##### Table of Contents



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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2007ORo

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

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

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

37620(Address of principal executive
    offices)

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




---



##### 



TABLE OF
    CONTENTS
  
  PagePart I  Financial
    InformationItem 1.


Financial Statements


3Condensed Consolidated Balance Sheets


3Condensed Consolidated Statements of
    Operations


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


5Condensed Consolidated Statements of Cash
    Flows


6Notes to Condensed Consolidated Financial
    Statements


7Item 2.


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


40Item 3.


Quantitative and Qualitative Disclosures about
    Market Risk


68Item 4


Controls and Procedures


68Part II  Other InformationItem 1.


Legal Proceedings


68Item 1A.


Risk Factors


68Item 6.


Exhibits


74Signatures


75EX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEOEX-32.2 Section 906 Certification of the CFO   2




---



##### Table of Contents



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


December 31,2007


2006ASSETSCurrent Assets:Cash and cash equivalents

$
24,943


$
113,777Investments in debt securities


1,051,876



890,185Marketable securities


2,273



Accounts receivable, net of allowance for doubtful accounts of
    $4,970 and $5,437, respectively


264,805



263,939Inventories


148,763



202,577Deferred income tax assets


111,272



81,991Income taxes receivable


4,817



Prepaid expenses and other current assets


33,016



106,595Current assets held for sale


13,519



14,409Total current assets


1,655,284



1,673,473Property, plant and equipment, net


250,203



244,382Intangible assets, net


832,326



790,313Goodwill


129,145



121,152Marketable securities






11,578Deferred income tax assets


340,237



271,554Other assets (includes restricted cash of $16,360 and $15,968,
    respectively)


98,552



93,347Assets held for sale


72,526



123,732Total assets

$
3,378,273


$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
59,033


$
77,158Accrued expenses


394,057



510,137Income taxes payable






30,501Total current liabilities


453,090



617,796Long-term debt


400,000



400,000Other liabilities


66,635



23,129Total liabilities


919,725



1,040,925Commitments and contingencies (Note 8)Shareholders equity


2,458,548



2,288,606Total liabilities and shareholders equity

$
3,378,273


$
3,329,531    3




---



##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Revenues:Net sales

$
524,812


$
472,570


$
1,542,848


$
1,415,729Royalty revenue


20,042



19,136



60,762



59,857Total revenues


544,854



491,706



1,603,610



1,475,586Operating costs and expenses:Cost of revenues, exclusive of depreciation, amortization and
    impairments shown below


197,761



106,473



434,745



305,925Selling, general and administrative, exclusive of co-promotion
    fees


136,286



107,300



384,324



319,480Co-promotion fees


48,971



50,294



142,453



162,615Total selling, general and administrative expense


185,257



157,594



526,777



482,095Research and development


34,889



38,419



104,515



102,931Research and development-in process upon acquisition


200



25,000



3,300



110,000Total research and development


35,089



63,419



107,815



212,931Depreciation and amortization


36,762



37,833



112,852



110,745Asset impairments


147,838







222,648



279Restructuring charges (Note 12)


20,274



3,202



20,734



3,194Total operating costs and expenses


622,981



368,521



1,425,571



1,115,169Operating (loss) income


(78,127
)


123,185



178,039



360,417Other income (expense):Interest income


10,678



8,489



28,461



22,842Interest expense


(1,792
)


(1,894
)


(5,670
)


(7,925
)Loss on investment


(10,453
)






(10,453
)


(Loss) gain on early extinguishment of debt






(11
)






698Other, net


(416
)


101



(681
)


(613
)Total other (expense) income


(1,983
)


6,685



11,657



15,002(Loss) income from continuing operations before income taxes


(80,110
)


129,870



189,696



375,419Income tax (benefit) expense


(39,583
)


40,020



49,310



123,931(Loss) income from continuing operations


(40,527
)


89,850



140,386



251,488Discontinued operations (Note 16):(Loss) income from discontinued operations


(16
)


865



(351
)


775Income tax (benefit) expense


(5
)


310



(125
)


278Total (loss) income from discontinued operations, net


(11
)


555



(226
)


497Net (loss) income

$
(40,538
)

$
90,405


$
140,160


$
251,985(Loss) income per common share:Basic:(Loss) income from continuing operations

$
(0.17
)

$
0.37


$
0.58


$
1.04Total (loss) income from discontinued operations














Net (loss) income

$
(0.17
)

$
0.37


$
0.58


$
1.04Diluted:(Loss) income from continuing operations

$
(0.17
)

$
0.37


$
0.57


$
1.04Total (loss) income from discontinued operations














Net (loss) income

$
(0.17
)

$
0.37


$
0.57


$
1.04    4




---



##### Table of Contents



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


Unearned


Retained


ComprehensiveShares


Amount


Compensation


Earnings


Income (Loss)


TotalBalance at December 31, 2005


242,493,416


$
1,222,246


$
(8,764
)

$
754,953


$
4,987


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






(8,764
)


8,764











Comprehensive income:Net income














251,985







251,985Net unrealized loss on marketable securities, net of tax of
    $1,978


















(3,872
)


(3,872
)Foreign currency translation


















(317
)


(317
)Total comprehensive income






















247,796Stock-based compensation expense






18,774















18,774Exercise of stock options


421,245



6,279















6,279Issuance of share-based awards


199,005



















Balance at September 30, 2006


243,113,666


$
1,238,535


$



$
1,006,938


$
798


$
2,246,271Balance at December 31, 2006


243,151,223


$
1,244,986


$



$
1,043,902


$
(282
)

$
2,288,606Comprehensive income:Net income














140,160







140,160Reclassification of unrealized losses  on marketable securities
    to earnings, net of tax of $377


















615



615Foreign currency translation


















1,126



1,126Total comprehensive income






















141,901Adoption of Financial Accounting Standards Board Interpretation
    No. 48














(1,523
)






(1,523
)Stock-based compensation expense






18,467















18,467Exercise of stock options


701,120



11,097















11,097Issuance of share-based awards


562,205



















Balance at September 30, 2007


244,414,548


$
1,274,550


$



$
1,182,539


$
1,459


$
2,458,548    5




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
  Nine Months Ended September 30,2007


2006Cash flows provided by operating activities

$
426,995


$
297,257Cash flows from investing activities:Transfers (to) from restricted cash


(392
)


128,722Purchases of investments in debt securities


(1,574,031
)


(1,170,272
)Proceeds from maturities and sales of investments in debt
    securities


1,412,340



885,390Purchases of property, plant and equipment


(36,672
)


(31,220
)Proceeds from sale of property and equipment


3



Acquisition of
    Avinza®


(296,664
)


Loan repayment from Ligand


37,750



Purchases of product rights and intellectual property


(67,932
)


(59,886
)Net cash used in investing activities


(525,598
)


(247,266
)Cash flows from financing activities:Proceeds from exercise of stock options, net


10,609



6,844Excess tax benefits from stock-based compensation


687



425Proceeds from issuance of long-term debt






400,000Payments on long-term debt






(338,434
)Debt issuance costs


(1,527
)


(10,786
)Net cash provided by financing activities


9,769



58,049(Decrease) increase in cash and cash equivalents


(88,834
)


108,040Cash and cash equivalents, beginning of period


113,777



30,014Cash and cash equivalents, end of period

$
24,943


$
138,054    6




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS
 September 30, 2007 and 2006
 (Unaudited)
 (In thousands, except share and per share data)
  1.
    General  Form 10-Q Rule 10-01 Regulation S-X Form 10-K
      2.
    Earnings
    Per Share    Three Months Ended September 30,


Nine Months Ended September 30,2007


2006


2007


2006Basic income per common share:Weighted average common shares


243,119,415



242,256,408



242,751,864



242,162,602Diluted income per common share:Weighted average common shares


243,119,415



242,256,408



242,751,864



242,162,602Effect of stock options






279,433



519,086



313,234Effect of dilutive share awards






261,789



871,350



235,379Weighted average common shares


243,119,415



242,797,630



244,142,300



242,711,215     1 4
 7




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3 4 1 4
  3.
    Inventories    September 30,


December 31,2007


2006Raw materials

$
92,362


$
135,164Work-in-process


26,513



17,885Finished goods (including $6,338, and $6,813 of sample
    inventory, respectively)


63,479



62,395182,354



215,444Inventory valuation allowance


(33,591
)


(12,867
)Total inventories

$
148,763


$
202,577   ® en banc ® ®
  ® ® ® ® ®
 8




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  ® ® ®
  4.  Acquisitions,
    Dispositions, Co-Promotions and Alliances
  ® tm ® ®
  tm tm
  Hart-Scott-Rodino
  ®
   9




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            ® ® ® ®
  ®
  
    If calendar year net sales are less than $200,000 the royalty
    payment will be 5% of all net sales.
    If calendar year net sales are greater than $200,000 then the
    royalty payment will be 10% of all net sales up to $250,000,
    plus 15% of net sales greater than $250,000. 10




---



##### Table of Contents



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

$
285,700Goodwill


7,992Inventory


2,800$
296,492     TM ® TM ®
  ® ® earn-out
    Intangible assets

$
23,985Inventory


618Fixed assets


3$
24,606      11




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
      ® 30-day
  5.
    Intangible
    Assets and Goodwill    September 30, 2007


