##### 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 June 30, 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 August 5, 2004: 241,559,586



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TABLE OF CONTENTS



|                                       |                                                                                               |                                                                                                     |  |  |  |  |  | 
|-------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION       
|                                       | Item 1. Financial Statements                                                                 
|                                       |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                                    
|                                       |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND OTHER COMPREHENSIVE INCOME
|                                       |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                    
|                                       |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                               
|                                       | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|RISK FACTORS                          
|PART II -- OTHER INFORMATION          
|                                       | Item 1. Legal Proceedings                                                                    
|                                       | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                            
|EX-31.1  SECTION 302 CEO CERTIFICATION
|EX-31.2  SECTION 302 CFO CERTIFICATION
|EX-32.1  SECTION 906 CEO CERTIFICATION
|EX-32.2  SECTION 906 CFO CERTIFICATION



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

(Unaudited)


(In thousands)


|                                                                |                                                                                       |                                            |           |              |           |  |           |         |           | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- |  | --------- | ------- | --------- | 
|                                                                |                                                                                       | June 30,                                   |           | December 31,
|                                                                |                                                                                       | 2004                                       |           | 2003        
|                                                                |                                                                                       |                                            |           |             
|ASSETS                                                         
|Current Assets:                                                 |                                                                                       |                                            |           |              |           |  |           |        
|                                                                | Cash and cash equivalents                                                             |                                            | $         | 106,807      |           |  | $         | 146,053 |          
|                                                                | Restricted cash                                                                       |                                            |           | 129,738      |           |  |           | 133,969 |          
|                                                                | Accounts receivable, net of allowance for
    doubtful accounts of $9,455 and $11,055 |                                            |           | 255,697      |           |  |           | 246,417 |          
|                                                                | Inventories                                                                           |                                            |           | 236,855      |           |  |           | 260,886 |          
|                                                                | Deferred income taxes                                                                 |                                            |           | 179,283      |           |  |           | 124,930 |          
|                                                                | Prepaid expenses and other current assets                                             |                                            |           | 64,534       |           |  |           | 30,036  |          
|                                                                | Assets related to discontinued operations                                             |                                            |           | 1,031        |           |  |           | 4,012   |          
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total current assets                       |           |              | 973,945   |  |           |         | 946,303   | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Property, plant and equipment, net                              |                                                                                       |                                            | 273,468   |              |           |  | 257,659   |        
|Goodwill                                                        |                                                                                       |                                            | 134,892   |              |           |  | 121,355   |        
|Intangible assets, net                                          |                                                                                       |                                            | 1,447,109 |              |           |  | 1,552,492 |        
|Other assets (includes restricted cash of $660
    and $30,265) |                                                                                       |                                            | 45,926    |              |           |  | 76,117    |        
|Deferred income taxes                                           |                                                                                       |                                            | 57,585    |              |           |  | 19,307    |        
|Assets related to discontinued operations                       |                                                                                       |                                            | 30,469    |              |           |  | 204,501   |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total assets                               |           | $            | 2,963,394 |  |           | $       | 3,177,734 | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                       
|Current Liabilities:                                            |                                                                                       |                                            |           |              |           |  |           |        
|                                                                | Accounts payable                                                                      |                                            | $         | 61,125       |           |  | $         | 83,078  |          
|                                                                | Accrued expenses                                                                      |                                            |           | 580,155      |           |  |           | 506,033 |          
|                                                                | Income taxes payable                                                                  |                                            |           | 26,182       |           |  |           | 79,641  |          
|                                                                | Current portion of long-term debt                                                     |                                            |           |             |           |  |           | 97      |          
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total current liabilities                  |           |              | 667,462   |  |           |         | 668,849   | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Long-term debt                                                  |                                                                                       |                                            | 345,000   |              |           |  | 345,000   |        
|Other liabilities                                               |                                                                                       |                                            | 81,032    |              |           |  | 121,705   |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total liabilities                          |           |              | 1,093,494 |  |           |         | 1,135,554 | 
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|Commitments and contingencies (Note 9)                          |                                                                                       |                                            |           |              |           |  |           |        
|Shareholders equity                                            |                                                                                       |                                            | 1,869,900 |              |           |  | 2,042,180 |        
|                                                                |                                                                                       |                                            |           |              |           |  |           |        
|                                                                |                                                                                       | Total liabilities and shareholders equity |           | $            | 2,963,394 |  |           | $       | 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                                 |                                                      | Six Months Ended
|                                                        |                                                                                     | June 30,                                           |                                                      | June 30,        
|                                                        |                                                                                     |                                                    |                                                      |                 
|                                                        |                                                                                     | 2004                                               |                                                      | 2003             |       | 2004    |         | 2003   
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |        
|Revenues:                                               |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Net sales                                                                           |                                                    | $                                                    | 254,021          |       |         | $       | 350,839 |       |         | $        | 527,909  |       |          | $       | 673,836 |      
|                                                        | Royalty revenue                                                                     |                                                    |                                                      | 21,119           |       |         |         | 16,176  |       |         |          | 37,875   |       |          |         | 31,600  |      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total revenues                                       |                  |       | 275,140 |         |         |       | 367,015 |          |          |       | 565,784  |         |         |       | 705,436 |  
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Operating costs and expenses:                           |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Cost of revenues, exclusive of depreciation shown
    below                         |                                                    |                                                      | 85,411           |       |         |         | 91,644  |       |         |          | 173,125  |       |          |         | 171,085 |      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Selling, general and administrative, exclusive of
    co-promotion fees             |                                                    |                                                      | 104,125          |       |         |         | 72,949  |       |         |          | 190,727  |       |          |         | 117,064 |      
|                                                        | Co-promotion fees                                                                   |                                                    |                                                      | 20,823           |       |         |         | 55,241  |       |         |          | 48,327   |       |          |         | 116,941 |      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total selling, general and administrative expense    |                  |       | 124,948 |         |         |       | 128,190 |          |          |       | 239,054  |         |         |       | 234,005 |  
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Research and development                                                            |                                                    |                                                      | 17,478           |       |         |         | 11,093  |       |         |          | 33,501   |       |          |         | 20,729  |      
|                                                        | Research and development-in process upon
    acquisition                            |                                                    |                                                      |                 |       |         |         | 175,000 |       |         |          |         |       |          |         | 193,000 |      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total research and development                       |                  |       | 17,478  |         |         |       | 186,093 |          |          |       | 33,501   |         |         |       | 213,729 |  
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Depreciation and amortization                                                       |                                                    |                                                      | 38,466           |       |         |         | 20,637  |       |         |          | 77,784   |       |          |         | 38,274  |      
|                                                        | Intangible asset impairment                                                         |                                                    |                                                      |                 |       |         |         |        |       |         |          | 34,936   |       |          |         | 110,970 |      
|                                                        | Medicaid related charge (Note 9)                                                    |                                                    |                                                      | 65,000           |       |         |         |        |       |         |          | 65,000   |       |          |         |        |      
|                                                        | Merger related costs (Note 12)                                                      |                                                    |                                                      | 3,126            |       |         |         |        |       |         |          | 3,126    |       |          |         |        |      
|                                                        | Restructuring charges (Note 11)                                                     |                                                    |                                                      | 6,153            |       |         |         |        |       |         |          | 6,153    |       |          |         |        |      
|                                                        | Gain on sale of products (Note 6)                                                   |                                                    |                                                      | (3,421           | )     |         |         |        |       |         |          | (4,279   | )     |          |         |        |      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total operating costs and expenses                   |                  |       | 337,161 |         |         |       | 426,564 |          |          |       | 628,400  |         |         |       | 768,063 |  
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Operating loss                                                                      |                                                    |                                                      | (62,021          | )     |         |         | (59,549 | )     |         |          | (62,616  | )     |          |         | (62,627 | )    
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Other income (expense):                                 |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Interest income                                                                     |                                                    |                                                      | 1,081            |       |         |         | 2,199   |       |         |          | 2,135    |       |          |         | 4,693   |      
|                                                        | Interest expense                                                                    |                                                    |                                                      | (3,266           | )     |         |         | (3,435  | )     |         |          | (6,371   | )     |          |         | (6,469  | )    
|                                                        | Valuation (charge) benefit 
    convertible notes receivable                       |                                                    |                                                      | (2,438           | )     |         |         | 7,647   |       |         |          | (2,487   | )     |          |         | 15,614  |      
|                                                        | Other, net                                                                          |                                                    |                                                      | 1,168            |       |         |         | (15     | )     |         |          | 465      |       |          |         | (98     | )    
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total other (expense) income                         |                  |       | (3,455  | )       |         |       | 6,396   |          |          |       | (6,258   | )       |         |       | 13,740  |  
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Loss from continuing operations before income
    taxes |                                                                                     |                                                    | (65,476                                              | )                |       |         | (53,153 | )       |       |         | (68,874  | )        |       |          | (48,887 | )      
|Income tax expense (benefit)                            |                                                                                     |                                                    | 152                                                  |                  |       |         | (16,653 | )       |       |         | (896     | )        |       |          | (7,977  | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Loss from continuing operations                         |                                                                                     |                                                    | (65,628                                              | )                |       |         | (36,500 | )       |       |         | (67,978  | )        |       |          | (40,910 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Discontinued operations (Note 8):                       |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Income (loss) from discontinued operations,
    including expected loss on disposal |                                                    |                                                      | 3,332            |       |         |         | 2,338   |       |         |          | (167,910 | )     |          |         | (2,044  | )    
|                                                        | Income tax expense (benefit)                                                        |                                                    |                                                      | 1,243            |       |         |         | 853     |       |         |          | (61,289  | )     |          |         | (746    | )    
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     |                                                    | Total income (loss) from discontinued
    operations |                  |       | 2,089   |         |         |       | 1,485   |          |          |       | (106,621 | )       |         |       | (1,298  | )
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|Net loss                                                |                                                                                     | $                                                  | (63,539                                              | )                |       | $       | (35,015 | )       |       | $       | (174,599 | )        |       | $        | (42,208 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|(Loss) income per common share:                         |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Basic:                                                                              |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |         |      
|                                                        |                                                                                     | Loss from continuing operations                    |                                                      | $                | (0.27 | )       |         | $       | (0.15 | )       |          | $        | (0.28 | )        |         | $       | (0.17 | )      
|                                                        |                                                                                     | Total gain (loss) from discontinued
    operations |                                                      |                  | 0.01  |         |         |         |      |         |          |          | (0.44 | )        |         |         | (0.01 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     | Net loss                                           |                                                      | $                | (0.26 | )       |         | $       | (0.15 | )       |          | $        | (0.72 | )        |         | $       | (0.18 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        | Diluted:                                                                            |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |         |      
|                                                        |                                                                                     | Loss from continuing operations                    |                                                      | $                | (0.27 | )       |         | $       | (0.15 | )       |          | $        | (0.28 | )        |         | $       | (0.17 | )      
|                                                        |                                                                                     | Total gain (loss) from discontinued
    operations |                                                      |                  | 0.01  |         |         |         |      |         |          |          | (0.44 | )        |         |         | (0.01 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        
|                                                        |                                                                                     | Net loss                                           |                                                      | $                | (0.26 | )       |         | $       | (0.15 | )       |          | $        | (0.72 | )        |         | $       | (0.18 | )      
|                                                        |                                                                                     |                                                    |                                                      |                  |       |         |         |         |       |         |          |          |       |          |         |        

See accompanying notes.

2



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##### Table of Contents



KING PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

AND OTHER COMPREHENSIVE INCOME


(Unaudited)


(In thousands, except share data)


|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          |          |  
|---------------------------- | -------------------------------------------------------------------- | -------------------------- | ----------- | -------- | - | ------------- | --------- | ------ | - | ----- | ------- | -------- | - | - | ----- | --- | --- | - | --------- | -------- | -------- | -
|                             |                                                                      |                            |             |          |   | Accumulated   |           |       
|                             |                                                                      | Common Stock               |             |          |   | Other         |           |       
|                             |                                                                      |                            |             | Retained |   | Comprehensive |           |       
|                             |                                                                      | Shares                     |             | Amount   |   | Earnings      |           | Income |   | Total
|                             |                                                                      |                            |             |          |   |               |           |        |   |      
|Balance at December 31, 2002 |                                                                      |                            | 240,624,751 |          |   | $             | 1,201,897 |        |   | $     | 729,241 |          |   | $ | 45    |     |     | $ | 1,931,183 |         
|Comprehensive loss:          |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|                             | Net loss                                                             |                            |             |         |   |               |           |       |   |       |         | (42,208  | ) |   |       |    |     |   |           | (42,208  | )       
|                             | Net unrealized gain on marketable securities, net
    of tax of $400 |                            |             |         |   |               |           |       |   |       |         |         |   |   |       | 742 |     |   |           | 742      |         
|                             | Foreign currency translation, net of tax of $45                      |                            |             |         |   |               |           |       |   |       |         |         |   |   |       | 83  |     |   |           | 83       |         
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|                             |                                                                      | Total comprehensive loss   |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          | (41,383  | )
|Stock option activity        |                                                                      |                            | 404,701     |          |   |               | 2,785     |        |   |       |        |          |   |   |      |     |     |   | 2,785     |         
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|Balance at June 30, 2003     |                                                                      |                            | 241,029,452 |          |   | $             | 1,204,682 |        |   | $     | 687,033 |          |   | $ | 870   |     |     | $ | 1,892,585 |         
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|Balance at December 31, 2003 |                                                                      |                            | 241,190,852 |          |   | $             | 1,205,970 |        |   | $     | 835,097 |          |   | $ | 1,113 |     |     | $ | 2,042,180 |         
|Comprehensive loss:          |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|                             | Net loss                                                             |                            |             |         |   |               |           |       |   |       |         | (174,599 | ) |   |       |    |     |   |           | (174,599 | )       
|                             | Net unrealized loss on                                               |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          |         
|                             |                                                                      | marketable securities, net |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          |          |  
|                             |                                                                      | of tax of $28              |             |          |  |               |           |        |  |       |         |          |  |   |       |     | (53 | ) |           |          | (53      | )
|                             | Foreign currency translation,                                        |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          |         
|                             |                                                                      | net of tax of $26          |             |          |  |               |           |        |  |       |         |          |  |   |       |     | 48  |   |           |          | 48       |  
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|                             |                                                                      | Total comprehensive loss   |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |          | (174,604 | )
|Stock option activity        |                                                                      |                            | 221,659     |          |   |               | 2,324     |        |   |       |        |          |   |   |      |     |     |   | 2,324     |         
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         
|Balance at June 30, 2004     |                                                                      |                            | 241,412,511 |          |   | $             | 1,208,294 |        |   | $     | 660,498 |          |   | $ | 1,108 |     |     | $ | 1,869,900 |         
|                             |                                                                      |                            |             |          |   |               |           |        |   |       |         |          |   |   |       |     |     |   |           |         

See accompanying notes.

