academics or others, including government agencies, the results
of which, when published, may have dramatic effects on the
markets for the pharmaceutical products that are the subject of
the study. The publication of negative results of studies or
clinical trials related to our products or the therapeutic areas
in which our products compete could adversely affect our sales,
the prescription trends for our products and the reputation of
our products. One example of these types of studies is the
Womens Health Initiative, an ongoing clinical trial
conducted by the National Institutes of Health, which released
data in July 2002. This data indicated that an increase in
certain health risks may result from the long-term use of a
competitors combination hormone therapy for women. News of
this data and the perception it has created have negatively
affected the entire combination hormone replacement therapy and
oral estrogen replacement therapy markets generally, which
include our products Prefest®, Menest® and
Delestrogen® and may affect our future marketing efforts
for EstrasorbTM. In the event of the publication of
negative results of studies or clinical trials related to our
branded pharmaceutical products or the therapeutic areas in
which our products compete, our business, financial condition,
results of operations and cash flows could be materially
adversely affected. Additionally, potential write-offs of the
intangible assets associated with the affected products could
materially adversely affect our results of operations.



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

A number of legislative and regulatory proposals
aimed at changing the health care system, including the cost of
prescription products, importation and reimportation of
prescription products from countries outside the United States
and changes in the levels at which pharmaceutical companies are
reimbursed for sales of their products, have been proposed.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, the pending nature of these proposals, as well as the
adoption of any proposal, may exacerbate industry-wide pricing
pressures and could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. For example, in 2000, Congress directed the FDA to adopt
regulations allowing the reimportation of approved drugs
originally manufactured in the United States back into the
United States from other countries where the drugs were sold at
a lower price. Although the Secretary of Health and Human
Services has refused to implement this directive, in July 2003
the House of Representatives passed a similar bill that does not
require the Secretary of Health and Human Services to act. The
reimportation bills have not yet resulted in any new laws or
regulations; however, these and other initiatives could decrease
the price we receive for our products. Additionally sales of our
products in the United States could be adversely affected by the
importation of products that some may deem to be equivalent to
ours that are manufactured by others and are available outside
the United States.

Changes in the Medicare, Medicaid or similar
governmental programs or the amounts paid by those programs for
our services may adversely affect our earnings. These programs
are highly regulated and subject to frequent and substantial
changes and cost containment measures. In recent years, changes
in these

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programs have limited and reduced reimbursement
to providers. The Medicare Prescription Drug, Improvement and
Modernization Act of 2003,creates a new, voluntary
prescription drug benefit under the Social Security Act, which
we refer to as Medicare Drug Benefit. Beginning in
2006, Medicare beneficiaries entitled to Part A or enrolled
in Part B, as well as certain other Medicare enrollees,
will be eligible for the Medicare Drug Benefit. Regulations
implementing the Medicare Drug Benefit have not yet been
published, and the Medicare Drug Act requires that the Federal
Trade Commission conduct a study and make recommendations
regarding additional legislation that may be needed concerning
the Medicare Drug Benefit. We are unable at this time to predict
or estimate the financial impact of this new legislation.


Recently enacted and proposed changes in the laws
and regulations affecting public companies, including the
provisions of the Sarbanes-Oxley Act of 2002 and related rules,
will cause us to incur increased costs as we evaluate the
implications of new rules and respond to new requirements.
Failure to comply with the new rules and regulations could
result in enforcement actions or assessment of other penalties.
The new laws and regulations could make it more difficult for us
to obtain certain types of insurance, including directors and
officers liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of
these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors,
or as executive officers. We may be required to hire additional
personnel and utilize additional outside legal, accounting and
advisory services, all of which could cause our general and
administrative costs to increase beyond what we currently have
planned. We are presently evaluating and monitoring developments
with respect to these rules, and we cannot predict or estimate
the amount of the additional costs we may incur or the timing of
such costs.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The industry is highly competitive, and
    other companies in our industry have much greater resources than
    we do.

In the industry, comparatively smaller
pharmaceutical companies like us compete with large, global
pharmaceutical companies with substantially greater financial
resources for the acquisition of products in development,
currently marketed products, technologies and companies. We
cannot assure you that



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

We also compete with pharmaceutical companies in
marketing and selling pharmaceutical products. The selling
prices of pharmaceutical products typically decline as
competition increases. Further, other products now in use,
developed or acquired by other pharmaceutical companies may be
more effective or offered at lower prices than our current or
future products. Competitors may also be able to complete the
regulatory process sooner and, therefore, may begin to market
their products in advance of ours. We believe that competition
for sales of our products will be based primarily on product
efficacy, safety, reliability, availability and price.

Competition for
Acquisitions.We compete with other
pharmaceutical companies for product and product line
acquisitions. These competitors include Biovail Corporation,
Forest Laboratories, Inc., Galen Holdings plc, Medicis
Pharmaceutical Corporation, Shire Pharmaceuticals Group plc,
Watson Pharmaceuticals, Inc., and other companies which also
acquire branded pharmaceutical products and product lines,
including those in development, from other pharmaceutical
companies. We cannot assure you that



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | we will be able to continue to acquire
    commercially attractive pharmaceutical products, companies or
    technologies;
|
| |  | additional competitors will not enter the market;
    or                                                                  

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| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.Additionally, since our currently marketed products are
generally established and commonly sold, they are subject to
competition from products with similar qualities.