December 31, 2006Gross





GrossCarrying


Accumulated


Carrying


AccumulatedAmount


Amortization


Amount


AmortizationTrademarks and product rights

$
911,721


$
385,612


$
1,056,991


$
337,046Patents


538,183



232,259



272,833



202,873Other intangibles


7,700



7,407



7,700



7,292Total intangible assets

$
1,457,604


$
625,278


$
1,337,524


$
547,211    12




---



##### Table of Contents



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


MeridianSegment


Segment


TotalGoodwill at September 30, 2007

$
20,735


$
108,410


$
129,145Goodwill at December 31, 2006

$
12,742


$
108,410


$
121,152   6.
    Assets
    Held for Sale   13




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ®
  ®
      September 30,


December 31,2007


2006Accounts receivable, net

$
749


$
1,528Inventories


12,770



12,881Total current assets held for sale

$
13,519


$
14,409Property, plant and equipment

$
61,370


$
62,654Intangible assets


58,101



61,078Allowance to reduce noncurrent assets to estimated fair value
    less cost to sell


(46,945
)


Noncurrent assets held for sale

$
72,526


$
123,732   7.
    Long-Term
    Debt    September 30,


December 31,2007


2006Convertible senior notes

$
400,000


$
400,000Senior secured revolving credit facility(1)






Long-term portion

$
400,000


$
400,000     (1)
    
    On April 23, 2002, the Company established a $400,000
    five-year Senior Secured Revolving Credit Facility which was
    scheduled to mature in April 2007 (the 2002 Credit
    Facility). On April 19, 2007, this facility was
    terminated and replaced with a new $475,000 five-year Senior
    Secured Revolving Credit Facility which matures in April 2012
    (the 2007 Credit Facility).The 2007 Credit Facility is collateralized by a pledge of 100%
    of the equity of most of the Companys domestic
    subsidiaries and by a pledge of 65% of the equity of the
    Companys foreign subsidiaries. The Companys
    obligations under this facility are unconditionally guaranteed
    on a senior basis by four of the Companys subsidiaries,
    King Pharmaceuticals Research and Development, Inc., Monarch
    Pharmaceuticals, Inc., Meridian Medical Technologies, Inc., and
    Parkedale Pharmaceuticals, Inc.The 2007 Credit Facility accrues interest either, at the
    Companys option, (a) at 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 0.5% (based on a leverage ratio), or
    (b) at the applicable LIBOR rate plus 14




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  an applicable spread ranging from 0.875% to 1.50% (based on a
    leverage ratio). In addition, the lenders under the 2007 Credit
    Facility are entitled to customary facility fees based on
    (x) unused commitments under the facility and
    (y) letters of credit outstanding. The facility provides
    availability for the issuance of up to $30,000 in letters of
    credit. The Company incurred $1,527 of deferred financing costs
    in connection with the establishment of this facility, which the
    Company will amortize over five years, the life of the facility.
    This facility requires the Company to maintain a minimum net
    worth of no less than $1,500,000 plus 50% of the Companys
    consolidated net income for each fiscal quarter after
    April 19, 2007, excluding any fiscal quarter for which
    consolidated income is negative; an EBITDA (earnings before
    interest, taxes, depreciation and amortization) 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.  8.
    Commitments
    and Contingencies  Fen/Phen
    Litigation
  In re Fen-Phen
    Litigation. and/or
  ®
  ®
   15




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Thimerosal
    / Childrens Vaccine Litigation
      Hormone
    Replacement Therapy
  In re: Prempro Products Liability Litigation
 16




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Average
    Wholesale Price Litigation
  In re: Pharmaceutical Industry
    Average Wholesale Pricing Litigation.
         17




---



##### Table of Contents



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




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or
            Other
    Legal Proceedings
  ® ® ® ®
 19




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    ® ® Approved Drug Products With Therapeutic
    Equivalence Evaluations 30-month ® 30-day
    ® ®
 20




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  KSR International Co. v. Teleflex Inc. en banc
  ®
  ®
  ® en banc ®
  ® ® ® ®
  30-month 30-month
 21




---



##### Table of Contents



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




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ® ®
  ® ® ® ® ® ®
  ®
 23




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other
    Contingencies
  ® ® ® en banc ® ® ® ® ®
  ® ® ®
  ® ®
  9.
    Accounting
    Developments  Accounting for Uncertainty in Income Taxes Accounting for Income
    Taxes
 24




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fair Value Measurements
  The Fair Value Option for
    Financial Assets and Financial Liabilities
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services Received for Use in Future Research and Development
    Activities 07-3). 07-3 07-03, 07-03 07-3
  10.
    Income
    Taxes       25




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    non-U.S. income
  11.
    Segment
    Information  ®
   26




---



##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Total revenues:Branded pharmaceuticals

$
472,363


$
432,887


$
1,388,381


$
1,269,625Meridian Medical Technologies


47,919



37,125



141,830



132,292Royalties


20,042



19,136



60,762



59,857Contract manufacturing


186,631



137,979



503,597



409,170Other


2,496







3,945



Eliminations


(184,597
)


(135,421
)


(494,905
)


(395,358
)Consolidated total net revenues

$
544,854


$
491,706


$
1,603,610


$
1,475,586Segment profit:Branded pharmaceuticals

$
298,590


$
349,662


$
1,031,975


$
1,045,306Meridian Medical Technologies


28,750



19,801



83,473



71,965Royalties


17,600



16,799



53,250



52,594Contract manufacturing


(478
)


(1,029
)


(109
)


(204
)Other


2,631







276



Other operating costs and expense


(425,220
)


(262,048
)


(990,826
)


(809,244
)Other income (expense)


(1,983
)


6,685



11,657



15,002Income from continuing operations before tax

$
(80,110
)

$
129,870


$
189,696


$
375,419   As of


As ofSeptember 30,


December 31,2007


2006Total assets:Branded pharmaceuticals

$
2,999,238


$
2,994,580Meridian Medical Technologies


310,950



294,455Royalties


57,571



21,626Contract manufacturing


10,514



18,870Other






Consolidated total assets

$
3,378,273


$
3,329,531  27




---



##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Total revenues:Cardiovascular/metabolic

$
205,770


$
198,962


$
605,061


$
603,968Neuroscience


155,316



124,592



460,134



365,875Hospital/acute care


95,195



93,241



278,187



257,652Other


16,082



16,092



44,999



42,130Consolidated branded pharmaceutical revenues

$
472,363


$
432,887


$
1,388,381


$
1,269,625   12.
    Restructuring
    Activities  ® en banc, ® ®
      tm
    tm
 28




---



##### Table of Contents



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











AccruedBalance at


Income








Balance atDecember 31,


Statement


Cash


Non-Cash


September 30,2006


Impact


Payments


Costs


2007Third quarter of 2007 actionEmployee separation payments

$



$
20,274


$



$
(946
)

$
19,328Accelerated depreciation(1)






638







(638
)


First quarter of 2007 actionEmployee separation payments






460











460Third quarter of 2006 actionEmployee separation payments


2,163















2,163Accelerated depreciation(1)






4,466







(4,466
)


Fourth quarter of 2005 actionEmployee separation payments


521















521$
2,684


$
25,838


$



$
(6,050
)

$
22,472     (1)
    
    Included in depreciation and amortization on the Condensed
    Consolidated Statements of Operations.    13.
    Marketable
    Securities   29




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14.
    Stock-Based
    Compensation                15.
    Change in
    Estimate     30




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  16.
    Discontinued
    Operations  ® ®
  ® ® ® ®
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2007


2006


2007


2006Total revenues

$
(16
)

$
865


$
(352
)

$
772Operating income (loss)


(16
)


865



(351
)


775Net income (loss)

$
(11
)

$
555


$
(226
)

$
497     17.
    Guarantor
    Financial Statements         31




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
  September 30, 2007


December 31, 2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
16,199


$
3,204


$
5,540


$



$
24,943


$
101,210


$
8,749


$
3,818


$



$
113,777Investments in debt securities


1,051,876















1,051,876



890,185















890,185Marketable securities


2,273















2,273



















Accounts receivable, net


2,279



261,559



967







264,805



3,056



258,825



2,058







263,939Inventories


112,574



35,842



347







148,763



176,389



25,933



255







202,577Deferred income tax assets


48,167



63,105











111,272



30,051



51,940











81,991Income taxes receivable


3,098



1,719











4,817



















Prepaid expenses and other current assets


22,221



10,810



(15
)






33,016



99,678



6,891



26







106,595Current assets held for sale






13,519











13,519







14,409











14,409Total current assets


1,258,687



389,758



6,839







1,655,284



1,300,569



366,747



6,157







1,673,473Property, plant and equipment, net


121,963



128,240











250,203



109,572



134,810











244,382Intangible assets, net






829,540



2,786







832,326







787,347



2,966







790,313Goodwill






129,145











129,145







121,152











121,152Marketable securities






















11,578















11,578Deferred income tax assets


5,128



334,446



663







340,237



(2,111
)


272,868



797







271,554Other assets


42,888



55,664











98,552



40,142



53,205











93,347Assets held for sale






72,526











72,526







123,732











123,732Investments in subsidiaries


1,632,071











(1,632,071
)