3



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##### Table of Contents



KING PHARMACEUTICALS, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


(In thousands)


|                                                                   |                                                                             |                                                                        |         |         |         |   |          |          |          |  
|------------------------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             | Six Months Ended June                                                 
|                                                                   |                                                                             | 30,                                                                   
|                                                                   |                                                                             |                                                                       
|                                                                   |                                                                             | 2004                                                                   |         | 2003   
|                                                                   |                                                                             |                                                                        |         |        
|Cash flows from operating activities of
    continuing operations  |                                                                             | $                                                                      | 15,948  |         |         | $ | 202,800  |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|Cash flows from investing activities of
    continuing operations: |                                                                             |                                                                        |         |         |         |   |          |         
|                                                                   | Transfer from restricted cash                                               |                                                                        |         | 806     |         |   |          |         |         
|                                                                   | Purchases of marketable securities                                          |                                                                        |         |        |         |   |          | (25,903  | )       
|                                                                   | Proceeds from sale of marketable securities                                 |                                                                        |         |        |         |   |          | 253,097  |         
|                                                                   | Proceeds from loan receivable                                               |                                                                        |         |        |         |   |          | 6,187    |         
|                                                                   | Purchases of property, plant and equipment                                  |                                                                        |         | (28,462 | )       |   |          | (24,774  | )       
|                                                                   | Proceeds from sale of assets                                                |                                                                        |         | 113     |         |   |          | 241      |         
|                                                                   | Acquisition of primary care business of Elan                                |                                                                        |         | (36,000 | )       |   |          | (760,212 | )       
|                                                                   | 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     |         |         | (63,543 | ) |          |          | (798,046 | )
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|Cash flows from financing activities of
    continuing operations: |                                                                             |                                                                        |         |         |         |   |          |         
|                                                                   | Proceeds from exercise of stock options, net                                |                                                                        |         | 2,324   |         |   |          | 2,765    |         
|                                                                   | Payments on other long-term debt and capital
    lease obligations          |                                                                        |         | (97     | )       |   |          | (96      | )       
|                                                                   | Proceeds from revolving credit facility                                     |                                                                        |         |        |         |   |          | 125,000  |         
|                                                                   | Debt issuance costs                                                         |                                                                        |         |        |         |   |          | (214     | )       
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|                                                                   |                                                                             | Net cash provided by financing activities of
    continuing operations |         |         | 2,227   |   |          |          | 127,455  |  
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|Net cash provided by discontinued operations                       |                                                                             |                                                                        | 6,122   |         |         |   | 3,308    |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|Decrease in cash and cash equivalents                              |                                                                             |                                                                        | (39,246 | )       |         |   | (464,483 | )       
|Cash and cash equivalents, beginning of period                     |                                                                             |                                                                        | 146,053 |         |         |   | 588,225  |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         
|Cash and cash equivalents, end of period                           |                                                                             | $                                                                      | 106,807 |         |         | $ | 123,742  |         
|                                                                   |                                                                             |                                                                        |         |         |         |   |          |         

See accompanying notes.

4



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##### Table of Contents



KING PHARMACEUTICALS, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


June 30, 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 and six months ended June 30, 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, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. 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 loss and diluted loss
per common share would have increased to the following pro forma
amounts:

|                               |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |         |  
|------------------------------ | -------------------------------------- | ------------------ | - | ---------------- | - | ---- | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                               |                                        |                    |   |                 
|                               |                                        | Three Months Ended |   | Six Months Ended
|                               |                                        | June 30,           |   | June 30,        
|                               |                                        |                    |   |                 
|                               |                                        | 2004               |   | 2003             |   | 2004 |   | 2003   
|                               |                                        |                    |   |                  |   |      |   |        
|Net loss:                      |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|                               | As reported                            |                    | $ | (63,539          | ) |      | $ | (35,015 | ) |  | $ | (174,599 | ) |  | $ | (42,208 | )
|                               | Compensation costs for options granted |                    |   | (2,377           | ) |      |   | (142    | ) |  |   | (3,568   | ) |  |   | (299    | )
|                               |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|                               | Pro forma                              |                    | $ | (65,916          | ) |      | $ | (35,157 | ) |  | $ | (178,167 | ) |  | $ | (42,507 | )
|                               |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|Diluted loss per common share: |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|Net loss:                      |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|                               | As reported                            |                    | $ | (0.26            | ) |      | $ | (0.15   | ) |  | $ | (0.72    | ) |  | $ | (0.18   | )
|                               |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        
|                               | Pro forma                              |                    | $ | (0.27            | ) |      | $ | (0.15   | ) |  | $ | (0.74    | ) |  | $ | (0.18   | )
|                               |                                        |                    |   |                  |   |      |   |         |   |  |   |          |   |  |   |        

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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##### Table of Contents



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 |  | Six Months Ended
|                               |                                | June 30,           |  | June 30,        
|                               |                                |                    |  |                 
|                               |                                | 2004               |  | 2003             |  | 2004 |  | 2003   
|                               |                                |                    |  |                  |  |      |  |        
|Basic loss per common share:   |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,383          |  |      |  | 240,954 |  |  |  | 241,341 |  |  |  | 240,866 | 
|                               |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|Diluted loss per common share: |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,383          |  |      |  | 240,954 |  |  |  | 241,341 |  |  |  | 240,866 | 
|                               | Effect of stock options        |                    |  |                 |  |      |  |        |  |  |  |        |  |  |  |        | 
|                               |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        
|                               | Weighted average common shares |                    |  | 241,383          |  |      |  | 240,954 |  |  |  | 241,341 |  |  |  | 240,866 | 
|                               |                                |                    |  |                  |  |      |  |         |  |  |  |         |  |  |  |        

For the three months ended June 30, 2004 and
June 30, 2003, options to purchase 817 and
1,178 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. For the six months ended
June 30, 2004 and June 30, 2003, options to purchase
866 and 1,292 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:

|                                                                                                      |  |          |         |              |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | -
|                                                                                                      |  | June 30, |         | December 31,
|                                                                                                      |  | 2004     |         | 2003        
|                                                                                                      |  |          |         |             
|Raw materials                                                                                         |  | $        | 131,419 |              |  | $ | 139,675 |  
|Work-in-process                                                                                       |  |          | 14,899  |              |  |   | 11,508  |  
|Finished goods (including $18,731 and $18,252 of
    sample inventory in 2004 and 2003, respectively) |  |          | 157,817 |              |  |   | 140,307 |  
|                                                                                                      |  |          |         |              |  |   |         |  
|                                                                                                      |  |          | 304,135 |              |  |   | 291,490 |  
|Inventory valuation allowance                                                                         |  |          | (67,280 | )            |  |   | (30,604 | )
|                                                                                                      |  |          |         |              |  |   |         |  
|                                                                                                      |  | $        | 236,855 |              |  | $ | 260,886 |  
|                                                                                                      |  |          |         |              |  |   |         |  

During the second quarter of 2004, the Company
initiated a voluntary recall of certain batches of
Levoxyl®. A charge in the amount of $4,459 related to this
recall is included in cost of revenues in the accompanying
financial statements.



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

In June 2004, the U.S. Food and Drug
Administration (FDA) approved supplemental New Drug
Applications (sNDA) which provide that
Unithroid® (levothyroxine sodium tablets, USP) and
Levo-T® (levothyroxine sodium tablets, USP) are
bioequivalent and therapeutically equivalent
(AB-Rated) to Levoxyl® (levothyroxine sodium
tablets, USP). Similarly, in July 2004, the FDA approved a
supplemental Abbreviated New Drug Application
(sANDA) which provides that Mylan Laboratories
Inc.s (Mylan) previously approved generic for
Unithroid® is AB-Rated to Levoxyl®. Accordingly, some
prescriptions for Levoxyl® are being filled with AB-Rated
product instead of Levoxyl®. As a result, sales of
Levoxyl® are likely to be materially adversely affected in
future periods. The Company does not have any intangible assets
recorded on its balance sheet related to Levoxyl®. However,
the St. Petersburg facility manufactures Levoxyl®

6



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

exclusively. At June 30, 2004, the net
carrying value of the property, plant and equipment at the St.
Petersburg facility was $14,818. Management currently believes
that these assets are not impaired based on estimated
undiscounted future cash flows.

The Companys Rochester, Michigan facility
manufactures products for the Company and various third parties.
As of June 30, 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 $85,747 and $26,922, 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 at other facilities or by third parties. As an example,
prior to May 2004, the Company relied solely on third parties to
manufacture Brevital®. As of May 2004 the Rochester
facility is qualified in accordance with FDA guidance as a
manufacturing, testing and packaging site for Brevital® and
the Company is currently distributing Brevital® that is
produced at this site. These transfers should increase
production and cash flow at the Rochester facility. Management
currently believes that these long-term assets associated with
the Rochester facility are not impaired based on estimated
undiscounted future cash flows. However, if production volumes
continue to decline or if the Company is not successful in
transferring additional production to Rochester, the Company may
have to write off a portion of the property, plant, equipment
and intangible assets associated with this facility.



|   |                              
|-- | -----------------------------
|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 and
six months ended June 30, 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 |         | Six Months Ended
|                                          |  | June 30, 2003      |         | June 30, 2003   
|                                          |  |                    |         |                 
|Total revenues from continuing operations |  | $                  | 430,924 |                  |  | $ | 822,201 |  
|                                          |  |                    |         |                  |  |   |         |  
|Net income (loss)                         |  | $                  | 88,572  |                  |  | $ | (32,704 | )
|                                          |  |                    |         |                  |  |   |         |  
|Basic income (loss) per common share      |  | $                  | 0.37    |                  |  | $ | (0.14   | )
|                                          |  |                    |         |                  |  |   |         |  
|Diluted income (loss) per common share    |  | $                  | 0.37    |                  |  | $ | (0.14   | )
|                                          |  |                    |         |                  |  |   |         |  

On June 30, 2004, the Company sold the
Anusol-HC® and Proctocort® product lines to Salix
Pharmaceuticals, Inc. (Salix) for $13,000. In
addition, the Company sold inventory of Anusol-HC® and
Proctocort® to Salix for $337. The assets sold included
related product assets, intangible property, advertising and
promotional materials, and labeling and packaging materials. As
part of the transaction, the Company will contract manufacture
the Anusol-HC® and Proctocort® product lines for two
years. The Company recorded a $3,421 gain on the sale of the
Anusol-HC® and Proctocort® product lines, which is
included as a reduction in total operating costs and expenses in
the accompanying financial statements.

7



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The following table reflects the components of
intangible assets as of June 30, 2004:

|                              |                         |          |           |              |  |            |         |         |  |   |           |           | 
|----------------------------- | ----------------------- | -------- | --------- | ------------ |  | ---------- | ------- | ------- |  | - | --------- | --------- | 
|                              |                         | Gross    |           |              |  | Net       
|                              |                         | Carrying |           | Accumulated  |  | Intangible
|                              |                         | Amount   |           | Amortization |  | Assets    
|                              |                         |          |           |              |  |           
|Trademarks and product rights |                         | $        | 1,481,212 |              |  | $          | 195,972 |         |  | $ | 1,285,240 |          
|Patents                       |                         |          | 260,068   |              |  |            | 99,793  |         |  |   | 160,275   |          
|Other intangibles             |                         |          | 9,986     |              |  |            | 8,392   |         |  |   | 1,594     |          
|                              |                         |          |           |              |  |            |         |         |  |   |           |          
|                              | Total intangible assets |          | $         | 1,751,266    |  |            | $       | 304,157 |  |   | $         | 1,447,109 | 
|                              |                         |          |           |              |  |            |         |         |  |   |           |          

Amortization expense for the three months ended
June 30, 2004 and 2003 was $31,904 and $19,131,
respectively. Estimated annual amortization expense as of
June 30, 2004 for each of the five succeeding fiscal years
is as follows:

|                               |  |        |         | 
|------------------------------ |  | ------ | ------- | 
|Fiscal Year Ended December 31: |  | Amount
|                               |  |       
|2004                           |  | $      | 132,881 | 
|2005                           |  |        | 107,126 | 
|2006                           |  |        | 87,797  | 
|2007                           |  |        | 85,223  | 
|2008                           |  |        | 78,196  | 

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 value of the Florinef® intangible
assets. 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. 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.

Prescriptions for Intal® and Tilade®
have declined over the past year. At June 30, 2004, the
Company had net intangible assets related to Intal® and
Tilade® of $113,381. Management currently believes that
these assets are not impaired based on estimated undiscounted
cash flows. If, however, prescription declines exceed current
expectations, the Company may have to write off a portion or all
of the intangible assets associated with these products.