Our largest product Altace® competes in the
market with other cardiovascular therapies, including in
particular, the following ACE inhibitors or any generic
equivalents:



| |   |                                             
| | - | --------------------------------------------
| |  | Zestril® (AstraZeneca plc),                 
|
| |  | Acupril® (Pfizer, Inc.),                    
|
| |  | Prinivil® (Merck & Co., Inc.),              
|
| |  | Lotensin® (Novartis AG),                    
|
| |  | Monopril® (Bristol-Myers Squibb Company),   
|
| |  | Vasotec® (Biovail Corporation),             
|
| |  | Capoten® (Bristol-Myers Squibb Company), and
|
| |  | Mavik® (Abbott Laboratories).               

Our product Levoxyl® competes with
levothyroxine sodium products, including in particular the
following and any generic equivalents:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | Synthroid® (Abbott Laboratories),                     
|
| |  | Levothroid® (Forest Laboratories, Inc.), and          
|
| |  | Unithroid® (Jerome Stevens Pharmaceuticals,
    Inc.).

Our product Skelaxin® competes in the market
with other muscle relaxants including in particular the
following and any generic equivalents:



| |   |                               
| | - | ------------------------------
| |  | Flexeril® (Johnson & Johnson),
|
| |  | Soma® (Medpointe),            
|
| |  | Robaxin® (Schwarz Pharma), and
|
| |  | Norflex® (3M Pharmaceuticals).

Our product Sonata® competes with other
insomnia treatments, including in particular Ambien®, a
product of Sanofi-Synthelabo Inc.

We intend to market these products aggressively
by, among other things



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

Many of our branded pharmaceutical products have
either a strong market niche or competitive position. Some of
our branded pharmaceutical products face competition from
generic substitutes. For example, the FDA approved for sale
generic substitutes for Florinef® in March 2002 and in
January 2003 and for Cortisporin® ophthalmic suspension in
April 2003. During the second half of 2004, we anticipate the
market entry of generic substitutes for Adenocard®, a
product for which we receive royalty revenues on its net sales.

The manufacturers of generic products typically
do not bear the related research and development costs and,
consequently, are able to offer such products at considerably
lower prices than the branded equivalents. There are, however, a
number of factors which enable products to remain profitable
once patent protection has ceased. For a manufacturer to launch
a generic substitute, it must prove to the FDA when filing an
application

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to make a generic substitute that the branded
pharmaceutical and the generic substitute have bioequivalence.
We believe it typically takes two or three years to prove
bioequivalence and receive FDA approval for many generic
substitutes. By focusing our efforts in part on patented
products, products with challenging bioequivalence or complex
manufacturing requirements and products with a strong brand
image with the prescriber or the consumer, supported by the
development of a broader range of alternative product
formulations or dosage forms, we are better able to maintain
market share, gross margins and cash flows. However, we cannot
assure you that any of our products will remain exclusive
without generic competition, or maintain their market share,
gross margins and cash flows as a result of these efforts, the
failure of which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.


A Warning About Forward-Looking
Statements

This report includes forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements relate to analyses and other
information which are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.

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

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



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the future potential of, including anticipated
    net sales and prescription trends for our branded pharmaceutical
    products, particularly Altace®, Skelaxin®,
    Levoxyl®, Thrombin-JMI® and Sonata®;
|
| |  | expectations regarding the enforceability and
    effectiveness of product-related patents, including in
    particular patents related to Altace®, Levoxyl®,
    Skelaxin® and Prefest®;                  
|
| |  | expected trends and projections with respect to
    particular products, reportable segment and income and expense
    line items;                                                                         
|
| |  | the adequacy of our liquidity and capital
    resources;                                                                                                                                                   
|
| |  | the development and approval of a diazepam-filled
    auto-injector, and new inhaler for Intal® and Tilade®
    using the alternative propellant HFA;                                                      
|
| |  | our continued successful execution of our growth
    strategies;                                                                                                                                           
|
| |  | anticipated developments and expansions of our
    business;                                                                                                                                               
|
| |  | our plans for the manufacture of some of our
    products, including but not limited to, the anticipated
    expansion of our manufacturing capacity for Thrombin-JMI®;                                    
|
| |  | anticipated increases in sales of acquired
    products or royalty revenues;                                                                                                                               
|
| |  | the development of product line extensions;                                                                                                                                                                
|
| |  | the products which we expect to offer;                                                                                                                                                                     
|
| |  | the intent, belief or current expectations,
    primarily with respect to our future operating performance;                                                                                                
|
| |  | expectations regarding sales growth, gross
    margins, manufacturing productivity, capital expenditures and
    effective tax rates;                                                                      
|
| |  | expectations regarding potential patent approvals
    including those patents pending for Levoxyl® and
    Tigan® 300mg capsules and the protections to be provided by
    these patents if issued;        
|
| |  | expectations regarding the outcome of various
    pending legal proceedings including the Altace®,
    Levoxyl®, Skelaxin® and Prefest® patent
    challenges, the SEC and Office of Inspector General     

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| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |   | investigations, other possible governmental
    investigations, securities litigation, and other legal
    proceedings described in this report;
|
| |  | the ongoing implementation of our new information
    technology system; and                                                                    
|
| |  | expectations regarding our financial condition
    and liquidity as well as future cash flows and earnings.                                     