2,615,029











(2,615,029
)


Total assets

$
3,060,737


$
1,939,319


$
10,288


$
(1,632,071
)

$
3,378,273


$
4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
44,430


$
14,274


$
329


$



$
59,033


$
51,671


$
25,063


$
424


$



$
77,158Accrued expenses


67,633



326,411



13







394,057



134,089



376,051



(3
)






510,137Income taxes payable






















28,045



2,456











30,501Total current liabilities


112,063



340,685



342







453,090



213,805



403,570



421







617,796Long-term debt


400,000















400,000



400,000















400,000Other long-term liabilities


58,631



8,004











66,635



16,243



6,886











23,129Intercompany payable (receivable)


31,495



(32,071
)


576











1,156,125



(1,168,516
)


12,391







Total liabilities


602,189



316,618



918







919,725



1,786,173



(758,060
)


12,812







1,040,925Shareholders equity


2,458,548



1,622,701



9,370



(1,632,071
)


2,458,548



2,288,606



2,617,921



(2,892
)


(2,615,029
)


2,288,606Total liabilities and shareholders equity

$
3,060,737


$
1,939,319


$
10,288


$
(1,632,071
)

$
3,378,273


$
4,074,779


$
1,859,861


$
9,920


$
(2,615,029
)

$
3,329,531  32




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
  Three Months Ended September 30, 2007


Three Months Ended September 30, 2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)(In thousands)Revenues:Net sales

$
136,214


$
522,082


$
140


$
(133,624
)

$
524,812


$
106,996


$
472,276


$
(157
)

$
(106,545
)

$
472,570Royalty revenue






20,042











20,042







19,136











19,136Total revenues


136,214



542,124



140



(133,624
)


544,854



106,996



491,412



(157
)


(106,545
)


491,706Operating costs and expenses:Cost of revenues


126,006



205,302



77



(133,624
)


197,761



36,358



176,660







(106,545
)


106,473Selling, general and administrative


79,024



106,189



44







185,257



57,653



99,883



58







157,594Research and development


1,265



33,824











35,089



181



63,238











63,419Depreciation and amortization


4,873



31,829



60







36,762



5,395



32,378



60







37,833Asset impairments






147,838











147,838



















Restructuring charges


2,967



17,307











20,274



202



3,000











3,202Total operating costs and expenses


214,135



542,289



181



(133,624
)


622,981



99,789



375,159



118



(106,545
)


368,521Operating (loss) income


(77,921
)


(165
)


(41
)






(78,127
)


7,207



116,253



(275
)






123,185Other income (expense):Interest income


10,650



23



5







10,678



8,434



53



2







8,489Interest expense


(1,781
)


(11
)










(1,792
)


(1,881
)


(13
)










(1,894
)Loss on early extinguishment of debt






















(11
)














(11
)(Loss) on investment


(10,453
)














(10,453
)


















Other, net


(731
)


7



308







(416
)


5



68



28







101Equity in earnings (loss) of subsidiaries


11,345











(11,345
)






100,267











(100,267
)


Intercompany interest income (expense)


5,523



(5,571
)


48











(10,533
)


10,646



(113
)






Total other income (expense)


14,553



(5,552
)


361



(11,345
)


(1,983
)


96,281



10,754



(83
)


(100,267
)


6,685(Loss) income from continuing operations before income taxes


(63,368
)


(5,717
)


320



(11,345
)


(80,110
)


103,488



127,007



(358
)


(100,267
)


129,870Income tax (benefit) expense


(22,830
)


(16,998
)


245







(39,583
)


13,083



27,106



(169
)






40,020(Loss) income from continuing operations


(40,538
)


11,281



75



(11,345
)


(40,527
)


90,405



99,901



(189
)


(100,267
)


89,850Discontinued operations:(Loss) income from discontinued operations






(16
)










(16
)






865











865Income tax (benefit) expense






(5
)










(5
)






310











310Total (loss) income from discontinued operations, net






(11
)










(11
)






555











555Net (loss) income

$
(40,538
)

$
11,270


$
75


$
(11,345
)

$
(40,538
)

$
90,405


$
100,456


$
(189
)

$
(100,267
)

$
90,405  33




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Nine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated(Unaudited)(In thousands)Revenues:Net sales

$
394,909


$
1,538,190


$
267


$
(390,518
)

$
1,542,848


$
317,821


$
1,413,603


$
1,254


$
(316,949
)

$
1,415,729Royalty revenue






60,762











60,762







59,857











59,857Total revenues


394,909



1,598,952



267



(390,518
)


1,603,610



317,821



1,473,460



1,254



(316,949
)


1,475,586Operating costs and expenses:Cost of revenues


219,301



605,649



313



(390,518
)


434,745



119,801



502,262



811



(316,949
)


305,925Selling, general and administrative


218,094



308,544



139







526,777



160,528



322,274



(707
)






482,095Research and development


3,287



104,528











107,815



3,102



209,829











212,931Depreciation and amortization


14,553



98,119



180







112,852



16,164



94,401



180







110,745Asset impairments






222,648











222,648







279











279Restructuring charges


3,427



17,307











20,734



202



2,992











3,194Total operating costs and expenses


458,662



1,356,795



632



(390,518
)


1,425,571



299,797



1,132,037



284



(316,949
)


1,115,169Operating (loss) income


(63,753
)


242,157



(365
)






178,039



18,024



341,423



970







360,417Other income (expense):Interest income


28,369



83



9







28,461



22,650



190



2







22,842Interest expense


(5,633
)


(37
)










(5,670
)


(7,769
)


(156
)










(7,925
)Gain on early extinguishment of debt






















698















698(Loss) on investment


(10,453
)














(10,453
)


















Other, net


(1,115
)






434







(681
)


(225
)


(711
)


323







(613
)Equity in earnings of subsidiaries


171,844











(171,844
)






266,175











(266,175
)


Intercompany dividend income


969,849











(969,849
)






















Intercompany interest (expense) income


(5,465
)


5,536



(71
)










(36,226
)


36,643



(417
)






Total other income (expenses)


1,147,396



5,582



372



(1,141,693
)


11,657



245,303



35,966



(92
)


(266,175
)


15,002Income (loss) from continuing operations before income taxes


1,083,643



247,739



7



(1,141,693
)


189,696



263,327



377,389



878



(266,175
)


375,419Income tax (benefit) expense


(26,366
)


75,541



135







49,310



11,342



112,325



264







123,931Income (loss) from continuing operations


1,110,009



172,198



(128
)


(1,141,693
)


140,386



251,985



265,064



614



(266,175
)


251,488Discontinued operations:(Loss) income from discontinued operations






(351
)










(351
)






775











775Income tax (benefit) expense






(125
)










(125
)






278











278Total (loss) income from discontinued operations






(226
)










(226
)






497











497Net income (loss)

$
1,110,009


$
171,972


$
(128
)

$
(1,141,693
)

$
140,160


$
251,985


$
265,561


$
614


$
(266,175
)

$
251,985  34




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Non











NonGuarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


Consolidated(Unaudited)(In thousands)Cash flows provided by (used in) operating activities

$
18,388


$
407,461


$
1,146


$
426,995


$
(39,643
)

$
336,660


$
240


$
297,257Cash flows from investing activities:Transfers (to) from restricted cash


(392
)










(392
)


128,722











128,722Purchases of investments in debt securities


(1,574,031
)










(1,574,031
)


(1,170,272
)










(1,170,272
)Proceeds from maturities and sales of investments in debt
    securities


1,412,340











1,412,340



885,390











885,390Purchases of property, plant and equipment


(25,676
)


(10,996
)






(36,672
)


(17,512
)


(13,708
)






(31,220
)Proceeds from sale of property and equipment






3







3















Acquisition of
    Avinza®


(23
)


(296,641
)






(296,664
)














Loan repayment from Ligand


37,750











37,750















Purchases of product rights and intellectual property






(67,932
)






(67,932
)






(59,886
)






(59,886
)Net cash used in investing activities


(150,032
)


(375,566
)






(525,598
)


(173,672
)


(73,594
)






(247,266
)Cash flows from financing activities:Proceeds from exercise of stock options, net


10,609











10,609



6,844











6,844Excess tax benefit from stock-based compensation


687











687



425











425Proceeds from issuance of long-term debt


















400,000











400,000Payments on long-term debt


















(338,434
)










(338,434
)Debt issuance costs


(1,527
)










(1,527
)


(10,786
)










(10,786
)Intercompany


36,864



(37,440
)


576







251,583



(252,648
)


1,065



Net cash provided by (used in) financing activities


46,633



(37,440
)


576



9,769



309,632



(252,648
)


1,065



58,049(Decrease) increase in cash and cash equivalents


(85,011
)


(5,545
)


1,722



(88,834
)