In March 2003, the Company also became aware that
an Abbreviated New Drug Application (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 June 30, 2004, the Company had net
intangible assets related to Cortisporin® of $17,711.
Management currently believes that this asset is not impaired
based on estimated undiscounted cash flows. If, however,
prescription declines exceed current expectations, the Company
may have to write off a portion or all of the intangible assets
associated with this product.

8



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Prescriptions for Corzide® have declined
over the past year. At June 30, 2004, the Company had net
intangible assets related to Corzide® of $53,051.
Management currently believes that this asset is not impaired
based on estimated undiscounted cash flows. If, however,
prescription declines exceed current expectations, the Company
may have to write off a portion or all of the intangible assets
associated with this product.

Goodwill at December 31, 2003 and
June 30, 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 June 30, 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

Ongoing research, referred to as 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. 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 these assets within
the next nine months.

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. During the
first quarter of 2004, 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:

|                       |              |          |        |              |  |   |         |         | 
|---------------------- | ------------ | -------- | ------ | ------------ |  | - | ------- | ------- | 
|                       |              | June 30, |        | December 31,
|                       |              | 2004     |        | 2003        
|                       |              |          |        |             
|Inventories            |              | $        | 1,031  |              |  | $ | 4,012   |        
|Intangible assets, net |              |          | 30,469 |              |  |   | 204,501 |        
|                       |              |          |        |              |  |   |         |        
|                       | Total assets |          | $      | 31,500       |  |   | $       | 208,513 | 
|                       |              |          |        |              |  |   |         |        

9



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summarized financial information for the
discontinued operations are as follows:

|                                                                 |  |              |       |                  |  |      |       |      |  |   |          |   |  |   |        |  
|---------------------------------------------------------------- |  | ------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | -------- | - |  | - | ------ | -
|                                                                 |  |              |       |                  |  |     
|                                                                 |  | Three Months |       |                 
|                                                                 |  | Ended        |       | Six Months Ended
|                                                                 |  | June 30,     |       | June 30,        
|                                                                 |  |              |       |                 
|                                                                 |  | 2004         |       | 2003             |  | 2004 |       | 2003
|                                                                 |  |              |       |                  |  |      |       |     
|Total revenues                                                   |  | $            | 4,268 |                  |  | $    | 3,695 |      |  | $ | 11,266   |   |  | $ | 9,117  |  
|Operating income (loss), including expected loss
    on disposal |  |              | 3,332 |                  |  |      | 2,338 |      |  |   | (167,910 | ) |  |   | (2,044 | )
|Net income (loss)                                                |  |              | 2,089 |                  |  |      | 1,485 |      |  |   | (106,621 | ) |  |   | (1,298 | )



|   |              
|-- | -------------
|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 745 multi-defendant
lawsuits involving the manufacture and sale of dexfenfluramine,
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

10



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
U.S. Securities and Exchange Commission (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 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 a
forensic 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 it had underpaid amounts due under
Medicaid and other governmental pricing programs during the
period from 1998 to 2002.

11



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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.

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 related to the 2002
adjustment and $19,000 related to the 2003 adjustment).

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 SEC
and other federal and state agencies. The Company expects that
these discussions will include a detailed review of its
calculations by the appropriate agencies, and 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, which are discussed below.

As part of Kings ongoing discussions with
the governmental agencies, King has begun to discuss with some
of the government representatives the possibility of settling
the matters being investigated. Although King has not reached
any agreements or understandings with respect to a possible
settlement, in accordance with generally accepted accounting
principles, King has determined that, solely for accounting
purposes, it is probable, as this term is defined by
SFAS No. 5, Accounting for Contingencies, that
it will enter into a settlement with respect to the
investigations.

Accordingly, King has accrued $65,000 for
estimated settlement costs as an operating expense during the
second quarter of 2004 to cover interest, costs, fines,
penalties and all other amounts beyond the $65,400 that King has
previously accrued for the Companys estimated
underpayments to Medicaid and other government pricing programs.
Although the Company has not entered into any agreements or
understandings with respect to any settlement, these accruals
represent Kings current best estimate of the aggregate
payment King would have to make pursuant to a comprehensive
settlement with the Office of Inspector General of the
Department of Health and Human Services, the SEC and all other
relevant state and federal agencies. There can be no assurance
that King will be able to reach a settlement, whether on these
terms or at all, and the ultimate amount that King will actually
have to pay to resolve these matters could be materially more or
less than the

12



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

total amount the Company has accrued for this
purpose. This accrual does not apply to the related pending
class actions and derivative suits, described below, as to which
King is still unable to predict the outcome or reasonably
estimate the range of loss, if any.

The governmental investigations of King described
above are continuing. The SEC, the Office of Inspector General
of the Department of Health and Human Services, and other
federal and state agencies that are 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. Except to the
limited extent reflected by the accrual for estimated settlement
costs described above, 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.

On July 13, 2004, the United States
Magistrate Judge issued a report recommendation on the
defendants motions to dismiss in which he recommended that
the motions be denied except as to two individual defendants as
to whom he recommended that the motion be granted. Both
plaintiffs and defendants have the right to object to the report
and ask that it be reviewed de novo by the United States
District Judge presiding over the case. The Company and those
individual defendants affected by the recommended denials of the
motion have objected to the report of the Magistrate Judge. The
District Court Judge will review these objections and ultimately
may accept all or part of the Magistrate Judges
recommendations, or reject them entirely. In the event that the
District Judge denies the defendants motion to dismiss,
the Company intends to vigorously defend the lawsuit but cannot
predict the outcome of the case.

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 is 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
(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

13



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 New Drug Application
(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

14



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 against the 128 and 102 patents
alleging noninfringement and invalidity of those patents. Mutual
has filed a Paragraph IV certification against the
102 patent alleging noninfringement and invalidity of
that patent. The Company filed separate suits against Eon Labs
on January 2, 2003; CorePharma on March 7, 2003; and
Mutual on March 12, 2004. Pursuant to the Hatch-Waxman Act,
the filing of the suits against CorePharma and Eon provides the
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 CorePharma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. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004), requesting the FDA to rescind that letter,
require generic applicants to submit Paragraph IV
certifications for the 128 patent, and prohibit the
removal of information about food effect studies from generic
labels. King concurrently filed a Petition for Stay of Action
requesting the FDA to stay approval of any generic metaxalone
products until the FDA has fully evaluated the Companys
Citizen Petition. CorePharma responded to the Companys
Citizen Petition on April 30, 2004.

On March 12, 2004, the FDA sent a letter to
the Company explaining that Kings proposed labeling
revision, which includes references to additional clinical
studies relating to food, age, and gender effects, was
approvable and only required certain formatting changes. On
April 5, 2004, the Company submitted amended labeling text
that incorporated those changes. On April 5, 2004, Mutual
filed a Petition for Stay of Action requesting the FDA to stay
approval of the Companys proposed labeling revision until
the FDA has fully evaluated and ruled upon the Companys
Citizen Petition, as well as all comments submitted in response
to that petition. The Company submitted a response in opposition
to Mutuals request on May 13, 2004. Mutual
supplemented its original petition on May 17, 2004. The
Company replied to both CorePharmas response and
Mutuals supplement on July 21, 2004.

If the Companys 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. At June 30,
2004, the Company had net intangible assets related to
Skelaxin® of $228,354. While the Company is amortizing the
intangible assets related to the patent over only a two year
period ending June 30, 2005, if a generic version of
Skelaxin® enters the market, the Company may have to write
off a portion of the patent intangible assets and the other
intangible assets associated with this product.

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

15



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##### Table of Contents



KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. See
Note 12 regarding Mylan.

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®, was issued on
April 28, 1992 and United States Patent No. 5,382,573
(the 573 patent), a utility patent with
pharmaceutical preparation claims relating to Prefest®, was
issued on January 17, 1995. The 995 patent and the
573 patent are both listed in the FDAs Orange
Book. The 995 patent does not expire until April 28,
2009, and the 573 patent does not expire until
January 17, 2012. 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.

On June 8, 2004, the U.S. Patent and
Trademark Office issued United States Patent No. 6,747,019
(the 019 patent). The 019 patent relates
to pharmaceutical preparations, pharmaceutical packages and
methods of treating a female in need of hormone replacement
therapy by administering a specific dose combination of estrogen
and progestin. The Company has certified that the 019
patent covers the Prefest® product and, therefore the
patent has been listed in the Orange Book. On June 30,
2004, the Company received a Notice Letter from Barr concerning
its amended Paragraph IV Certification to its ANDA for
Prefest®. The Notice Letter outlines Barrs assertions
of invalidity and noninfringement of the 019 patent. On
July 9, 2004, the Company filed a complaint in the Southern
District of New York for infringement of the 019 patent.
The Company intends to vigorously enforce its rights under the
995, 573, and 019 patents. At June 30,
2004, the Company had net intangible assets related to
Prefest® of $15,656. If a generic version enters the
market, the Company may have to write off a portion of the
intangible assets associated with this product.

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.     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:
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 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

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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

|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |          |         |  
|--------------- | --------------------------------- | ------------------------------------------------------- | - | ---------------- | ------- | ---- | - | ------- | ------- | - | - | -------- | ------- | - | - | -------- | ------- | -
|                |                                   |                                                         |   |                 
|                |                                   | Three Months Ended                                      |   | Six Months Ended
|                |                                   | June 30,                                                |   | June 30,        
|                |                                   |                                                         |   |                 
|                |                                   | 2004                                                    |   | 2003             |         | 2004 |   | 2003   
|                |                                   |                                                         |   |                  |         |      |   |        
|Total revenues: |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                | Branded pharmaceuticals           |                                                         | $ | 219,587          |         |      | $ | 308,969 |         |   | $ | 452,796  |         |   | $ | 599,932  |        
|                | Meridian Medical Technologies     |                                                         |   | 27,681           |         |      |   | 34,298  |         |   |   | 62,182   |         |   |   | 59,938   |        
|                | Royalties                         |                                                         |   | 21,119           |         |      |   | 16,176  |         |   |   | 37,875   |         |   |   | 31,600   |        
|                | Contract manufacturing and other  |                                                         |   | 152,540          |         |      |   | 64,908  |         |   |   | 285,431  |         |   |   | 157,170  |        
|                | Eliminations                      |                                                         |   | (145,787         | )       |      |   | (57,336 | )       |   |   | (272,500 | )       |   |   | (143,204 | )      
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                |                                   | Consolidated total net revenues                         |   | $                | 275,140 |      |   | $       | 367,015 |   |   | $        | 565,784 |   |   | $        | 705,436 |  
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|Segment profit: |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                | Branded pharmaceuticals           |                                                         | $ | 160,847          |         |      | $ | 248,267 |         |   | $ | 331,879  |         |   | $ | 485,977  |        
|                | Meridian Medical Technologies     |                                                         |   | 14,001           |         |      |   | 15,325  |         |   |   | 33,454   |         |   |   | 23,273   |        
|                | Royalties                         |                                                         |   | 17,978           |         |      |   | 13,714  |         |   |   | 32,155   |         |   |   | 26,130   |        
|                | Contract manufacturing and other  |                                                         |   | (3,097           | )       |      |   | (1,935  | )       |   |   | (4,829   | )       |   |   | (1,029   | )      
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                |                                   | Consolidated segment profit, excluding
    depreciation |   | $                | 189,729 |      |   | $       | 275,371 |   |   | $        | 392,659 |   |   | $        | 534,351 |  
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                | Other operating costs and expense |                                                         |   | 251,750          |         |      |   | 334,920 |         |   |   | 455,275  |         |   |   | 596,978  |        
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         
|                |                                   | Operating loss                                          |   | $                | (62,021 | )    |   | $       | (59,549 | ) |   | $        | (62,616 | ) |   | $        | (62,627 | )
|                |                                   |                                                         |   |                  |         |      |   |         |         |   |   |          |         |   |   |         

The three and six months ended June 30, 2003
segment profit amounts reflect reclassifications of $2,332 and
$7,497, respectively, 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       
|              |                                  | June 30,                  |   | December 31,
|              |                                  | 2004                      |   | 2003        
|              |                                  |                           |   |             
|Total assets: |                                  |                           |   |              |           |  |   |          
|              | Branded pharmaceuticals          |                           | $ | 2,921,614    |           |  | $ | 3,151,045 |          
|              | Meridian Medical Technologies    |                           |   | 261,427      |           |  |   | 250,935   |          
|              | Royalties                        |                           |   | 22,943       |           |  |   | 20,032    |          
|              | Contract manufacturing and other |                           |   | 92,690       |           |  |   | 91,002    |          
|              | Eliminations                     |                           |   | (335,280     | )         |  |   | (335,280  | )        
|              |                                  |                           |   |              |           |  |   |          
|              |                                  | Consolidated total assets |   | $            | 2,963,394 |  |   | $         | 3,177,734 | 
|              |                                  |                           |   |              |           |  |   |          