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






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

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

As of March 31, 2004, there were no
significant changes in our qualitative or quantitative market
risk since the prior reporting period.

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

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






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

(a) Evaluation of Disclosure Controls and
Procedures. As of the end of the period covered by this
report, our chief executive officer and chief financial officer
have evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14(c)). Based on that evaluation, the chief
executive officer and chief financial officer have concluded
that our disclosure controls and procedures are effective as of
March 31, 2004 to ensure that material information relating
to us and our consolidated subsidiaries is made known to them by
others within these entities, in order to allow timely decisions
regarding required disclosure.

(b) Changes in Internal Controls. In
connection with the evaluation referred to above, there have
been no changes in our internal controls that occurred during
our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.

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PART II  OTHER
INFORMATION






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

The information required by this Item is
incorporated by reference to Note 9 to the condensed
consolidated financial statements included elsewhere in this
report.






|        |                  
|------- | -----------------
|Item 5. | Other Information

(b) Shareholders may recommend director
candidates to the Nominating and Corporate Governance Committee
of Kings Board of Directors at any time by submitting a
written recommendation to Kings General Counsel, 501 Fifth
Street, Bristol, Tennessee 37620. The General Counsel will
direct all such correspondence to the Committee.

In order for a written shareholder recommendation
to be evaluated by the Committee, it must include all
information about the recommended person that would be required
to be disclosed in a solicitation of proxies for election of
directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. The written recommendation
must also be accompanied by the recommended persons
written consent to be named in a proxy statement as a nominee,
if so selected by the Committee and by the Board, and to serve
as a director if appointed or elected. Additional information
about the recommended person may be requested by the Committee
from time to time, either from the recommended person or from
the recommending shareholder.

The recommending shareholder must also disclose,
with the written recommendation, the number of shares of
Kings common stock beneficially owned by the shareholder,
the percentage of all outstanding common stock which the shares
represent and the period of time the shareholder has
beneficially owned the shares. If the shareholder is part of a
group of shareholders that is making the recommendation, the
shareholder must also disclose the names of the other members of
the group and, for each member of the group, the number of
shares of Kings common stock beneficially owned by the
member, the percentage of all outstanding common stock which the
shares represent and the period of time the member has
beneficially owned the shares.

A shareholder may also nominate a person for
election to the Board at a meeting of shareholders by giving
notice in the form and at the times required by Kings
bylaws.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |      |  |  |   |  |                                                                                                                                                                                      
| | ---- |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  |  |  | Certification of Jefferson J. Gregory, Chairman
    and Chief Executive Officer of King Pharmaceuticals, Inc.
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
| | 31.2 |  |  |  |  | Certification of James R. Lattanzi, Chief
    Financial Officer of King Pharmaceuticals, Inc. Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                         
| | 32.1 |  |  |  |  | Certification of Jefferson J. Gregory, the
    Chairman and Chief Executive Officer of King Pharmaceuticals,
    Inc., Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.
| | 32.2 |  |  |  |  | Certification of James R. Lattanzi, Chief
    Financial Officer of King Pharmaceuticals, Inc. Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                         

(b) Reports on Form 8-K

We filed the following Current Reports on
Form 8-K during the quarter ended March 31, 2004:

(1) A Current Report on Form 8-K filed
February 19, 2004 furnished under Item 12 our
financial results for the quarter ended June 30, 2003.

(2) A Current Report on Form 8-K filed
March 15, 2004 reporting under Item 5 issuance of a
press release announcing the receipt of a letter from the U.S.
Food and Drug Administration (FDA) to all
Abbreviated New Drug Application (ANDA) applicants
for a generic equivalent to Kings approved

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product Skelaxin® 400 mg (metaxalone). The
letter stated that ANDA applicants may delete the use listed in
the FDAs publication entitled Approved Drug Products
with Therapeutic Equivalent Evaluations (commonly known as
the Orange Book) for U.S. Patent No. 6,407,128 from
their product labeling. Skelaxin® is a muscle relaxant,
indicated for the relief of discomforts associated with acute,
painful musculoskeletal conditions. On March 12, 2004, King
issued a press release regarding the announcement.


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SIGNATURES

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



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

Date: May 10, 2004

| |     |                         
| | --- | ------------------------
| | By: | /s/ JEFFERSON J. GREGORY

| |                        
| | -----------------------
| |                        
| | Jefferson J. Gregory   
| | Chief Executive Officer

Date: May 10, 2004

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

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

60