96,317



10,418



1,305



108,040Cash and cash equivalents, beginning of period


101,210



8,749



3,818



113,777



26,802



1,071



2,141



30,014Cash and cash equivalents, end of period

$
16,199


$
3,204


$
5,540


$
24,943


$
123,119


$
11,489


$
3,446


$
138,054    35




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
  September 30, 2007


December 31, 2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
16,199


$
3,208


$
5,536


$



$
24,943


$
101,210


$
8,801


$
3,766


$



$
113,777Investment in Debt Securities


1,051,876















1,051,876



890,185















890,185Marketable securities


2,273















2,273



















Accounts receivable, net


2,279



261,559



967







264,805



3,056



258,825



2,058







263,939Inventories


112,574



23,081



13,108







148,763



176,389



16,942



9,246







202,577Deferred income tax assets


48,167



62,532



573







111,272



30,051



51,518



422







81,991Income taxes receivable


3,098



1,538



181







4,817



















Prepaid expenses and other current assets


22,221



10,811



(16
)






33,016



99,678



6,578



339







106,595Current assets held for sale






13,519











13,519







14,409











14,409Total current assets


1,258,687



376,248



20,349







1,655,284



1,300,569



357,073



15,831







1,673,473Property, plant and equipment, net


121,963



84,132



44,108







250,203



109,572



86,595



48,215







244,382Intangible assets, net






829,248



3,078







832,326







787,029



3,284







790,313Goodwill






128,483



662







129,145







120,490



662







121,152Marketable securities






















11,578















11,578Deferred income tax assets


5,128



336,265



(1,156
)






340,237



(2,111
)


274,992



(1,327
)






271,554Other assets


42,888



55,664











98,552



40,142



53,161



44







93,347Assets held for sale






72,526











72,526







123,732











123,732Investments in subsidiaries


1,632,071











(1,632,071
)






2,615,029











(2,615,029
)


Total assets

$
3,060,737


$
1,882,566


$
67,041


$
(1,632,071
)

$
3,378,273


$
4,074,779


$
1,803,072


$
66,709


$
(2,615,029
)

$
3,329,531LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
44,430


$
12,416


$
2,187


$



$
59,033


$
51,671


$
22,836


$
2,651


$



$
77,158Accrued expenses


67,633



324,292



2,132







394,057



134,089



373,886



2,162







510,137Income taxes payable






















28,045



2,507



(51
)






30,501Total current liabilities


112,063



336,708



4,319







453,090



213,805



399,229



4,762







617,796Long-term debt


400,000















400,000



400,000















400,000Other long-term liabilities


58,631



6,021



1,983







66,635



16,243



4,675



2,211







23,129Intercompany (receivable) payable


31,495



(29,357
)


(2,138
)










1,156,125



(725,304
)


(430,821
)






Total liabilities


602,189



313,372



4,164







919,725



1,786,173



(321,400
)


(423,848
)






1,040,925Shareholders equity


2,458,548



1,569,194



62,877



(1,632,071
)


2,458,548



2,288,606



2,124,472



490,557



(2,615,029
)


2,288,606Total liabilities and shareholders equity

$
3,060,737


$
1,882,566


$
67,041


$
(1,632,071
)

$
3,378,273


$
4,074,779


$
1,803,072


$
66,709


$
(2,615,029
)

$
3,329,531  36




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Three Months Ended September 30, 2007


Three Months Ended September 30, 2006Non














NonGuarantor


Guarantor


Eliminating


King





Guarantor


Guarantor


Eliminating


KingKing


Subsidiaries


Subsidiaries


Entries


Consolidated


King


Subsidiaries


Subsidiaries


Entries


Consolidated(Unaudited)(In thousands)Revenues:Net sales

$
136,214


$
522,716


$
10,712


$
(144,830
)

$
524,812


$
106,996


$
474,381


$
14,845


$
(123,652
)

$
472,570Royalty revenue






20,042











20,042







19,136











19,136Total revenues


136,214



542,758



10,712



(144,830
)


544,854



106,996



493,517



14,845



(123,652
)


491,706Operating costs and expenses:Cost of revenues


126,006



208,383



8,202



(144,830
)


197,761



36,358



182,704



11,063



(123,652
)


106,473Selling, general and administrative


79,024



106,156



77







185,257



57,653



99,764



177







157,594Research and development


1,265



33,747



77







35,089



181



63,238











63,419Depreciation and amortization


4,873



30,236



1,653







36,762



5,395



30,848



1,590







37,833Asset impairments






147,838











147,838



















Restructuring charges


2,967



17,320



(13
)






20,274



202



837



2,163







3,202Total operating costs and expenses


214,135



543,680



9,996



(144,830
)


622,981



99,789



377,391



14,993



(123,652
)


368,521Operating (loss) income


(77,921
)


(922
)


716







(78,127
)


7,207



116,126



(148
)






123,185Other income (expense):Interest income


10,650



23



5







10,678



8,434



53



2







8,489Interest expense


(1,781
)


(10
)


(1
)






(1,792
)


(1,881
)


(13
)










(1,894
)Loss on early extinguishment of debt






















(11
)














(11
)(Loss) on investment


(10,453
)














(10,453
)


















Other, net


(731
)


8



307







(416
)


5



68



28







101Equity in earnings (loss) of subsidiaries


11,345











(11,345
)






100,267











(100,267
)


Intercompany interest (expense) income


5,523



(3,781
)


(1,742
)










(10,533
)


6,329



4,204







Total other income (expense)


14,553



(3,760
)


(1,431
)


(11,345
)


(1,983
)


96,281



6,437



4,234



(100,267
)


6,685(Loss) income from continuing operations before income taxes


(63,368
)


(4,682
)


(715
)


(11,345
)


(80,110
)


103,488



122,563



4,086



(100,267
)


129,870Income tax (benefit) expense


(22,830
)


(16,470
)


(283
)






(39,583
)


13,083



32,518



(5,581
)






40,020(Loss) income from continuing operations


(40,538
)


11,788



(432
)


(11,345
)


(40,527
)


90,405



90,045



9,667



(100,267
)


89,850Discontinued operations:(Loss) income from discontinued operations






(16
)










(16
)






865











865Income tax (benefit) expense






(5
)










(5
)






310











310Total (loss) income from discontinued operations, net






(11
)










(11
)






555











555Net (loss) income

$
(40,538
)

$
11,777


$
(432
)

$
(11,345
)

$
(40,538
)

$
90,405


$
90,600


$
9,667


$
(100,267
)

$
90,405  37




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Nine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Non














NonGuarantor


Guarantor





King





Guarantor


Guarantor





KingKing


Subsidiaries


Subsidiaries


Eliminations


Consolidated


King


Subsidiaries


Subsidiaries


Eliminations


Consolidated(Unaudited)(In thousands)Revenues:Net sales

$
394,909


$
1,541,653


$
36,068


$
(429,782
)

$
1,542,848


$
317,821


$
1,417,937


$
38,212


$
(358,241
)

$
1,415,729Royalty revenue






60,762











60,762







59,857











59,857Total revenues


394,909



1,602,415



36,068



(429,782
)


1,603,610



317,821



1,477,794



38,212



(358,241
)


1,475,586Operating costs and expenses:Cost of revenues


219,301



616,029



29,197



(429,782
)


434,745



119,801



517,483



26,882



(358,241
)


305,925Selling, general and administrative


218,094



308,484



199







526,777



160,528



321,926



(359
)






482,095Research and development


3,287



104,342



186







107,815



3,102



209,829











212,931Depreciation and amortization


14,553



93,471



4,828







112,852



16,164



90,995



3,586







110,745Asset impairments






222,648











222,648







279











279Restructuring charges


3,427



17,320



(13
)






20,734



202



837



2,155







3,194Total operating costs and expenses


458,662



1,362,294



34,397



(429,782
)


1,425,571



299,797



1,141,349



32,264



(358,241
)


1,115,169Operating (loss) income


(63,753
)


240,121



1,671







178,039



18,024



336,445



5,948







360,417Other income (expense):Interest income


28,369



83



9







28,461



22,650



190



2







22,842Interest expense


(5,633
)


(36
)


(1
)






(5,670
)


(7,769
)


(156
)










(7,925
)Gain on early extinguishment of debt






















698















698(Loss) on investment


(10,453
)














(10,453
)


















Other, net


(1,115
)


6



428







(681
)


(225
)


(700
)


312







(613
)Equity in earnings of subsidiaries


269,348











(269,348
)






266,175











(266,175
)


Intercompany dividend income


969,849



97,504







(1,067,353
)






















Intercompany interest (expense) income


(5,465
)


2,752



2,713











(36,226
)


20,839



15,387







Total other income (expense)


1,244,900



100,309



3,149



(1,336,701
)


11,657



245,303



20,173



15,701



(266,175
)


15,002Income (loss) from continuing operations before income taxes


1,181,147



340,430



4,820



(1,336,701
)


189,696



263,327



356,618



21,649



(266,175
)


375,419Income tax (benefit) expense


(26,366
)


73,996



1,680







49,310



11,342



117,737



(5,148
)






123,931Income (loss) from continuing operations


1,207,513



266,434



3,140



(1,336,701
)


140,386



251,985



238,881



26,797



(266,175
)


251,488Discontinued operations:Income from discontinued operations






(351
)










(351
)






775











775Income tax expense






(125
)










(125
)






278











278Total income from discontinued operations






(226
)










(226
)






497











497Net income (loss)

$
1,207,513


$
266,208


$
3,140


$
(1,336,701
)

$
140,160


$
251,985


$
239,378


$
26,797


$
(266,175
)

$
251,985  38




---



##### Table of Contents



KING
    PHARMACEUTICALS, INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  GUARANTOR
    SUBSIDIARIES
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30, 2007