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following represents branded pharmaceutical
revenues by therapeutic area:

|                |                              |                                              |   |                  |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------- | ---------------------------- | -------------------------------------------- | - | ---------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                |                              |                                              |   |                 
|                |                              | Three Months Ended                           |   | Six Months Ended
|                |                              | June 30,                                     |   | June 30,        
|                |                              |                                              |   |                 
|                |                              | 2004                                         |   | 2003             |         | 2004 |   | 2003   
|                |                              |                                              |   |                  |         |      |   |        
|Total revenues: |                              |                                              |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                | Cardiovascular               |                                              | $ | 70,454           |         |      | $ | 152,719 |         |  | $ | 150,319 |         |  | $ | 309,536 |        
|                | Anti-infective               |                                              |   | 10,030           |         |      |   | 29,621  |         |  |   | 19,959  |         |  |   | 61,299  |        
|                | Critical care                |                                              |   | 38,602           |         |      |   | 36,161  |         |  |   | 78,104  |         |  |   | 71,524  |        
|                | Endocrinology/womens health |                                              |   | 33,733           |         |      |   | 37,260  |         |  |   | 67,736  |         |  |   | 85,765  |        
|                | Respiratory                  |                                              |   | 780              |         |      |   | 3,227   |         |  |   | 9,908   |         |  |   | 15,305  |        
|                | Neuroscience                 |                                              |   | 63,057           |         |      |   | 45,994  |         |  |   | 125,486 |         |  |   | 45,994  |        
|                | Other branded                |                                              |   | 2,931            |         |      |   | 3,987   |         |  |   | 1,284   |         |  |   | 10,509  |        
|                |                              |                                              |   |                  |         |      |   |         |         |  |   |         |         |  |   |        
|                |                              | Consolidated branded pharmaceutical revenues |   | $                | 219,587 |      |   | $       | 308,969 |  |   | $       | 452,796 |  |   | $       | 599,932 | 
|                |                              |                                              |   |                  |         |      |   |         |         |  |   |         |         |  |   |        

11.     Restructuring

During the second quarter of 2004 the Company
incurred restructuring charges of $6,248, as a result of
separation agreements with several executives and the relocation
of the Companys sales and marketing operations from
Bristol, Tennessee to Princeton, New Jersey. A summary of the
types of costs accrued and incurred are summarized below:

|                                       |  |           |       |          |  |            |       |  |  |   |       | 
|-------------------------------------- |  | --------- | ----- | -------- |  | ---------- | ----- |  |  | - | ----- | 
|                                       |  |           |       |          |  | Accrued   
|                                       |  | Income    |       |          |  | Balance at
|                                       |  | Statement |       |          |  | June 30,  
|                                       |  | Impact    |       | Payments |  | 2004      
|                                       |  |           |       |          |  |           
|Employee separation payments           |  | $         | 5,772 |          |  | $          | 2,373 |  |  | $ | 3,399 | 
|Employee relocation                    |  |           | 476   |          |  |            | 136   |  |  |   | 340   | 
|Reversal of amounts previously accrued |  |           | (95   | )        |  |            |      |  |  |   |      | 
|                                       |  |           |       |          |  |            |       |  |  |   |       | 
|                                       |  | $         | 6,153 |          |  | $          | 2,509 |  |  | $ | 3,739 | 
|                                       |  |           |       |          |  |            |       |  |  |   |       | 

It is anticipated that the relocation of key
sales and marketing employees to New Jersey will be completed
within the next year and will require additional costs, which in
accordance with FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, have not yet
been accrued. All of the accrued restructuring charges relate to
the branded pharmaceutical segment, except for $374 related to
contract manufacturing which has not yet been paid but which was
accrued at June 30, 2004.

12.     Subsequent
Events

On July 26, 2004, the Company entered into a
merger agreement with Mylan and a wholly-owned subsidiary of
Mylan (Merger Sub) pursuant to which Mylan will
acquire King in a stock-for-stock transaction. Under the merger
agreement, Mylan has agreed to issue 0.9 shares of its
common stock in exchange for each outstanding share of common
stock of the Company. Subject to the terms and conditions of the
merger agreement, upon the closing of the merger, Merger Sub
will be merged with and into the Company, the separate corporate
existence of Merger Sub will cease, and the Company will
continue as a wholly-owned subsidiary of Mylan. The merger
agreement has been approved by each of the Boards of Directors
of the Company and Mylan. The transaction is anticipated to
close by the end of calendar year 2004 and be tax-free to
shareholders of the Company and Mylan. The closing of the
transaction is subject to regulatory approvals, the declaration
of effectiveness of the Form S-4 registration statement to
be filed by Mylan with the SEC, approval by the shareholders of
the Company and Mylan and other customary closing conditions.
The Company incurred merger related costs of $3,126 for
professional fees and expenses related to

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

this agreement. In connection with the planned
merger, the Company expects to continue to incur professional
fees that could be material to cash flows and results of
operations.

On July 19, 2004, the Company and Novavax,
Inc. (Novavax) mutually agreed to end their
co-promotion and license agreements regarding
EstrasorbTM. As part of this transaction, Novavax
reacquired all rights to EstrasorbTM as well as all
rights to other womens health products that Novavax may
successfully develop utilizing its micellar nanoparticle
technology. Additionally, Novavax repurchased all of its
convertible notes held by King, acquired a portion of
Kings womens health field sales force, and received
approximately $8,000 from the Company to provide support for
marketing and promotion. In return, Novavax paid King $22,000
and issued approximately 3,776 shares of Novavax common
stock to King. This transaction will result in an immaterial net
gain in the third quarter of 2004. As a result of this
transaction, King now owns approximately 4,101 shares of
common stock of Novavax that the Company will account for as
available for sale securities. Such shares are currently
restricted and are required to be held by the Company until July
2005.

13.     Related Party
Transactions

The Company periodically makes contributions to
charitable and not-for-profit organizations in communities where
its facilities are located. In April 2004, the Company made a
three-year pledge totaling $900 to Sullins Academy, a private
school offering education in grades K-8. The Company recorded
the pledge during the second quarter of 2004. During the fourth
quarter of 2003 and the first quarter of 2004, the Company made
a contribution to Sullins Academy of $150. At certain times
during this period, children of some Company employees,
including the Companys former Chief Executive Officer and
the former President, attended Sullins Academy and the former
President and the spouse of the former Chief Executive Officer
served as volunteer members of the Sullins Academy board of
directors.

14.     Recent
Accounting Pronouncements

On July 1, 2004, the Emerging Issues Task Force
(EITF) reached a tentative consensus on earnings per
share calculation for issuers of contingently convertible bonds.
In EITF Issue 04-8, Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effects on
Diluted Earnings per Share, the EITF has proposed that the
potential earnings per share (EPS) dilution from
contingently convertible bonds should be considered and included
in the EPS calculation from the date of issue. Currently, the
Company does not consider the EPS dilution of the Convertible
Debentures until the closing price of our common stock reaches
the threshold to permit conversion of Debentures at the option
of holders of the Convertible Debentures of $55.18 per share
(110% of the conversion price of $50.16 per share) for at least
20 trading days during 30 consecutive trading days. If all of
the Convertible Debentures were converted, the Company would
currently be required to issue approximately 6,878 shares.

15.     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.

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KING PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEETS


(In thousands, except per share
data)


|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ------------- | --------- | ------------ |  | ------------ | --------- | ----------- |  | ------------ | ----- | ------ |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            |              
|                                          |                                            | June 30, 2004
|                                          |                                            |              
|                                          |                                            |               |           | Non-         |  |             
|                                          |                                            |               |           | Guarantor    |  | Guarantor    |           | Eliminating |  | King        
|                                          |                                            | King          |           | Subsidiaries |  | Subsidiaries |           | Entries     |  | Consolidated
|                                          |                                            |               |           |              |  |              |           |             |  |             
|ASSETS                                    |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current assets:                           |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $             | 98,859    |              |  | $            | 6,150     |             |  | $            | 1,798 |        |  | $ |           |            |   | $ | 106,807   |          
|Restricted cash                           |                                            |               | 65,980    |              |  |              | 63,758    |             |  |              |      |        |  |   |           |            |   |   | 129,738   |          
|Accounts receivable, net                  |                                            |               | 6,061     |              |  |              | 248,080   |             |  |              | 1,556 |        |  |   |           |            |   |   | 255,697   |          
|Inventories                               |                                            |               | 197,241   |              |  |              | 39,332    |             |  |              | 282   |        |  |   |           |            |   |   | 236,855   |          
|Deferred income tax assets                |                                            |               | 40,775    |              |  |              | 138,508   |             |  |              |      |        |  |   |           |            |   |   | 179,283   |          
|Prepaid expenses and other current assets |                                            |               | 28,004    |              |  |              | 36,530    |             |  |              |      |        |  |   |           |            |   |   | 64,534    |          
|Assets related to discontinued operations |                                            |               |          |              |  |              | 1,031     |             |  |              |      |        |  |   |           |            |   |   | 1,031     |          
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current assets                       |               |           | 436,920      |  |              |           | 533,389     |  |              |       | 3,636  |  |   |            |           |   |   |           | 973,945   | 
|Property, plant, and equipment, net       |                                            |               | 115,913   |              |  |              | 157,553   |             |  |              | 2     |        |  |   |           |            |   |   | 273,468   |          
|Goodwill                                  |                                            |               |          |              |  |              | 134,892   |             |  |              |      |        |  |   |           |            |   |   | 134,892   |          
|Intangible assets, net                    |                                            |               | 5,408     |              |  |              | 1,434,411 |             |  |              | 7,290 |        |  |   |           |            |   |   | 1,447,109 |          
|Other assets                              |                                            |               | 45,636    |              |  |              | 290       |             |  |              |      |        |  |   |           |            |   |   | 45,926    |          
|Deferred income tax assets                |                                            |               | (6,493    | )            |  |              | 64,078    |             |  |              |      |        |  |   |           |            |   |   | 57,585    |          
|Investment in subsidiaries                |                                            |               | 2,185,905 |              |  |              |          |             |  |              |      |        |  |   | (2,185,905 | )          |   |   |          |          
|Assets related to discontinued operations |                                            |               |          |              |  |              | 30,469    |             |  |              |      |        |  |   |           |            |   |   | 30,469    |          
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total assets                               |               | $         | 2,783,289    |  |              | $         | 2,355,082   |  |              | $     | 10,928 |  |   | $          | (2,185,905 | ) |   | $         | 2,963,394 | 
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current liabilities:                      |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Accounts payable                          |                                            | $             | 30,832    |              |  | $            | 29,445    |             |  | $            | 848   |        |  | $ |           |            |   | $ | 61,125    |          
|Accrued expenses                          |                                            |               | 114,294   |              |  |              | 465,861   |             |  |              |      |        |  |   |           |            |   |   | 580,155   |          
|Income taxes payable                      |                                            |               | 28,969    |              |  |              | (2,640    | )           |  |              | (147  | )      |  |   |           |            |   |   | 26,182    |          
|Current portion of long-term debt         |                                            |               |          |              |  |              |          |             |  |              |      |        |  |   |           |            |   |   |          |          
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current liabilities                  |               |           | 174,095      |  |              |           | 492,666     |  |              |       | 701    |  |   |            |           |   |   |           | 667,462   | 
|Long-term debt                            |                                            |               | 345,000   |              |  |              |          |             |  |              |      |        |  |   |           |            |   |   | 345,000   |          
|Other liabilities                         |                                            |               | 48,746    |              |  |              | 32,286    |             |  |              |      |        |  |   |           |            |   |   | 81,032    |          
|Intercompany (receivable) payable         |                                            |               | 345,548   |              |  |              | (349,478  | )           |  |              | 3,930 |        |  |   |           |            |   |   |          |          
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities                          |               |           | 913,389      |  |              |           | 175,474     |  |              |       | 4,631  |  |   |            |           |   |   |           | 1,093,494 | 
|Shareholders equity                      |                                            |               | 1,869,900 |              |  |              | 2,179,608 |             |  |              | 6,297 |        |  |   | (2,185,905 | )          |   |   | 1,869,900 |          
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities and shareholders equity |               | $         | 2,783,289    |  |              | $         | 2,355,082   |  |              | $     | 10,928 |  |   | $          | (2,185,905 | ) |   | $         | 2,963,394 | 
|                                          |                                            |               |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          

[Additional columns below]