Nine Months Ended September 30, 2006Non











NonGuarantor


Guarantor


King





Guarantor


Guarantor


KingKing


Subsidiaries


Subsidiaries


Consolidated


King


Subsidiaries


Subsidiaries


Consolidated(Unaudited)(In thousands)Cash flows provided by (used in) operating activities

$
18,388


$
403,682


$
4,925


$
426,995


$
(39,643
)

$
307,504


$
29,396


$
297,257Cash flows from investing activities:Transfers from (to) restricted cash


(392
)










(392
)


128,722











128,722Purchases of investments in debt securities


(1,574,031
)










(1,574,031
)


(1,170,272
)










(1,170,272
)Proceeds from maturities and sales of investments in debt
    securities


1,412,340











1,412,340



885,390











885,390Purchases of property, plant and equipment


(25,676
)


(10,362
)


(634
)


(36,672
)


(17,512
)


(10,206
)


(3,502
)


(31,220
)Proceeds from sale of property and equipment






3







3















Acquisition of
    Avinza®


(23
)


(296,641
)






(296,664
)














Loan repayment from Ligand


37,750











37,750















Purchases of product rights and intellectual property






(67,932
)






(67,932
)






(59,886
)






(59,886
)Net cash used in investing activities


(150,032
)


(374,932
)


(634
)


(525,598
)


(173,672
)


(70,092
)


(3,502
)


(247,266
)Cash flows from financing activities:Proceeds from exercise of stock options, net


10,609











10,609



6,844











6,844Excess tax benefit from stock-based compensation


687











687



425











425Proceeds from issuance of long-term debt


















400,000











400,000Payments on long-term debt


















(338,434
)










(338,434
)Debt issuance costs


(1,527
)










(1,527
)


(10,786
)










(10,786
)Intercompany


36,864



(34,343
)


(2,521
)






251,583



(226,800
)


(24,783
)


Net cash provided by (used in) financing activities


46,633



(34,343
)


(2,521
)


9,769



309,632



(226,800
)


(24,783
)


58,049(Decrease) increase in cash and cash equivalents


(85,011
)


(5,593
)


1,770



(88,834
)


96,317



10,612



1,111



108,040Cash and cash equivalents, beginning of period


101,210



8,801



3,766



113,777



26,802



1,172



2,040



30,014Cash and cash equivalents, end of period

$
16,199


$
3,208


$
5,536


$
24,943


$
123,119


$
11,784


$
3,151


$
138,054  39




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion contains certain forward-looking
    statements that reflect managements current views of
    future events and operations. This discussion should be read in
    conjunction with the following: (a) Risk
    Factors set out below and in our Annual Report on
    Form 10-K
    for the year ended December 31, 2006, which are
    supplemented by the discussion which follows; (b) our
    audited consolidated financial statements and related notes
    which are included in our Annual Report on
    Form 10-K
    for the year ended December 31, 2006; and (c) our
    unaudited consolidated financial statements and related notes
    which are included in this report on
    Form 10-Q.
    Please see the sections entitled Risk Factors and
    A Warning About Forward-Looking Statements for a
    discussion of the uncertainties, risks and assumptions
    associated with these statements.
  OVERVIEW
  Our
    Business
        
    by maximizing the potential of our currently marketed products
    through sales and marketing and prudent product life-cycle
    management,
    through the successful development of new branded pharmaceutical
    products,
    through the acquisition or in-licensing of novel branded
    pharmaceutical products in various stages of development, and of
    technologies that have significant market potential, that
    complement our key therapeutic areas, and
    through mergers and acquisitions which add products or products
    in development, technologies or sales and marketing capabilities
    to our key therapeutic areas or that otherwise complement our
    operations.    Recent
    Developments
  Avinza®
  ® ® ® ® ® ®
 40




---



##### Table of Contents



Thrombin-JMI®
  TM ® TM ® ®
  Altace®/Diuretic
    Combination
  ® ® ® ®
  Thrombin-JMI®
    Epistaxis Kit
  ® ® ® ®
  Remoxy tm
  TM TM
  Bremelanotide
       41




---



##### Table of Contents



Altace®
  ® en banc ® ®
    tm
  Rochester,
    Michigan Sterile Manufacturing Facility
  ®
  License,
    Development and Commercialization Agreement with Acura
    Pharmaceuticals, Inc.
  ® tm ® ®
 42




---



##### Table of Contents



RESULTS
    OF OPERATIONS
  Three
    and Nine Months Ended September 30, 2007 and
    2006
    For the Three


For the NineMonths Ended


Months EndedSeptember 30,


September 30,2007


2006


2007


2006(In thousands)


(In thousands)Total RevenuesBranded pharmaceuticals

$
472,363


$
432,887


$
1,388,381


$
1,269,625Meridian Medical Technologies


47,919



37,125



141,830



132,292Royalties


20,042



19,136



60,762



59,857Contract manufacturing


2,034



2,558



8,692



13,812Other


2,496







3,945



Total revenues

$
544,854


$
491,706


$
1,603,610


$
1,475,586Cost of Revenues, exclusive of depreciation, amortization and
    impairments Branded pharmaceuticals

$
173,773


$
83,225


$
356,406


$
224,319Meridian Medical Technologies


19,169



17,324



58,357



60,327Royalties


2,442



2,337



7,512



7,263Contract manufacturing


2,512



3,587



8,801



14,016Other


(135
)






3,669



Total cost of revenues

$
197,761


$
106,473


$
434,745


$
305,925     For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2007


2006


2007


2006(In thousands)


(In thousands)Gross Sales

$
673,111


$
607,543


$
1,975,373


$
1,831,972Commercial Rebates


48,902



47,306



142,965



144,350Medicaid Rebates


8,323



2,882



29,219



21,194Medicare Part D Rebates


14,334



15,586



43,970



41,456Chargebacks


26,200



24,193



72,427



76,440Returns


5,900



2,511



11,136



10,053Trade Discounts/Other


24,614



22,494



72,398



62,121544,838



492,571



1,603,258



1,476,358Discontinued Operations


(16
)


865



(352
)


772Net Sales

$
544,854


$
491,706


$
1,603,610


$
1,475,586   ®
   43




---



##### Table of Contents



Accrual
    for Rebates, including Administrative Fees (in
    thousands):
  2007


2006Balance at January 1, net of prepaid amounts

$
53,765


$
126,240Current provision related to sales made in current period


72,088



79,690Current provision related to sales made in prior periods


534



(3,532
)Rebates paid


(67,255
)


(115,999
)Balance at March 31, net of prepaid amounts

$
59,132


$
86,399Current provision related to sales made in current period


72,822



69,912Current provision related to sales made in prior periods


(849
)


(4,844
)Rebates paid


(72,924
)


(82,158
)Balance at June 30, net of prepaid amounts

$
58,181


$
69,309Current provision related to sales made in current period


73,760



76,684Current provision related to sales made in prior periods


(2,201
)


(10,910
)Rebates paid


(74,672
)


(76,460
)Balance at September 30, net of prepaid amounts

$
55,068


$
58,623          44




---



##### Table of Contents



Accrual for Returns (in thousands):
  2007


2006Balance at January 1

$
42,001


$
50,902Current provision


(1,254
)


(702
)Actual returns


(6,295
)


(7,692
)Ending balance at March 31

$
34,452


$
42,508Current provision


6,490



8,244Actual returns


(4,767
)


(4,410
)Ending balance at June 30

$
36,175


$
46,342Current provision


5,900



2,511Actual returns


(4,713
)


(6,760
)Ending balance at September 30

$
37,362


$
42,093     Accrual
    for Chargebacks (in thousands):
  2007


2006Balance at January 1

$
13,939


$
13,153Current provision


23,645



29,390Actual chargebacks


(26,557
)


(25,972
)Ending balance at March 31

$
11,027


$
16,571Current provision


22,582



22,857Actual chargebacks


(22,962
)


(25,402
)Ending balance at June 30

$
10,647


$
14,026Current provision


26,200



24,193Actual chargebacks


(25,289
)


(25,278
)Ending balance at September 30

$
11,558


$
12,941  45




---



##### Table of Contents



Branded
    Pharmaceuticals Segment
  For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2007 vs. 2006


Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Branded Pharmaceutical revenue:Altace®

$
168,524


$
158,914


$
9,610



6.0
%

$
488,440


$
471,604


$
16,836



3.6
%Skelaxin®


105,653



105,933



(280
)


(<1
)


325,778



302,037



23,741



7.9Thrombin-JMI®


68,968



70,029



(1,061
)


(1.5
)


198,099



190,133



7,966



4.2Avinza®


31,802







31,802







76,051







76,051



Levoxyl®


20,596



24,644



(4,048
)


(16.4
)


68,237



84,726



(16,489
)


(19.5
)Sonata®


17,862



18,660



(798
)


(4.3
)


58,305



63,838



(5,533
)


(8.7
)Other


58,958



54,707



4,251



7.8



173,471



157,287



16,184



10.3Total revenue


472,363



432,887



39,476



9.1



1,388,381



1,269,625



118,756



9.4Cost of revenues, exclusive of depreciation, amortization and
    impairments


173,773



83,225



90,548



>100.0



356,406



224,319



132,087



58.9   ® ® ® ® ® ® ®
  Sales
    of Key Products
  Altace®
  ® ®
  ®
  ®
  Skelaxin®
  ® ® ® ®
 46




---



##### Table of Contents



®
  ®
  Thrombin-JMI®
  ® ® ®
  Avinza®
  ® ® ®
  ®
  Levoxyl®
  ® ®
  ®
  Sonata®
  ® ®
  ®
  ®
 47




---



##### Table of Contents



Other
    ® ®
  Cost
    of Revenues
  ® ® ®
      
    A termination of a contract that resulted in a charge of
    $3.8 million in the first nine months of 2007.
    An inventory valuation allowance of $17.3 million for raw
    material inventory associated with
    Altace®
    and a charge of $39.9 million for the write-down of prepaid raw
    material inventory associated with
    Altace®
    in the third quarter of 2007. For additional information, please
    see Note, 3, Inventories, in Item 1,
    Financial Statements.
    A charge of $24.6 million primarily associated with minimum
    purchase requirements under a supply agreement to purchase raw
    material inventory associated with
    Altace®
    in the third quarter of 2007. For additional information, please
    see Note, 3, Inventories, in Item 1,
    Financial Statements.  Meridian
    Medical Technologies
  For the Three Months Ended


Change


For the Nine


ChangeSeptember 30,


2007 vs. 2006


Months Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Meridian Medical Technologies revenue

$
47,919


$
37,125


$
10,794



29.1
%

$
141,830


$
132,292


$
9,538



7.2
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


19,169



17,324



1,845



10.6



58,357



60,327



(1,970
)


(3.3
)  48




---



##### Table of Contents



® ® ® ®
    Royalties
  For the ThreeMonths Ended


Change


For the Nine


ChangeSeptember 30,


2007 vs. 2006


Months Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Royalty revenue

$
20,042


$
19,136


$
906



4.7
%

$
60,762


$
59,857


$
905



1.5
%Cost of revenues, exclusive of depreciation, amortization and
    impairments


2,442



2,337



105



4.5



7,512



7,263



249



3.4   ® ®
  Contract
    Manufacturing
  For the Three Months Ended


Change


For the Nine


ChangeSeptember 30,


2007 vs. 2006


Months Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Contract manufacturing revenue

$
2,034


$
2,558


$
(524
)


(20.5
)%

$
8,692


$
13,812


$
(5,120
)


(37.1
)%Cost of revenues, exclusive of depreciation, amortization and
    impairments


2,512



3,587



(1,075
)


(30.0
)


8,801



14,016



(5,215
)


(37.2
)    49




---



##### Table of Contents



Operating
    Costs and Expenses
    For the Three Months


Change


For the Nine Months


ChangeEnded September 30,


2007 vs. 2006


Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Cost of revenues, exclusive of depreciation, amortization and
    impairments as shown below

$
197,761


$
106,473


$
91,288



85.7
%

$
434,745


$
305,925


$
128,820



42.1
%Selling, general and administrative


185,257



157,594



27,663



17.6



526,777



482,095



44,682



9.3Research and development


35,089



63,419



(28,330
)


(44.7
)


107,815



212,931



(105,116
)


(49.4
)Depreciation and amortization


36,762



37,833



(1,071
)


(2.8
)


112,852



110,745



2,107



1.9Asset impairments


147,838







147,838







222,648



279



222,369



>100Restructuring charges


20,274



3,202



17,072



>100



20,734



3,194



17,540



100Total operating costs and expenses

$
622,981


$
368,521


$
254,460



69.0
%

$
1,425,571


$
1,115,169


$
310,402



27.8
%   Selling,
    General and Administrative Expenses
  For the Three Months


Change


For the Nine


ChangeEnded September 30,


2007 vs. 2006


Months Ended September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








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

$
136,286


$
107,300


$
28,986



27.0
%

$
384,324


$
319,480


$
64,844



20.3
%Co-promotion fees


48,971



50,294



(1,323
)


(2.6
)


142,453



162,615



(20,162
)


(12.4
)Total selling, general and administrative

$
185,257


$
157,594


$
27,663



17.6
%

$
526,777


$
482,095


$
44,682



9.3
%     ® ®
  ® ®
 50




---



##### Table of Contents



Research
    and Development Expense
  For the Three





For the NineMonths Ended


Change


Months Ended


ChangeSeptember 30,


2007 vs. 2006


September 30,


2007 vs. 20062007


2006


$


%


2007


2006


$


%(In thousands)








(In thousands)Research and development

$
34,889


$
38,419


$
(3,530
)


(9.2
)%

$
104,515


$
102,931


$
1,584



1.5
%Research and development  in process upon acquisition


200



25,000



(24,800
)


(99.2
)


3,300



110,000



(106,700
)


(97.0
)Total research and development

$
35,089


$
63,419


$
(28,330
)


(44.7
)%

$
107,815


$
212,931


$
(105,116
)


(49.4
)%     ®
     51




---



##### Table of Contents



Depreciation
    and Amortization Expense
  ®
  ® ®
  ® Co-Promotions
  ®
  Other
    Operating Expenses
    
    An intangible asset impairment charge of $146.4 million in
    the third quarter of 2007 related to our
    Altace®
    product. On September 11, 2007 the Circuit Court declared
    invalid the 722 patent that covers our
    Altace®
    product. Following the Circuit Courts decision, we reduced
    the estimated useful life of this product and forecasted net
    sales which reduced the probability-weighted estimated
    undiscounted future cash flows associated with
    Altace®
    intangible assets to a level below their carrying value. We
    determined the fair value of these assets based on
    probability-weighted estimated discounted future cash flows.
    An intangible asset impairment charge of $29.3 million in
    the second quarter of 2007 and $0.3 million in the second
    quarter of 2006. The intangible asset impairment charge in the
    second quarter of 2007 was primarily related to our decision to
    no longer pursue the development of a new formulation of
    Intal®
    utilizing hydroflouroalkane as a propellant.
    A charge of $45.6 million in the second quarter of 2007 and
    a charge of $1.4 million in the third quarter of 2007
    related to the write-down of our Rochester, Michigan sterile
    manufacturing facility and certain legacy branded pharmaceutical
    products which we have classified as held for sale. On
    October 1, 2007, we closed the asset purchase agreement
    with JHP, pursuant to which JHP acquired our Rochester, Michigan
    sterile manufacturing facility, some of our legacy products that
    are manufactured there, and the related contract manufacturing
    business. For additional information, please see Note 6,
    Assets Held for Sale, in Item 1,
    Financial Statements, and Recent
    Developments, in Item 2, Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.
    Restructuring charges in the amount of $20.3 million in the
    third quarter of 2007 primarily due to our restructuring
    initiative designed to accelerate a planned strategic shift
    emphasizing our focus in 52




---



##### Table of Contents




    Restructuring charges of $0.5 million in the first quarter of
    2007 and $3.2 million in the third quarter of 2006
    associated with separation payments primarily due to our
    decision to transfer the production of
    Levoxyl®
    from our St. Petersburg, Florida facility to the Bristol,
    Tennessee facility by the end of 2008.  ® and/or
  ® ® ® ® ® ®
  Non-Operating
    Items
  For the Three Months


For the Nine MonthsEnded September 30,


Ended September 30,2007


2006


2007


2006(In thousands)


(In thousands)Interest income

$
10,678


$
8,489


$
28,461


$
22,842Interest expense


(1,792
)


(1,894
)


(5,670
)


(7,925
)Gain (loss) on investment


(10,453
)






(10,453
)


(Loss) gain on early extinguishment of debt






(11
)






698Other, net


(416
)


101



(681
)


(613
)Total other income (expense)


(1,983
)


6,685



11,657



15,002Income tax (benefit) expense


(39,853
)


40,020



49,310



123,931Discontinued operations


(11
)


555



(226
)


497       
    A loss of $10.5 million in third quarter and first nine
    months of 2007 related to our investment in Palatin. For
    additional information, please see Note 13,
    Marketable Securities in Item I,
    Financial Statements.
    A gain of $0.7 million during the first nine months of 2006
    resulting from the early retirement of our
    23/4% Convertible
    Debentures due November 15, 2021.  Income
    Tax (Benefit) Expense
     53




---



##### Table of Contents



Liquidity
    and Capital Resources
  General
      ® tm ® ®
  tm tm
  Hart-Scott-Rodino
  ® en banc ® ®
   54




---



##### Table of Contents



® ® ® ®
  ®
  
    If calendar year net sales are less than $200.0 million,
    the royalty payment will be 5% of all net sales.
    If calendar year net sales are greater than $200.0 million,
    then the royalty payment will be 10% of all net sales up to
    $250.0 million, plus 15% of net sales greater than
    $250.0 million.  ® ® ®
  TM ® TM ®
 55




---



##### Table of Contents



® ® ® ®
  
    For 2006, 15% of
    Altace®
    net sales up to $165.0 million, 42.5% of
    Altace®
    net sales in excess of $165.0 million and less than or
    equal to $465.0 million, and 52.5% of
    Altace®
    net sales that are in excess of $465.0 million and less
    than or equal to $585.0 million.
    For 2007, 30% of
    Altace®
    net sales, with the fee not to exceed $178.5 million.
    For 2008, 22.5% of
    Altace®
    net sales, with the fee not to exceed $134.0 million.
    For 2009, 14.2% of
    Altace®
    net sales, with the fee not to exceed $84.5 million.
    For 2010, 25% of
    Altace®
    net sales, with the fee not to exceed $5.0 million.  ® ®
  ®
  TM TM TM TM TM TM
  TM
  ® ®
  ®
 56