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

|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |           | 
|----------------------------------------- | ------------------------------------------ | ------------------------------ | --------- | ------------ |  | ------------ | --------- | ----------- |  | ------------ | ----- | ------ |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                          |                                            |                               
|                                          |                                            | June 30, 2004 December 31,2003
|                                          |                                            |                               
|                                          |                                            |                               
|                                          |                                            |                                |           | Non-         |  |             
|                                          |                                            |                                |           | Guarantor    |  | Guarantor    |           | Eliminating |  | King        
|                                          |                                            | King                           |           | Subsidiaries |  | Subsidiaries |           | Entries     |  | Consolidated
|                                          |                                            |                                |           |              |  |              |           |             |  |             
|ASSETS                                    |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current assets:                           |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Cash and cash equivalents                 |                                            | $                              | 140,617   |              |  | $            | 3,641     |             |  | $            | 1,795 |        |  | $ |           |            |   | $ | 146,053   |          
|Restricted cash                           |                                            |                                | 67,199    |              |  |              | 66,770    |             |  |              |      |        |  |   |           |            |   |   | 133,969   |          
|Accounts receivable, net                  |                                            |                                | 4,529     |              |  |              | 240,574   |             |  |              | 1,314 |        |  |   |           |            |   |   | 246,417   |          
|Inventories                               |                                            |                                | 224,081   |              |  |              | 36,554    |             |  |              | 251   |        |  |   |           |            |   |   | 260,886   |          
|Deferred income tax assets                |                                            |                                | 16,428    |              |  |              | 108,502   |             |  |              |      |        |  |   |           |            |   |   | 124,930   |          
|Prepaid expenses and other current assets |                                            |                                | 5,249     |              |  |              | 24,787    |             |  |              |      |        |  |   |           |            |   |   | 30,036    |          
|Assets related to discontinued operations |                                            |                                | 4,012     |              |  |              |          |             |  |              |      |        |  |   |           |            |   |   | 4,012     |          
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current assets                       |                                |           | 462,115      |  |              |           | 480,828     |  |              |       | 3,360  |  |   |            |           |   |   |           | 946,303   | 
|Property, plant, and equipment, net       |                                            |                                | 115,442   |              |  |              | 142,217   |             |  |              |      |        |  |   |           |            |   |   | 257,659   |          
|Goodwill                                  |                                            |                                |          |              |  |              | 121,355   |             |  |              |      |        |  |   |           |            |   |   | 121,355   |          
|Intangible assets, net                    |                                            |                                | 6,955     |              |  |              | 1,538,035 |             |  |              | 7,502 |        |  |   |           |            |   |   | 1,552,492 |          
|Other assets                              |                                            |                                | 45,410    |              |  |              | 30,707    |             |  |              |      |        |  |   |           |            |   |   | 76,117    |          
|Deferred income tax assets                |                                            |                                | 14,831    |              |  |              | 4,476     |             |  |              |      |        |  |   |           |            |   |   | 19,307    |          
|Investment in subsidiaries                |                                            |                                | 2,308,924 |              |  |              |          |             |  |              |      |        |  |   | (2,308,924 | )          |   |   |          |          
|Assets related to discontinued operations |                                            |                                |          |              |  |              | 204,501   |             |  |              |      |        |  |   |           |            |   |   | 204,501   |          
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total assets                               |                                | $         | 2,953,677    |  |              | $         | 2,522,119   |  |              | $     | 10,862 |  |   | $          | (2,308,924 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY      |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Current liabilities:                      |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Accounts payable                          |                                            | $                              | 51,924    |              |  | $            | 31,135    |             |  | $            | 19    |        |  | $ |           |            |   | $ | 83,078    |          
|Accrued expenses                          |                                            | $                              | 55,764    |              |  |              | 450,269   |             |  |              |      |        |  |   |           |            |   |   | 506,033   |          
|Income taxes payable                      |                                            |                                | 78,363    |              |  |              | 838       |             |  |              | 440   |        |  |   |           |            |   |   | 79,641    |          
|Current portion of long-term debt         |                                            |                                | 97        |              |  |              |          |             |  |              |      |        |  |   |           |            |   |   | 97        |          
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total current liabilities                  |                                |           | 186,148      |  |              |           | 482,242     |  |              |       | 459    |  |   |            |           |   |   |           | 668,849   | 
|Long-term debt                            |                                            |                                | 345,000   |              |  |              |          |             |  |              |      |        |  |   |           |            |   |   | 345,000   |          
|Other liabilities                         |                                            |                                | 50,953    |              |  |              | 70,752    |             |  |              |      |        |  |   |           |            |   |   | 121,705   |          
|Intercompany (receivable) payable         |                                            |                                | 329,396   |              |  |              | (333,103  | )           |  |              | 3,707 |        |  |   |           |            |   |   |          |          
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities                          |                                |           | 911,497      |  |              |           | 219,891     |  |              |       | 4,166  |  |   |            |           |   |   |           | 1,135,554 | 
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|Shareholders equity                      |                                            |                                | 2,042,180 |              |  |              | 2,302,228 |             |  |              | 6,696 |        |  |   | (2,308,924 | )          |   |   | 2,042,180 |          
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          
|                                          | Total liabilities and shareholders equity |                                | $         | 2,953,677    |  |              | $         | 2,522,119   |  |              | $     | 10,862 |  |   | $          | (2,308,924 | ) |   | $         | 3,177,734 | 
|                                          |                                            |                                |           |              |  |              |           |             |  |              |       |        |  |   |            |            |   |   |           |          

20



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##### Table of Contents



GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |         |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | -------------- | -------------------------------- | ------- | ------------ | ------- | ----------- | ------- | ------------ | --- | ---- | --- | ------------ | ------ | ------------ | -------- | ----------- | ------- | ------------ | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ----- | ----- | --- | ----- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                 |                                                     |                                    |                |                                 
|                                                                 |                                                     | Three Months Ended June 30, 2004   |                | Three Months Ended June 30, 2003
|                                                                 |                                                     |                                    |                |                                 
|                                                                 |                                                     |                                    |                | Non                              |         |              |         |             |         | Non          |     |     
|                                                                 |                                                     |                                    |                | Guarantor                        |         | Guarantor    |         | Eliminating |         | King         |     |      |     | Guarantor    |        | Guarantor    |          | Eliminating |         | King        
|                                                                 |                                                     | King                               |                | Subsidiaries                     |         | Subsidiaries |         | Entries     |         | Consolidated |     | King |     | Subsidiaries |        | Subsidiaries |          | Entries     |         | Consolidated
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |             
|Revenues:                                                        |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 | Net sales                                           |                                    | $              | 121,767                          |         |              | $       | 253,563     |         |              | $   | 465  |     |              | $      | (121,774     | )        |             | $       | 254,021      |         |         | $       | 34,803  |         |        | $       | 349,013 |         |         | $     | 1,603 |     |       | $      | (34,580 | )       |         | $       | 350,839 |        
|                                                                 | Royalty revenue                                     |                                    |                |                                 |         |              |         | 21,119      |         |              |     |     |     |              |        |             |          |             |         | 21,119       |         |         |         |        |         |        |         | 16,176  |         |         |       |      |     |       |        |        |         |         |         | 16,176  |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 |                                                     |                                    | Total revenues |                                  |         | 121,767      |         |             |         | 274,682      |     |      |     | 465          |        |              |          | (121,774    | )       |              |         | 275,140 |         |         |         | 34,803 |         |         |         | 365,189 |       |       |     | 1,603 |        |         |         | (34,580 | )       |         |         | 367,015 | 
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|Operating costs and expenses:                                    |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 | Costs of revenues                                   |                                    |                | 35,167                           |         |              |         | 171,881     |         |              |     | 137  |     |              |        | (121,774     | )        |             |         | 85,411       |         |         |         | 10,584  |         |        |         | 115,208 |         |         |       | 432   |     |       |        | (34,580 | )       |         |         | 91,644  |        
|                                                                 | Selling, general and administrative                 |                                    |                | 48,692                           |         |              |         | 76,165      |         |              |     | 91   |     |              |        |             |          |             |         | 124,948      |         |         |         | 20,117  |         |        |         | 107,993 |         |         |       | 80    |     |       |        |        |         |         |         | 128,190 |        
|                                                                 | Depreciation and amortization                       |                                    |                | 4,312                            |         |              |         | 34,048      |         |              |     | 106  |     |              |        |             |          |             |         | 38,466       |         |         |         | 2,055   |         |        |         | 18,508  |         |         |       | 74    |     |       |        |        |         |         |         | 20,637  |        
|                                                                 | Research and development                            |                                    |                | 146                              |         |              |         | 17,332      |         |              |     |     |     |              |        |             |          |             |         | 17,478       |         |         |         | 225     |         |        |         | 185,868 |         |         |       |      |     |       |        |        |         |         |         | 186,093 |        
|                                                                 | Medicaid related charge                             |                                    |                | 65,000                           |         |              |         |            |         |              |     |     |     |              |        |             |          |             |         | 65,000       |         |         |         |        |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 | Transaction costs                                   |                                    |                | 3,126                            |         |              |         |            |         |              |     |     |     |              |        |             |          |             |         | 3,126        |         |         |         |        |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 | Gain on sale of product lines                       |                                    |                |                                 |         |              |         | (3,421      | )       |              |     |     |     |              |        |             |          |             |         | (3,421       | )       |         |         |        |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 | Restructuring charges                               |                                    |                | 6,247                            |         |              |         | (94         | )       |              |     |     |     |              |        |             |          |             |         | 6,153        |         |         |         |        |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 | Intangible asset impairment                         |                                    |                |                                 |         |              |         |            |         |              |     |     |     |              |        |             |          |             |         |             |         |         |         |        |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 |                                                     | Total operating costs and expenses |                |                                  | 162,690 |              |         |             | 295,911 |              |     |      | 334 |              |        |              | (121,774 | )           |         |              | 337,161 |         |         |         | 32,981  |        |         |         | 427,577 |         |       |       | 586 |       |        |         | (34,580 | )       |         |         | 426,564 |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|Operating (loss) income                                          |                                                     |                                    | (40,923        | )                                |         |              | (21,229 | )           |         |              | 131 |      |     |              |       |              |          |             | (62,021 | )            |         |         | 1,822   |         |         |        | (62,388 | )       |         |         | 1,017 |       |     |       |       |         |         |         | (59,549 | )      
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|Other income (expense):                                          |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 | Interest income                                     |                                    |                | 917                              |         |              |         | 164         |         |              |     |     |     |              |        |             |          |             |         | 1,081        |         |         |         | 2,136   |         |        |         | 63      |         |         |       |      |     |       |        |        |         |         |         | 2,199   |        
|                                                                 | Interest expense                                    |                                    |                | (3,266                           | )       |              |         |            |         |              |     |     |     |              |        |             |          |             |         | (3,266       | )       |         |         | (3,435  | )       |        |         |        |         |         |       |      |     |       |        |        |         |         |         | (3,435  | )      
|                                                                 | Valuation change  convertible notes
    receivable |                                    |                | (2,438                           | )       |              |         |            |         |              |     |     |     |              |        |             |          |             |         | (2,438       | )       |         |         | 7,647   |         |        |         |        |         |         |       |      |     |       |        |        |         |         |         | 7,647   |        
|                                                                 | Other, net                                          |                                    |                | (162                             | )       |              |         | 1,375       |         |              |     | (45  | )   |              |        |             |          |             |         | 1,168        |         |         |         | (4      | )       |        |         | (11     | )       |         |       |      |     |       |        |        |         |         |         | (15     | )      
|                                                                 | Equity in loss of subsidiaries                      |                                    |                | 1,919                            |         |              |         |            |         |              |     |     |     |              |        | (1,919       | )        |             |         |             |         |         |         | (49,578 | )       |        |         |        |         |         |       |      |     |       |        | 49,578  |         |         |         |        |        
|                                                                 | Intercompany interest income (expense)              |                                    |                | (8,164                           | )       |              |         | 8,164       |         |              |     |     |     |              |        |             |          |             |         |             |         |         |         | 4,902   |         |        |         | (4,902  | )       |         |       |      |     |       |        |        |         |         |         |        |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 |                                                     | Total other income (expense)       |                |                                  | (11,194 | )            |         |             | 9,703   |              |     |      | (45 | )            |        |              | (1,919   | )           |         |              | (3,455  | )       |         |         | (38,332 | )      |         |         | (4,850  | )       |       |       |    |       |        |         | 49,578  |         |         |         | 6,396   |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|(Loss) income from continuing operations before
    income taxes |                                                     |                                    | (52,117        | )                                |         |              | (11,526 | )           |         |              | 86  |      |     |              | (1,919 | )            |          |             | (65,476 | )            |         |         | (36,510 | )       |         |        | (67,238 | )       |         |         | 1,017 |       |     |       | 49,578 |         |         |         | (53,153 | )      
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|Income tax expense (benefit)                                     |                                                     |                                    | 11,422         |                                  |         |              | (11,300 | )           |         |              | 30  |      |     |              |       |              |          |             | 152     |              |         |         | (1,495  | )       |         |        | (15,538 | )       |         |         | 380   |       |     |       |       |         |         |         | (16,653 | )      
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|Loss from continuing operations                                  |                                                     |                                    | (63,539        | )                                |         |              | (226    | )           |         |              | 56  |      |     |              | (1,919 | )            |          |             | (65,628 | )            |         |         | (35,015 | )       |         |        | (51,700 | )       |         |         | 637   |       |     |       | 49,578 |         |         |         | (36,500 | )      
|Discontinued operations:                                         |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 | Income from discontinued operations                 |                                    |                |                                 |         |              |         | 3,332       |         |              |     |     |     |              |        |             |          |             |         | 3,332        |         |         |         |        |         |        |         | 2,338   |         |         |       |      |     |       |        |        |         |         |         | 2,338   |        
|                                                                 | Income tax expense                                  |                                    |                |                                 |         |              |         | 1,243       |         |              |     |     |     |              |        |             |          |             |         | 1,243        |         |         |         |        |         |        |         | 853     |         |         |       |      |     |       |        |        |         |         |         | 853     |        
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        
|                                                                 |                                                     | Net (loss) income                  |                | $                                | (63,539 | )            |         | $           | 1,863   |              |     | $    | 56  |              |        | $            | (1,919   | )           |         | $            | (63,539 | )       |         | $       | (35,015 | )      |         | $       | (50,215 | )       |       | $     | 637 |       |        | $       | 49,578  |         |         | $       | (35,015 | )      
|                                                                 |                                                     |                                    |                |                                  |         |              |         |             |         |              |     |      |     |              |        |              |          |             |         |              |         |         |         |         |         |        |         |         |         |         |       |       |     |       |        |         |         |         |         |        

21



---



##### Table of Contents



GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

(Unaudited)