---



##### Table of Contents



®
    ®
  ®
  TM TM TM TM TM TM
  ® ® ® ®
 57




---



##### Table of Contents



Settlement
    of Governmental Pricing Investigation
          Form 8-K
  SEC
    Investigation
    Securities
    and Derivative Litigation
     58




---



##### Table of Contents



Patent
    Challenges
  ® ® ® ® ® ® ® ® ® ®
  Cash
    Flows
  Operating
    Activities
  For theNine Months EndedSeptember 30,2007


2006(In thousands)Net cash provided by operating activities

$
426,995


$
297,257    59




---



##### Table of Contents



For theNine Months EndedSeptember 30,2007


2006(In thousands)Accounts receivable, net of allowance

$
(397
)

$
(31,015
)Inventories


38,457



41,293Prepaid expenses and other current assets


(37,047
)


(43,567
)Accounts payable


(17,689
)


(5,552
)Accrued expenses and other liabilities


(26,753
)


(114,547
)Income taxes payable


8,691



(1,537
)Deferred revenue


(3,510
)


(5,716
)Other assets


(5,433
)


(20,256
)Deferred taxes


(98,540
)


(13,853
)Total changes in operating assets and liabilities and deferred
    taxes

$
(142,221
)

$
(194,750
)   Investing
    Activities
  For theNine Months EndedSeptember 30,2007


2006(In thousands)Net cash used in investing activities

$
(525,598
)

$
(247,266
)   ®
  ®
   60




---



##### Table of Contents



Financing
    Activities
  For theNine Months EndedSeptember 30,2007


2006(In thousands)Net cash provided by financing activities

$
9,769


$
58,049   1 4 3 4
  Certain
    Indebtedness and Other Matters
  1 4 1 4
    3 4
     61




---



##### Table of Contents



Form S-3 and/or
  Impact
    of Inflation
    Recently
    Issued Accounting Standards
  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  Fair Value Measurements
  The Fair Value Option for
    Financial Assets and Financial Liabilities
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services Received for Use in Future Research and Development
    Activities 07-3). 07-3 07-03, 07-03 07-3
 62




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
              
    Intangible assets, goodwill, and other long-lived assets.When we acquire product rights in conjunction with either
    business or asset acquisitions, we allocate an appropriate
    portion of the purchase price to intangible assets, goodwill and
    other long-lived assets. The purchase price is allocated to
    product rights and trademarks, patents, acquired research and
    development, if any, and other intangibles using the assistance
    of valuation consultants. We estimate the useful lives of the
    assets by factoring in the characteristics of the products such
    as: patent protection, competition from products prescribed for
    similar indications, estimated future introductions of competing
    products, and other issues. The factors that drive the estimate
    of the life of the asset are inherently uncertain. However,
    patents have specific legal lives over which they are amortized.
    Conversely, trademarks and product rights have no specific legal
    lives. Trademarks and product rights will continue to be an
    asset to us after the expiration of the patent, as their
    economic value is not tied exclusively to the patent. We believe
    that by establishing separate lives for the patent versus the
    trademark and product rights, we are in essence using an
    accelerated method of amortization for the product as a whole.
    This results in greater amortization in earlier years when the
    product is under patent protection, as we are amortizing both
    the patent and the trademark and product rights, and less
    amortization when the product faces potential generic
    competition, as the amortization on the patent is eliminated.
    Because we have no discernible evidence to show a decline in
    cash flows for trademarks and product rights, or for patents, we
    use the straight-line method of amortization for both
    intangibles.   63




---



##### Table of Contents



Accumulated


Net BookCost


Amortization


Value(In thousands)BrandedAltace®

$
156,744


$
97,369


$
59,375Other Cardiovascular/metabolic


80,569



49,787



30,782Cardiovascular/metabolic


237,313



147,156



90,157Intal®


34,033



26,737



7,296Other Hospital/acute care


170,242



56,440



113,802Hospital/acute care


204,275



83,177



121,098Skelaxin®


203,015



59,840



143,175Sonata®


23,146



23,146



Neuroscience


226,161



82,986



143,175Other


66,643



39,691



26,952Total Branded


734,392



353,010



381,382Meridian Medical Technologies


174,859



30,446



144,413Royalties


2,470



2,156



314Contract manufacturing










All other










Total trademarks and product rights

$
911,721


$
385,612


$
526,109     Three Months Ended





Three Months EndedSeptember 30, 2007





September 30, 2006Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®
    (1)

$
124,406


$
4,084



10


$



$
3,677Other Cardiovascular/metabolic






851











1,821Cardiovascular/metabolic


124,406



4,935











5,498Intal®






1,459



6







1,903Other Hospital/acute care






2,572











3,195Hospital/acute care






4,031











5,098Skelaxin®






3,887



13.5







3,887Other






605











774Total Branded


124,406



13,458











15,257Meridian Medical Technologies






2,012











1,933Royalties






10











10Contract manufacturing


















All other


















Total trademarks and product rights

$
124,406


$
15,480










$
17,200  64




---



##### Table of Contents



Nine Months Ended





Nine Months EndedSeptember 30, 2007





September 30, 2006Amortization


Life





AmortizationImpairments


Expense


(Years)


Impairments


Expense(In thousands)





(In thousands)BrandedAltace®(1)

$
124,406


$
12,146



10


$



$
11,032Other Cardiovascular/metabolic






4,449











5,462Cardiovascular/metabolic


124,406



16,595











16,494Intal®


27,693



4,263



6







5,708Other Hospital/acute care


1,566



8,238







279



9,556Hospital/acute care


29,259



12,501







279



15,264Skelaxin®






11,661



13.5







11,661Other






1,816











2,364Total Branded


153,665



42,573







279



45,783Meridian Medical Technologies






5,962











5,330Royalties






31











31Contract manufacturing


















All other


















Total trademark and product rights

$
153,665


$
48,566






$
279


$
51,144     (1)
    
    The intangible asset impairment associated with
    Altace®
    totaled $146,444, of which $124,406 related to
    Altace®
    trademarks and product rights.    Remaining Life at September 30, 2007Trademark &Patent


Product RightsAltace®






1 year 3 monthsSkelaxin®






9 years 3 monthsAvinza®


10 years 2 months



Intal®






1 year 3 months   
    Inventories.  Our inventories are valued at the
    lower of cost or market value. We evaluate our entire inventory
    for short dated or slow moving product and inventory commitments
    under supply agreements based on projections of future demand
    and market conditions. For those units in inventory that are so
    identified, we estimate their market value or net sales value
    based on current realization trends. If the projected net
    realizable value is less than cost, on a product basis, we make
    a provision to reflect the lower value of that inventory. This
    methodology recognizes projected inventory losses at the time
    such losses are evident rather than at the time goods are
    actually sold. We maintain supply agreements with some of our
    vendors which contain minimum purchase requirements. We estimate
    future inventory requirements based on current facts and trends.
    Should our minimum purchase requirements under supply agreements
    or our estimated future inventory requirements exceed actual
    inventory quantities that we will be able to sell to our
    customers, we record a charge in costs of revenues.
    Accruals for rebates, returns, and
    chargebacks.  We establish accruals for returns,
    chargebacks and Medicaid, Medicare, and commercial rebates in
    the same period we recognize the related sales. The accruals
    reduce revenues and are included in accrued expenses. At the
    time a rebate or chargeback payment is made or a product return
    is received, which occurs with a delay after the related sale,
    we record a reduction to accrued expenses and, at the end of
    each quarter, adjust accrued expenses for differences between
    estimated and actual payments. Due to estimates and assumptions
    inherent in determining the amount of returns, chargebacks and
    rebates, the actual amount of product returns and claims for
    chargebacks and rebates may be different from our estimates. 65




---



##### Table of Contents




    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. 66




---



##### Table of Contents



A WARNING
    ABOUT FORWARD-LOOKING STATEMENTS
        
    the potential of, including anticipated net sales and
    prescription trends for, our branded pharmaceutical products,
    particularly
    Altace®,
    Skelaxin®,
    Avinza®,
    Thrombin-JMI®,
    Levoxyl®
    and
    Sonata®;
    expectations regarding the enforceability and effectiveness of
    product-related patents, including in particular patents related
    to
    Altace®,
    Skelaxin®,
    Avinza®,
    Sonata®
    and
    Adenoscan®;
    expected trends and projections with respect to particular
    products, reportable segment and income and expense line items;
    the adequacy of our liquidity and capital resources;
    anticipated capital expenditures;
    the development, approval and successful commercialization of
    RemoxyTM,
    an investigational drug for the treatment of moderate-to-severe
    chronic pain; an
    Altace®
    diuretic combination product for patients who require an
    antihypertensive as well as a diuretic; and product life-cycle
    development projects;
    the successful execution of our growth and restructuring
    strategies;
    anticipated developments and expansions of our business;
    our plans for the manufacture of some of our products, including
    products manufactured by third parties;
    the potential costs, outcomes and timing of research, clinical
    trials and other development activities involving pharmaceutical
    products, including, but not limited to, the magnitude and
    timing of potential payments to third parties in connection with
    development activities;
    the development of product line extensions;
    the expected timing of the initial marketing of a ramipril
    tablet formulation and other products;
    products developed, acquired or in-licensed that may be
    commercialized;
    our intent, beliefs or current expectations, primarily with
    respect to our future operating performance;
    expectations regarding sales growth, gross margins,
    manufacturing productivity, capital expenditures and effective
    tax rates;
    expectations regarding the outcome of various pending legal
    proceedings including the
    Altace®
    and
    Skelaxin®
    patent challenges, governmental investigations, securities
    litigation, and other legal proceedings described in this
    report; and
    expectations regarding our financial condition and liquidity as
    well as future cash flows and earnings.   67