(In thousands, except per share
data)


|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |         |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | -------------- | ------------------------------ | -------- | ------------ | ------- | ----------- | -------- | ------------ | ---- | ---- | ----- | ------------ | ------- | ------------ | -------- | ----------- | ------- | ------------ | -------- | ------- | ------- | ------- | ------- | ------- | -------- | ------- | ------- | ------- | ----- | ----- | --- | ----- | ------ | -------- | -------- | -------- | ------- | ------- | ------- | ------- | 
|                                                                 |                                                     |                                    |                |                               
|                                                                 |                                                     | Six Months Ended June 30, 2004     |                | Six Months Ended June 30, 2003
|                                                                 |                                                     |                                    |                |                               
|                                                                 |                                                     |                                    |                | Non                            |          |              |         |             |          | Non          |      |     
|                                                                 |                                                     |                                    |                | Guarantor                      |          | Guarantor    |         | Eliminating |          | King         |      |      |       | Guarantor    |         | Guarantor    |          | Eliminating |         | King        
|                                                                 |                                                     | King                               |                | Subsidiaries                   |          | Subsidiaries |         | Entries     |          | Consolidated |      | King |       | Subsidiaries |         | Subsidiaries |          | Entries     |         | Consolidated
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |             
|Revenues:                                                        |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 | Net sales                                           |                                    | $              | 228,269                        |          |              | $       | 526,911     |          |              | $    | 883  |       |              | $       | (228,154     | )        |             | $       | 527,909      |          |         | $       | 100,821 |         |         | $        | 671.817 |         |         | $     | 1,796 |     |       | $      | (100,598 | )        |          | $       | 673,836 |        
|                                                                 | Royalty revenue                                     |                                    |                |                               |          |              |         | 37,875      |          |              |      |     |       |              |         |             |          |             |         | 37,875       |          |         |         |        |         |         |          | 31,600  |         |         |       |      |     |       |        |         |          |          |         | 31,600  |        
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 |                                                     |                                    | Total revenues |                                |          | 228,269      |         |             |          | 564,786      |      |      |       | 883          |         |              |          | (228,154    | )       |              |          | 565,784 |         |         |         | 100,821 |          |         |         | 703,417 |       |       |     | 1,796 |        |          |          | (100,598 | )       |         |         | 705,436 | 
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|Operating costs and expenses:                                    |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 | Costs of revenues                                   |                                    |                | 67,164                         |          |              |         | 333,861     |          |              |      | 254  |       |              |         | (228,154     | )        |             |         | 173,125      |          |         |         | 35,172  |         |         |          | 236,030 |         |         |       | 481   |     |       |        | (100,598 | )        |          |         | 171,085 |        
|                                                                 | Selling, general and administrative                 |                                    |                | 85,387                         |          |              |         | 152,725     |          |              |      | 942  |       |              |         |             |          |             |         | 239,054      |          |         |         | 25,278  |         |         |          | 208,646 |         |         |       | 81    |     |       |        |         |          |          |         | 234,005 |        
|                                                                 | Depreciation and amortization                       |                                    |                | 8,652                          |          |              |         | 68,920      |          |              |      | 212  |       |              |         |             |          |             |         | 77,784       |          |         |         | 3,959   |         |         |          | 34,167  |         |         |       | 148   |     |       |        |         |          |          |         | 38,274  |        
|                                                                 | Research and development                            |                                    |                | 256                            |          |              |         | 33,245      |          |              |      |     |       |              |         |             |          |             |         | 33,501       |          |         |         | 450     |         |         |          | 213,279 |         |         |       |      |     |       |        |         |          |          |         | 213,729 |        
|                                                                 | Medicaid related charge                             |                                    |                | 65,000                         |          |              |         |            |          |              |      |     |       |              |         |             |          |             |         | 65,000       |          |         |         |        |         |         |          |        |         |         |       |      |     |       |        |         |          |          |         |        |        
|                                                                 | Transaction costs                                   |                                    |                | 3,126                          |          |              |         |            |          |              |      |     |       |              |         |             |          |             |         | 3,126        |          |         |         |        |         |         |          |        |         |         |       |      |     |       |        |         |          |          |         |        |        
|                                                                 | Gain on sale of product lines                       |                                    |                |                               |          |              |         | (4,279      | )        |              |      |     |       |              |         |             |          |             |         | (4,279       | )        |         |         |        |         |         |          |        |         |         |       |      |     |       |        |         |          |          |         |        |        
|                                                                 | Restructuring charges                               |                                    |                | 6,247                          |          |              |         | (94         | )        |              |      |     |       |              |         |             |          |             |         | 6,153        |          |         |         |        |         |         |          |        |         |         |       |      |     |       |        |         |          |          |         |        |        
|                                                                 | Intangible asset impairment                         |                                    |                |                               |          |              |         | 34,936      |          |              |      |     |       |              |         |             |          |             |         | 34,936       |          |         |         |        |         |         |          | 110,970 |         |         |       |      |     |       |        |         |          |          |         | 110,970 |        
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 |                                                     | Total operating costs and expenses |                |                                | 235,832  |              |         |             | 619,314  |              |      |      | 1,408 |              |         |              | (228,154 | )           |         |              | 628,400  |         |         |         | 64,859  |         |          |         | 803,092 |         |       |       | 710 |       |        |          | (100,598 | )        |         |         | 768,063 |        
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|Operating (loss) income                                          |                                                     |                                    | (7,563         | )                              |          |              | (54,528 | )           |          |              | (525 | )    |       |              |        |              |          |             | (62,616 | )            |          |         | 35,962  |         |         |         | (99,675  | )       |         |         | 1,086 |       |     |       |       |          |          |          | (62,627 | )      
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|Other income (expense):                                          |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 | Interest income                                     |                                    |                | 1,811                          |          |              |         | 324         |          |              |      |     |       |              |         |             |          |             |         | 2,135        |          |         |         | 4,532   |         |         |          | 161     |         |         |       |      |     |       |        |         |          |          |         | 4,693   |        
|                                                                 | Interest expense                                    |                                    |                | (6,366                         | )        |              |         | (5          | )        |              |      |     |       |              |         |             |          |             |         | (6,371       | )        |         |         | (6,467  | )       |         |          | (2      | )       |         |       |      |     |       |        |         |          |          |         | (6,469  | )      
|                                                                 | Valuation change  convertible notes
    receivable |                                    |                | (2,487                         | )        |              |         |            |          |              |      |     |       |              |         |             |          |             |         | (2,487       | )        |         |         | 15,614  |         |         |          |        |         |         |       |      |     |       |        |         |          |          |         | 15,614  |        
|                                                                 | Other, net                                          |                                    |                | (487                           | )        |              |         | 1,044       |          |              |      | (92  | )     |              |         |             |          |             |         | 465          |          |         |         | (68     | )       |         |          | (30     | )       |         |       |      |     |       |        |         |          |          |         | (98     | )      
|                                                                 | Equity in loss of subsidiaries                      |                                    |                | (123,067                       | )        |              |         |            |          |              |      |     |       |              |         | 123,067      |          |             |         |             |          |         |         | (80,889 | )       |         |          |        |         |         |       |      |     |       |        | 80,889   |          |          |         |        |        
|                                                                 | Intercompany interest income (expense)              |                                    |                | (15,330                        | )        |              |         | 15,330      |          |              |      |     |       |              |         |             |          |             |         |             |          |         |         | 6,293   |         |         |          | (6,293  | )       |         |       |      |     |       |        |         |          |          |         |        |        
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 |                                                     | Total other income (expense)       |                |                                | (145,926 | )            |         |             | 16,693   |              |      |      | (92   | )            |         |              | 123,067  |             |         |              | (6,258   | )       |         |         | (60,985 | )       |          |         | (6,164  | )       |       |       |    |       |        |          | 80,889   |          |         |         | 13,740  |        
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|(Loss) income from continuing operations before
    income taxes |                                                     |                                    | (153,489       | )                              |          |              | (37,835 | )           |          |              | (617 | )    |       |              | 123,067 |              |          |             | (68,874 | )            |          |         | (25,023 | )       |         |         | (105,839 | )       |         |         | 1,086 |       |     |       | 80,889 |          |          |          | (48,887 | )      
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|Income tax expense (benefit)                                     |                                                     |                                    | 21,110         |                                |          |              | (21,790 | )           |          |              | (216 | )    |       |              |        |              |          |             | (896    | )            |          |         | 17,185  |         |         |         | (25,542  | )       |         |         | 380   |       |     |       |       |          |          |          | (7,977  | )      
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|(Loss) income from continuing operations                         |                                                     |                                    | (174,599       | )                              |          |              | (16,045 | )           |          |              | (401 | )    |       |              | 123,067 |              |          |             | (67,978 | )            |          |         | (42,208 | )       |         |         | (80,297  | )       |         |         | 706   |       |     |       | 80,889 |          |          |          | (40,910 | )      
|Discontinued operations:                                         |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 | Loss from discontinued operations                   |                                    |                |                               |          |              |         | (167,910    | )        |              |      |     |       |              |         |             |          |             |         | (167,910     | )        |         |         |        |         |         |          | (2,044  | )       |         |       |      |     |       |        |         |          |          |         | (2,044  | )      
|                                                                 | Income tax benefit                                  |                                    |                |                               |          |              |         | (61,289     | )        |              |      |     |       |              |         |             |          |             |         | (61,289      | )        |         |         |        |         |         |          | (746    | )       |         |       |      |     |       |        |         |          |          |         | (746    | )      
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        
|                                                                 |                                                     | Net (loss) income                  |                | $                              | (174,599 | )            |         | $           | (122,666 | )            |      | $    | (401  | )            |         | $            | 123,067  |             |         | $            | (174,599 | )       |         | $       | (42,208 | )       |          | $       | (81,595 | )       |       | $     | 706 |       |        | $        | 80,889   |          |         | $       | (42,208 | )      
|                                                                 |                                                     |                                    |                |                                |          |              |         |             |          |              |      |      |       |              |         |              |          |             |         |              |          |         |         |         |         |         |          |         |         |         |       |       |     |       |        |          |          |          |         |        

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GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands, except per share
data)


|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |          |  
|------------------------------------------------------- | -------------------------------------------- | ------------------------------ | ------- | ------------------------------ | - | ------------ | ------- | ------------ | - | ---- | ----- | ------------ | - | ------------ | ------- | ------------ | - | - | -------- | -------- | - | - | -------- | -------- | - | - | - | - |  | - | -------- | -------- | -
|                                                        |                                              |                                |         |                               
|                                                        |                                              | Six Months Ended June 30, 2004 |         | Six Months Ended June 30, 2003
|                                                        |                                              |                                |         |                               
|                                                        |                                              |                                |         | Non                            |   |              |         |              |   | Non  |       |             
|                                                        |                                              |                                |         | Guarantor                      |   | Guarantor    |         | King         |   |      |       | Guarantor    |   | Guarantor    |         | King        
|                                                        |                                              | King                           |         | Subsidiaries                   |   | Subsidiaries |         | Consolidated |   | King |       | Subsidiaries |   | Subsidiaries |         | Consolidated
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |             
|Cash flows from operating activities                    |                                              | $                              | (44,664 | )                              |   | $            | 60,694  |              |   | $    | (82   | )            |   | $            | 15,948  |              |   | $ | 1,057    |          |   | $ | 201,743  |          |   | $ |  |   |  | $ | 202,800  |         
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from investing activities:                   |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Transfer from restricted cash                |                                |         | 1,351                          |   |              |         | (545         | ) |      |       |             |   |              |         | 806          |   |   |          |         |   |   |          |         |   |   |   |  |  |   |          |         |  
|                                                        | Purchases of marketable securities           |                                |         |                                |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | (25,903  | ) |   |          |         |   |   |   |  |  |   |          | (25,903  | )
|                                                        | Proceeds from sale of marketable securities  |                                |         |                                |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | 253,097  |   |   |          |         |   |   |   |  |  |   |          | 253,097  |  
|                                                        | Proceeds from loans receivable               |                                |         |                               |   |              |         |              |   |      |       |             |   |              |         |              |   |   |          |         |   |   |          | 6,187    |   |   |   |  |  |   |          | 6,187    |  
|                                                        | Purchases of property, plant and equipment   |                                |         | (6,891                         | ) |              |         | (21,569      | ) |      |       | (2           | ) |              |         | (28,462      | ) |   |          | (4,748   | ) |   |          | (20,026  | ) |   |   |  |  |   |          | (24,774  | )
|                                                        | Proceeds from sale of assets                 |                                |         | 113                            |   |              |         |             |   |      |       |             |   |              |         | 113          |   |   |          | 12       |   |   |          | 229      |   |   |   |  |  |   |          | 241      |  
|                                                        | Acquisition of Primary Care from Elan        |                                |         |                               |   |              |         | (36,000      | ) |      |       |             |   |              |         | (36,000      | ) |   |          |         |   |   |          | (760,212 | ) |   |   |  |  |   |          | (760,212 | )
|                                                        | Investment in Meridian                       |                                |         |                               |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | (253,092 | ) |   |          | 15,410   |   |   |   |  |  |   |          | (237,682 | )
|                                                        | Purchases of product rights                  |                                |         |                               |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | (9,000   | ) |   |          |         |   |   |   |  |  |   |          | (9,000   | )
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash used in investing activities                   |                                              |                                | (5,427  | )                              |   |              | (58,114 | )            |   |      | (2    | )            |   |              | (63,543 | )            |   |   | (39,634  | )        |   |   | (758,412 | )        |   |   |  |   |  |   | (798,046 | )       
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash flows from financing activities:                   |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|                                                        | Proceeds from exercise of stock options, net |                                |         | 2,324                          |   |              |         |             |   |      |       |             |   |              |         | 2,324        |   |   |          | 2,765    |   |   |          |         |   |   |   |  |  |   |          | 2,765    |  
|                                                        | Payments on other long-term debt             |                                |         | (97                            | ) |              |         |             |   |      |       |             |   |              |         | (97          | ) |   |          | (96      | ) |   |          |         |   |   |   |  |  |   |          | (96      | )
|                                                        | Proceeds from revolving credit facility      |                                |         |                               |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | 125,000  |   |   |          |         |   |   |   |  |  |   |          | 125,000  |  
|                                                        | Debt issuance costs                          |                                |         |                               |   |              |         |             |   |      |       |             |   |              |         |             |   |   |          | (214     | ) |   |          |         |   |   |   |  |  |   |          | (214     | )
|                                                        | Intercompany                                 |                                |         | 6,106                          |   |              |         | (6,193       | ) |      |       | 87           |   |              |         |             |   |   |          | (570,174 | ) |   |          | 570,174  |   |   |   |  |  |   |          |         |  
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash provided by (used in) financing
    activities |                                              |                                | 8,333   |                                |   |              | (6,193  | )            |   |      | 87    |              |   |              | 2,227   |              |   |   | (442,719 | )        |   |   | 570,174  |          |   |   |  |   |  |   | 127,455  |         
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Net cash provided by discontinued operations            |                                              |                                |        |                                |   |              | 6,122   |              |   |      |      |              |   |              | 6,122   |              |   |   |         |          |   |   | 3,308    |          |   |   |  |   |  |   | 3,308    |         
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Increase (decrease) in cash and cash equivalents        |                                              |                                | (41,758 | )                              |   |              | 2,509   |              |   |      | 3     |              |   |              | (39,246 | )            |   |   | (481,296 | )        |   |   | 16,813   |          |   |   |  |   |  |   | (464,483 | )       
|Cash and cash equivalents, beginning of period          |                                              |                                | 140,617 |                                |   |              | 3,641   |              |   |      | 1,795 |              |   |              | 146,053 |              |   |   | 594,385  |          |   |   | (6,160   | )        |   |   |  |   |  |   | 588,225  |         
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         
|Cash and cash equivalents, end of period                |                                              | $                              | 98,859  |                                |   | $            | 6,150   |              |   | $    | 1,798 |              |   | $            | 106,807 |              |   | $ | 113,089  |          |   | $ | 10,653   |          |   | $ |  |   |  | $ | 123,742  |         
|                                                        |                                              |                                |         |                                |   |              |         |              |   |      |       |              |   |              |         |              |   |   |          |          |   |   |          |          |   |   |   |   |  |   |          |         

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##### Table of Contents








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

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.

Strategic Developments

Mylan Merger

On July 26, 2004, we entered into a merger
agreement with Mylan Laboratories Inc. and a wholly-owned
subsidiary of Mylan, which we refer to as Merger
Sub, pursuant to which Mylan will acquire King in a
stock-for-stock transaction. Under the merger agreement, Mylan
has agreed to issue 0.9 shares of its common stock in
exchange for each outstanding share of common stock of King.
Subject to the terms and conditions of the merger agreement,
upon the closing of the merger, Merger Sub will be merged with
and into King, the separate corporate existence of Merger Sub
will cease, and King will continue as a wholly-owned subsidiary
of Mylan. The merger agreement has been approved by each of the
Boards of Directors of King and Mylan. The transaction is
anticipated to close by the end of calendar year 2004 and be
tax-free to shareholders of King and Mylan. The closing of the
transaction is subject to regulatory approvals, the declaration
of effectiveness of the Form S-4 registration statement to
be filed by Mylan with the U.S. Securities and Exchange
Commission, which we refer to as the SEC, approval
by the shareholders of King and Mylan and other customary
closing conditions.

Key Product Developments

Levoxyl®

On August 14, 1997, the U.S. Food and Drug
Administration, which we refer to as 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, 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 New Drug Application,
which we refer to in this report as an NDA, for
Levoxyl®, our levothyroxine sodium product.

During 2001 and 2002, we filed with the U.S.
Patent and Trademark Office 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.

Mylan and KV Pharmaceutical Company have each
filed an ANDA with the FDA seeking permission to market a
generic version of Levoxyl®. 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

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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.


We filed a Citizen Petition with the FDA on
March 28, 2003 requesting that the FDA refrain from
approving or accepting for filing any Abbreviated New Drug
Application, which we refer to as ANDA, or
supplemental Abbreviated New Drug Application, which we refer to
as sANDA, 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 submitted similar and/or related comments to the FDA.

On June 23, 2004, the FDA denied our Citizen
Petition and approved supplemental New Drug Applications, which
we refer to as sNDA, filed by Alara Pharmaceuticals,
Inc. and Jerome Stevens Pharmaceutical, Inc. under
§ 355(b)(2) of the Federal Food, Drug and Cosmetic
Act, 21 U.S.C. § 355 et seq. seeking to
market their currently approved products (Levo-T® and
Unithroid®, respectively) as bioequivalent and
therapeutically equivalent (i.e., AB rated)
to Kings Levoxyl®. Neither Alara nor Jerome submitted
a patent certification (under 21 U.S.C. §355(b)(2)(A))
against our 581 patent, despite its listing in the Orange
Book as applicable to Levoxyl®. In response, we filed an
action in the U.S. District Court for the District of
Columbia against the FDA seeking preliminary and permanent
injunctive relief in the form of an Order directing the FDA to
withdraw its approval of the two sNDAs. Alara intervened in the
action. In an Order dated July 8, 2004, however, the Court
denied our request for a temporary restraining order and a
preliminary injunction on the basis that we could not
demonstrate a likelihood of success on the merits of our claim.
We have yet to appeal that decision. Neither the FDA nor Alara
has filed an Answer to our Complaint.

On July 14, 2004, the FDA approved an sANDA
filed by Mylan under 21 U.S.C. § 355(j), seeking
to market Mylans currently approved levothyroxine sodium
(LS) tablets as AB rated to Levoxyl®. The FDA
did not require Mylan to certify against our 581 patent
because Unithroid®, not Levoxyl®, is the listed drug
referred to in Mylans original ANDA. Presently, we have
taken no action against the FDA in response to the Mylan
approval. The pending patent infringement action discussed above
against Mylan, however, will have no effect on the approval of
the supplement (seeking AB rating to Levoxyl®) Mylan
submitted to its earlier ANDA for Unithroid®. The
FDAs decision to designate other levothyroxine sodium
products as AB-Rated to Levoxyl® will adversely effect net
sales of Levoxyl®, our results of operations and cash flows.

Levothyroxine sodium is a drug recognized to have
a narrow toxic to therapeutic ratio with significant clinical
consequences of excessive or inadequate treatment. The American
Thyroid Association, The Endocrine Society, and the American
Association of Clinical Endocrinologists have all raised
concerns regarding patients being switched among a number of
levothyroxine sodium preparations. Accordingly, these
organizations have advised physicians caring for patients on
levothyroxine sodium therapy to encourage their patients to ask
to remain on their current levothyroxine sodium preparation.
Nevertheless, sales of Levoxyl® may be materially adversely
affected in future periods.

Skelaxin®

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 against the
128 patent and the 102 patent alleging
noninfringement and invalidity of these patents. Mutual has
filed a Paragraph IV certification against the
102 patent alleging noninfringement and invalidity of
that patent. We filed separate suits against Eon Labs on
January 2, 2003; CorePharma on March 7, 2003; and
Mutual on March 12, 2004. Pursuant to the Hatch-Waxman Act,
the filing of the suits against CorePharma and Eon provides us
with an automatic stay of FDA

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approval of Eons ANDA for 30 months
from no earlier than November 18, 2002 and an automatic
stay of FDA approval of CorePharma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. We filed a Citizen Petition on
March 18, 2004 (supplemented on April 15, 2004),
requesting the FDA to rescind that letter, require generic
applicants to submit Paragraph IV certifications for the
128 patent, and prohibit the removal of information
about food effect studies from generic labels. We concurrently
filed a Petition for Stay of Action requesting the FDA to stay
approval of any generic metaxalone products until the FDA has
fully evaluated our Citizen Petition. CorePharma responded to
our Citizen Petition on April 30, 2004.

On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. We submitted a response in opposition to
Mutuals request on May 13, 2004. Mutual supplemented
its original petition on May 17, 2004. We replied to both
CorePharmas response and Mutuals supplement on
July 21, 2004.

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. At June 30, 2004, we had net intangible
assets related to Skelaxin® of $228.4 million. While
we are amortizing the patent intangibles over only a two-year
period ending June 30, 2005, if a generic version of
Skelaxin® enters the market, we may have to write off a
portion of the patent intangible assets and the other intangible
assets associated with this product.

We purchase metaxalone, the active ingredient in
Skelaxin®, from two suppliers. We have a supply agreement
with one of the suppliers. Both suppliers require firm purchase
orders nine months prior to delivery. If sales of Skelaxin®
decline, we may incur losses in connection with committed
purchase orders under the supply agreement. In the event we
incur losses in connection with the purchase orders, there may
be a material adverse effect upon our results of operations and
cash flows.

Research and Development Update

Altace®Product Life-Cycle Projects

We recently began our clinical development
program for an Altace®-chlorthalidone combination product.
Altace® is our patented angiotensin converting enzyme
(ACE) inhibitor, indicated for the treatment of
hypertension and chlorthalidone is a long-acting diuretic. The
Seventh Report of the Joint National Committee on Prevention,
Detection, Evaluation, and Treatment of High Blood Pressure
(JNC 7) states that data from hypertension trials and the
standard clinical care of hypertensive patients demonstrate that
most patients will require two or more antihypertensive
medications to achieve their blood pressure goals. The
combination product of Altace® and chlorthalidone would
give physicians treatment options, while simplifying a
patients antihypertensive drug regimen.

We recently commenced the first of two planned
bioavailability studies evaluating our
Altace®-chlorthalidone product. The pivotal efficacy trial
is expected to commence by mid 2005, with a possible NDA
submission for the combination product in 2007. The clinical
development program for the proposed combination tablet is
designed to demonstrate that ramipril and chlorthalidone may be
combined in a single dosage form with each component making a
contribution to the claimed antihypertensive effect. We plan to
discontinue our development of a modified-release formulation of
Altace®.

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Other Developments

Wholesale Inventory
Reductions

During the six months ended June 30, 2004,
net sales of some of our branded pharmaceutical products have
been significantly affected by wholesale inventory reductions.
In order to facilitate improved management of wholesale
inventory levels of all of our branded pharmaceutical products,
we entered into inventory management agreements with each of our
three key wholesale customers in April 2004. As we previously
disclosed, we anticipated that sales of our branded
pharmaceutical products would be significantly adversely
affected during the second quarter of 2004 as we effectively
reduced wholesale inventory levels of our branded pharmaceutical
products. As of June 30, 2004, the wholesale inventory
levels of our key branded pharmaceutical products, Altace®,
Skelaxin®, Sonata® and Levoxyl®, based on data
obtained through our inventory management agreements with our
three largest customers and IMS America prescription data, were
on average at an acceptable level of approximately
2.4 months of prescription demand. Accordingly, with the
possible exception of Levoxyl® due to the recent entry of
generic competition as discussed above, we anticipate that
future quarterly net sales of our key branded products should
more closely reflect demand-based sales.

Divestitures

Ongoing research, referred to as 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. 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®. At June 30, 2004, we had net intangible
assets related to Prefest®, Menest®, and
Nordette® of $34.3 million. If we are unable to sell these
products at or above net book value, we may have to write off a
portion of the intangible assets associated with these products.

As an extension of our strategic decision to
divest many of our womens health products, in July 2004 we
terminated our co-promotion and license agreements with Novavax,
Inc. regarding EstrasorbTM. As part of the
transaction, Novavax reacquired all rights to
EstrasorbTM as well as all rights to other
womens health products that Novavax may successfully
develop utilizing its micellar nanoparticle technology.
Additionally, Novavax repurchased all of its convertible notes
which we held, acquired a portion of our womens health
field sales force, and received approximately $8.0 million
from us to provide support for marketing and promotion. In
return, Novavax paid us $22.0 million and issued us
approximately 3.8 million shares of Novavax common stock.
This transaction will result in an immaterial net gain in the
third quarter of 2004. As a result of this transaction, we own
approximately 4.1 million shares of Novavax common stock,
representing approximately 10% of the outstanding common stock
of Novavax. Such shares are currently restricted and are
required to be held by King until July 2005.

In June 2004, we divested our Anusol-HC® and
Proctocort® product lines to Salix Pharmaceuticals, Inc.
for $13.0 million. As part of this transaction, we will
contract manufacture the Anusol-HC® and Proctocort®
product lines for two years. Additionally, in July 2004, we sold
our rights to Derma Cidol®, Derma Scrub®, Derma
Soothe®, Derma Stat® and Panthoderm® for
approximately $0.4 million in cash, plus royalties and
potential milestones based on future product sales. These
divestitures are part of our strategy to divest some of our
smaller, non-core products and use the proceeds from such
divestitures to focus more extensively on the strategic
acquisition and in-licensing of products in late-stage
development.

Brevital®

Prior to May 2004, we relied solely on third
parties to manufacture Brevital® who were unable to
consistently supply the product. As of May 2004 the Rochester
facility is qualified in accordance with FDA

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guidance as a manufacturing, testing and
packaging site for Brevital® and we are currently
distributing Brevital® that is produced at this site. This
qualification is part of our plan to transfer the manufacture of
some of our pharmaceutical products to our Rochester facility.


Key Personnel

In May 2004, Jefferson J. Gregory resigned from
his position as Chief Executive Officer and from his position as
Chairman and as a member of our Board of Directors. We
previously announced Mr. Gregorys intention to retire
in February 2004. Also in May 2004, Kyle P. Macione left his
position as President.

Our Board of Directors appointed Ted G. Wood
as Non-Executive Chairman of the Board in May 2004. On
July 16, 2004, our Board appointed Brian A. Markison as our
President and Chief Executive Officer and also appointed him to
our Board.