---



##### Table of Contents



Form 10-K,
  Item 3.
    Quantitative
    and Qualitative Disclosures about Market Risk          Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Rules 13a-15(f) 15d-15(f)
  PART II 
    OTHER INFORMATION
  Item 1.
    Legal
    Proceedings    Item 1A.
    Risk
    Factors  Form 10-K
  If we
    cannot successfully enforce our rights under the patents
    relating to three of our largest products,
    Altace®,
    Skelaxin®
    and
    Avinza®,
    or if we are unable to secure or enforce our rights under other
    patents, trademarks, trade secrets or other intellectual
    property, additional competitors could enter the market, and
    sales of these products may decline materially.
   68




---



##### Table of Contents




    Cobalt Pharmaceuticals, Inc. (Cobalt), a generic
    drug manufacturer, filed an ANDA with the FDA seeking permission
    to market a generic version of
    Altace®
    and filed a Paragraph IV certification alleging invalidity
    of a patent held by us related to
    Altace®.
    Aventis Pharma Deutschland GmbH (Aventis) and we
    filed suit in March 2003, in the District Court for the District
    of Massachusetts to enforce our rights under that patent. The
    parties submitted a joint stipulation of dismissal in April
    2006, and the court granted dismissal. We have received a civil
    investigative demand for information from the U.S. Federal
    Trade Commission (FTC) in connection with our
    collaboration with Arrow, the dismissal without prejudice of our
    patent infringement litigation against Cobalt under the
    Hatch-Waxman Act of 1984 and other information. We are
    cooperating with the FTC in this investigation.
    Lupin filed an ANDA with the FDA seeking permission to market a
    generic version of
    Altace®
    and filed a Paragraph IV certification challenging the
    validity and infringement of a patent related to
    Altace®,
    and seeking to market its generic version of
    Altace®
    before expiration of that patent. In July 2005, we filed civil
    actions for infringement of the patent against Lupin. In July
    2006, the validity of the patent was upheld. Lupin appealed the
    case and, on September 11, 2007, the Circuit Court reversed
    the decision of the District Court and invalidated the
    Companys 722 patent on the basis of obviousness. The
    Company has filed with the Circuit Court a petition for
    rehearing and rehearing en banc. Lupin filed its
    responsive brief on November 7, 2007. The Circuit Court has
    not yet issued a decision regarding this petition. Following the
    Circuit Courts decision, we undertook an analysis of its
    potential effects on future sales of
    Altace®.
    As a result of this analysis, we reduced our estimate of future
    net sales of
    Altace®
    and recorded charges associated with minimum purchase
    requirements under our supply agreement to purchase
    Altace®
    raw material, raw material inventories associated with
    Altace®
    and an impairment of our
    Altace®
    intangible assets. If our petition for rehearing and rehearing
    en banc is unsuccessful, our actual and estimated future
    net sales of
    Altace®
    are likely to decrease, and we may have to take additional
    material charges related to
    Altace®.Teva Pharmaceuticals USA, Dr. Reddys Pharmaceutical
    Laboratories, Ltd and Dr. Reddys Pharmaceutical
    Laboratories, Inc. have also sought to market generic versions
    of
    Altace®
    and have filed related Paragraph IV certifications.
    Eon Labs, Inc. (Eon Labs), CorePharma, LLC
    (CorePharma) and Mutual Pharmaceutical Co.
    (Mutual), Inc. have each filed an ANDA with the FDA
    seeking permission to market a generic version of
    Skelaxin®
    400 mg tablets. Additionally, Eon Labs ANDA seeks
    permission to market a generic version of
    Skelaxin®
    800 mg tablets. Each has also filed Paragraph IV
    certifications against patents related to
    Skelaxin®
    and are alleging noninfringement, invalidity and
    unenforceability of those patents. A patent infringement suit
    was filed against Eon Labs in January 2003; against CorePharma
    in March 2003; and against Mutual in March 2004 concerning their
    proposed 400 mg products. Additionally, we filed a separate
    suit against Eon Labs in December 2004 concerning its proposed
    800 mg product. In May 2006 the Mutual case was suspended
    pending the outcome of the FDA activity described below. In June
    2006, the Eon Labs cases were consolidated with the CorePharma
    case. On April 30, 2007, the 400 mg case was dismissed
    without prejudice, although the question of Eon Labs
    attorney fees and expenses was severed and consolidated with the
    800 mg case.  ®
 69




---



##### Table of Contents



® ® ®
  ® ®
  
    Actavis, Inc. (Actavis) filed an ANDA with the FDA
    seeking permission to market a generic version of
    Avinza®
    and filed a paragraph IV certification challenging the
    validity and infringement of a composition of matter patent
    related to
    Avinza®.
    We and Elan Pharma International LTD, the owner of the patent,
    filed suit on October 18, 2007 in the United States
    District Court for the District of New Jersey to enforce the
    rights under the patent. Pursuant to the Hatch-Waxman Act, the
    filing of the lawsuit against Actavis provided the Company with
    an automatic stay of FDA approval of Actavis ANDA for up
    to 30 months (unless the patent is held invalid,
    unenforceable, or not infringed) from no earlier than
    September 4, 2007.            ® ®
 70




---



##### Table of Contents



Seven
    of our products plus royalty payments presently account for
    85.3% of our revenues from continuing operations and a decrease
    in sales or royalty income in the future would have a material
    adverse effect on our results of operations.
  In
    General. ® ® ® ® ® ® ® ® ® ®
  Product Competition.
  
    Our largest selling product,
    Altace®,
    competes in a very competitive and highly genericized market
    with other cardiovascular therapies.
    Our product
    Skelaxin®
    competes in a highly genericized market with other muscle
    relaxants.
    Our product
    Sonata®
    competes with other insomnia treatments in a highly competitive
    market.
    Our product
    Levoxyl®
    competes in a competitive and highly genericized market with
    other levothyroxine sodium products.
    We anticipate competition from recombinant human and human
    thrombin for our product
    Thrombin-JMI®
    in the near future. Omrix Biopharmaceuticals, Inc.s
    Biologics Licensing Application (BLA) for its human
    thrombin product was approved in September 2007. Zymogenetics,
    Inc. filed a BLA for its recombinant human thrombin product in
    December 2006.      EpiPen. ® ® ®
 71




---



##### Table of Contents



If we
    cannot implement our strategy to grow our business through
    increased sales, acquisitions, development and in-licensing, our
    business or competitive position in the pharmaceutical industry
    may suffer. Our restructuring initiative might not succeed, and
    we do not expect that the benefits of the initiative will
    outweigh the adverse effect on our business if net sales of
    Altace®
    or another significant product are reduced by generic
    competition.
          
    Remoxytm,
    an investigational drug for the treatment of moderate to severe
    chronic pain;
    binodenoson, a myocardial pharmacologic stress imaging agent;
    Vanquixtm,
    a diazepam-filled auto-injector;
    sonodenoson, an investigational drug for the topical treatment
    of chronic diabetic foot ulcers;
    T-62, an investigational drug for the treatment of neuropathic
    pain;
    a potential new formulation of metaxalone;
    an
    Altace®/diuretic
    combination product; and
    a program to evaluate the safety and efficacy of
    Altace®
    in children.    
    engage in product life-cycle management to develop new
    indications and line extensions for existing and acquired
    products,
    successfully develop, license or commercialize new products on a
    timely basis or at all,
    continue to develop products already in development in a cost
    effective manner, or
    obtain any FDA approvals necessary to successfully implement the
    strategies described above. 72




---



##### Table of Contents




    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.    ®
  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.
  ® ® ® ® ® ® ® ® ®
   73




---



##### Table of Contents



® ® ® ®
  Item 6.
    Exhibits  Number



Exhibit Title10
.1(1)



Asset Purchase Agreement by and among King Pharmaceuticals,
    Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals,
    Inc., King Pharmaceuticals Research and Development, Inc., and
    JHP Pharmaceuticals, LLC dated as of July 14, 2007.31
.1



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



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



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



Certification by Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     (1)
    
    Incorporated by reference to Registrants Current Report on
    Form 8-K
    filed July 19, 2007. 74




---



##### Table of Contents



SIGNATURES
      By:
    /s/  BRIAN
    A. MARKISON   President and Chief Executive Officer
    By:
    /s/  
    JOSEPH SQUICCIARINO   Chief Financial Officer
   75