General Review of Financial
Results

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

|                              |       |                      |         |                    |  |      |         |         |  |   |         |         |  |   |         |         | 
|----------------------------- | ----- | -------------------- | ------- | ------------------ |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |       |                      |         |                   
|                              |       | For the Three Months |         | For the Six Months
|                              |       | Ended June 30,       |         | Ended June 30,    
|                              |       |                      |         |                   
|                              |       | 2004                 |         | 2003               |  | 2004 |         | 2003   
|                              |       |                      |         |                    |  |      |         |        
|Branded pharmaceuticals       |       | $                    | 219,587 |                    |  | $    | 308,969 |         |  | $ | 452,796 |         |  | $ | 599,932 |        
|Meridian Medical Technologies |       |                      | 27,681  |                    |  |      | 34,298  |         |  |   | 62,182  |         |  |   | 59,938  |        
|Royalties                     |       |                      | 21,119  |                    |  |      | 16,176  |         |  |   | 37,875  |         |  |   | 31,600  |        
|Contract manufacturing        |       |                      | 6,753   |                    |  |      | 7,572   |         |  |   | 12,931  |         |  |   | 13,966  |        
|                              |       |                      |         |                    |  |      |         |         |  |   |         |         |  |   |         |        
|                              | Total |                      | $       | 275,140            |  |      | $       | 367,015 |  |   | $       | 565,784 |  |   | $       | 705,436 | 
|                              |       |                      |         |                    |  |      |         |         |  |   |         |         |  |   |         |        

Results of Operations



| |                                              
| | ---------------------------------------------
| | Three Months Ended June 30, 2004 and
    2003



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

Total net revenues decreased $91.9 million,
or 25.0%, to $275.1 million in 2004 from
$367.0 million in 2003 primarily due to dramatically lower
net sales from our branded pharmaceuticals segment during 2004.

Net sales from branded pharmaceutical products
decreased $89.1 million, or 28.8%, to $219.9 million
in 2004 from $309.0 million in 2003. This decrease was
primarily the result of wholesale inventory reductions of some
of our branded pharmaceutical products during 2004 partially
offset by an increase in net sales of Skelaxin®, which we
acquired in June 2003. Net sales of Altace®,
Skelaxin®, Levoxyl® and Sonata® during 2004 were
well below the level that prescription demand for such products
would indicate. Prescription demand estimates are imprecise and
rely on third-party information which itself is subject to
uncertainties and limitations.

Returns of branded pharmaceuticals increased
significantly in 2004, primarily reflecting high levels of
returns by wholesalers, as well as reduced prescriptions for
some products due to the entry of generic competition.
Additionally, we believe our inventory management agreements
that we entered into with our three key wholesalers during the
second quarter of 2004 have also contributed to the increase in
returns of our branded pharmaceutical products. While we believe
the rate of returns during 2004 is not indicative of future
returns, we are closely monitoring this matter. As a result of
the unusually high level of returns in 2004, we supplemented our
normal returns reserve to address specific products with higher
levels of returns and/or declining sales. Levoxyl® required
the most significant supplemental reserve of all of our products
during 2004 due to the FDAs decision to designate other
available products as AB-Rated to Levoxyl® as discussed
above in the section entitled Key Product
Development under the subsection
Levoxyl®. Returns reduced our net sales
$20.4 million in 2003 and $56.0 million in 2004. As of
June 30, 2004, the total return reserve was
$61.9 million.

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Revenues from Meridian Medical Technologies
decreased $6.6 million, or 19.2%, to $27.7 million in
2004 from $34.3 million in 2003 primarily due to a decrease
in sales to the U.S. military partially offset by an
increase in sales of Epipen® under our supply agreement
with Dey, L.P. which markets the product.

Revenues from royalties are derived primarily
from payments we receive based on sales of Adenoscan®.
Revenue from royalties increased $4.9 million, or 30.5%, to
$21.1 million in 2004 from $16.2 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 are not
able to predict whether growth will continue, if at all, at the
rate experienced in the second quarter of 2004.

Net revenues from contract manufacturing were
$6.8 million in 2004 compared to $7.6 million in 2003.



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

Total operating costs and expenses decreased
$89.4 million, or 21.0%, to $337.2 million in 2004
from $426.6 million in 2003. The decrease was primarily due
to a substantially lower 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;
litigation settlements, 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 decreased $6.2 million, or
6.8%, to $85.4 million in 2004 from $91.6 million in
2003. The decrease was primarily due to lower unit sales of our
branded pharmaceutical products as a result of wholesale
inventory reductions as discussed above, partially offset by a
charge during the second quarter of 2004 in the amount of
$10.4 million for the write-off of excess inventory
associated with our branded pharmaceuticals segment which is to
some extent attributable to reduced unit sales of branded
pharmaceutical products during 2004. Special items affecting
cost of revenues included a charge of $4.6 million and
$1.5 million, respectively, in the second quarter of 2004
and 2003 which primarily related to the voluntary recall of some
lots of Levoxyl®. As a percentage of total revenues, cost
of revenues increased to 31.0% in 2004 from 25.0% in 2003
primarily due to lower net sales of our branded pharmaceutical
products which on average have lower cost of revenues, as a
percentage of revenues, and the write-off of excess inventory
described above. 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 decreased $2.0 million, or 3.3%, to
$58.7 million in 2004 from $60.7 million in 2003.

Cost of revenues from Meridian Medical
Technologies decreased $5.3 million, or 27.9%, to
$13.7 million in 2004 from $19.0 million in 2003
primarily due to a decrease in unit sales of lower margin
products, partially offset by an increase in unit sales of
higher margin products.

Cost of revenues from royalties increased
$0.6 million to $3.1 million in 2004 from
$2.5 million in 2003.

Cost of revenues associated with contract
manufacturing was $9.9 million in 2004 compared to
$9.5 million in 2003.

Total selling, general and administrative
expenses decreased $3.3 million, or 2.6%, to
$124.9 million in 2004 from $128.2 million in 2003.
This decrease was primarily attributable to a decrease in
co-promotion fees paid under our Co-Promotion Agreement with
Wyeth Pharmaceuticals due to lower sales of Altace® during

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2004, as compared to 2003, for the reasons
discussed above, offset by increased operating expenses
primarily associated with the expansion of our field sales force
and increased marketing expenses associated with the creation
and/or launch of new marketing campaigns for some of our
products. Selling, general and administrative expenses included
a special item resulting in a net charge of $5.0 million and
$14.3 million, respectively, in the second quarter of 2004 and
2003 for professional fees that were primarily related to the
ongoing investigations of our company by the SEC and the Office
of Inspector General of the Department of Health and Human
Services. In connection with these investigations, we expect to
continue to incur legal and professional fees that could
materially affect our cash flows and results of operations.


As a percentage of total revenues, total selling,
general, and administrative expenses increased to 45.4% in 2004
compared to 34.9% in 2003. The increase was primarily due to
lower net sales of branded pharmaceutical products during 2004
for the reasons discussed above in the section entitled
Other Developments in the subsection entitled
Wholesale Inventory Reductions.

Depreciation and amortization expense increased
$17.9 million, or 86.9%, to $38.5 million in 2004 from
$20.6 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.

Prescriptions for Intal® and Tilade®
have declined over the past year. At June 30, 2004, we had
net intangible assets related to Intal® and Tilade® of
$113.4 million. 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 these products.

Prescriptions for Corzide® have declined
over the past year. At June 30, 2004, we had net intangible
assets related to Corzide® of $53.1 million.
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 this product.

Total research and development expense decreased
$168.6 million, to $17.5 million in 2004 from
$186.1 million in 2003. This decrease was primarily due to
a special item that resulted in a charge of $175.0 million
during 2003 due to acquired in-process research and development
associated with our acquisition of Sonata® and
Skelaxin® on June 12, 2003, offset by an increase in
expenses associated with ongoing research and development
programs that have progressed to later stages of clinical
development.

In addition to the special items related to cost
of revenues, selling, general and administrative expense and
research and development described above, we incurred other
special items affecting operating costs and expenses during 2004
resulting in a net charge totaling $70.9 million during the
second quarter of 2004. These other special items include the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As part of our ongoing discussions with the
    Office of Inspector General of the Department of Health and
    Human Services, the U.S. Securities and Exchange Commission,
    which we refer to as the SEC, and other state and
    federal agencies, we have begun to discuss with some of the
    government representatives the possibility of settling the
    matters being investigated. We have accrued $65.0 million
    for estimated settlement costs as an operating expense during
    the second quarter of 2004 to cover interest, costs, fines,
    penalties and all other amounts in addition to the
    $65.4 million that we have previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    Although we have not entered into any agreements or
    understandings with respect to a possible settlement, these
    accruals represent our current best estimate of the aggregate
    payment we would have to make pursuant to a comprehensive
    settlement with the Office of Inspector General of the
    Department of Health and Human Services, the SEC and other
    federal and state agencies. For additional information, please
    see Governmental Investigations and Securities
    Litigation in Liquidity and Capital Resources.
|
| |  | A restructuring charge in the amount of $6.2
    million during 2004 primarily due to separation agreements with
    several executives and the relocation of our sales and marketing
    operations from                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Bristol, Tennessee to Princeton, New Jersey. It
    is anticipated that the relocation of key sales and marketing
    employees to New Jersey will be completed within the next year
    and will require additional costs. All of the restructuring
    charges relate to the branded pharmaceutical segment, except for
    any related to contract manufacturing.
|
| |  | Income in the amount of $3.4 million due to a
    gain on the sale of our Anusol-HC® and Proctocort®
    product lines.                                                                                                                                                                                                                                             
|
| |  | A charge of $3.1 million for professional fees
    and expenses related to our merger agreement with Mylan. In
    connection with the planned merger, we expect to continue to
    incur professional fees that could be material to our cash flows
    and results of operations.                                                                                 



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

Due to the factors discussed above, we had an
operating loss of $62.0 million during 2004 compared to an
operating loss of $59.5 million in 2003.



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

Interest income decreased $1.1 million to
$1.1 million in 2004 from $2.2 million in 2003
primarily due to lower cash balances in 2004.

Interest expense was $3.3 million in 2004
compared to $3.4 million in 2003.

Special items affecting other income
(expense) include a charge in the amount of
$2.4 million during 2004 to reflect an increase in the
valuation allowance for the convertible notes of Novavax
compared to income in the amount of $7.6 million during
2003 to reflect a decrease in the valuation allowance. As
discussed above, Novavax repurchased the convertible notes from
us in July 2004.



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

As discussed above, we are actively marketing the
Prefest® and Nordette® product rights to potential
purchasers. These 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 during 2004 and 2003 include income
from discontinued operations in the amount of $3.3 million
and $2.3 million, or $2.1 million and
$1.5 million net of tax expense, respectively.



| |                             
| | ----------------------------
| | Income Tax Expense (Benefit)

During 2004, we had a tax expense of
$0.2 million, which excludes any tax benefit related to the
Medicaid related charge discussed above. During 2003, we had an
income tax benefit of $16.7 million, which reflects a
reduction of $5.8 million in the tax benefit due to the
establishment of a valuation allowance against state deferred
tax assets generated by the write-off of acquired in-process
research and development. Accordingly, our effective tax rate
for 2003 of 31.3% was lower than the federal statutory rate of
35%.



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

Due to the factors discussed above, we had a net
loss of $63.5 million during 2004 compared to a net loss of
$35.0 million in 2003.

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Six Months Ended June 30, 2004 and
2003



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

Total net revenue decreased $139.7 million,
or 19.8%, to $565.8 million in 2004 from
$705.4 million in 2003, primarily due to lower net sales
from our branded pharmaceuticals segment during 2004 as a result
of wholesale inventory reductions as discussed above in the
section entitled Other Developments in the
subsection entitled Wholesale Inventory Reductions.

Net sales from branded pharmaceutical products
decreased $147.1 million, or 24.5%, to $452.8 million
in 2004 from $599.9 million in 2003. This decrease was
primarily the result of wholesale inventory reductions of some
of our branded pharmaceutical products during 2004, partially
offset by increases in net sales of Skelaxin® and
Sonata® which we acquired in June 2003. Net sales of
Altace®, Skelaxin®, and Sonata® during 2004 were
well below the level that prescription demand for such products
would indicate. Prescription demand estimates are imprecise and
rely on third-party information which itself is subject to
uncertainties and limitations.

Returns of branded pharmaceuticals increased
significantly during 2004 primarily reflecting high levels of
returns by wholesalers as well as reduced prescriptions for some
products due to the entry of generic competition. Additionally,
we believe our inventory management agreements that we entered
into with our three key wholesalers have also contributed to the
increase in returns of our branded pharmaceutical products.
While we believe the rate of returns during 2004 is not
indicative of future returns, we are closely monitoring this
matter. As a result of the unusually high return levels in 2004,
we supplemented our normal returns reserve to address specific
products with higher levels of returns and/or declining sales.
Levoxyl® required the most significant supplemental reserve
of all of our products in 2004 due to the FDAs decision to
designate other available products as AB-Rated to Levoxyl®
as discussed above. Returns reduced our net sales by
$33.3 million in 2003 and by $97.3 million in the
first half of 2004.

Revenues from Meridian Medical Technologies
increased $2.3 million, or 3.7%, to $62.2 million in
2004 from $59.9 million in 2003 primarily due to increased
unit sales of EpiPen® under our supply agreement with Dey,
L.P., which markets the product partially offset by a decrease
in sales to the U.S. military.

Revenues from royalties are primarily derived
from payments we receive based on sales of Adenoscan®.
Revenue from royalties increased $6.3 million, or 19.9%, to
$37.9 million in 2004 from $31.6 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 are not
able to predict whether growth will continue, if at all, at the
rate experienced in the first half of 2004.

Net revenues from contract manufacturing were
$12.9 million in 2004 compared to $14.0 million in
2003.



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

Total operating costs and expenses decreased
$139.7 million, or 18.2%, to $628.4 million in 2004
from $768.1 million in 2003. The decrease was primarily due
to a $199.7 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.

Cost of revenues increased $2.0 million, or
1.2%, to $173.1 million in 2004 from $171.1 million in
2003. This increase was primarily due to a charge during 2004 in
the amount of $31.4 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, 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
and a special item resulting in a $4.6 million charge
primarily related to the recall of some lots of Levoxyl®.
Cost of revenue in

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2003 includes special items resulting in a
$5.8 million charge relating to the recall of some lots of
Levoxyl® and our acquisition of Meridian. Accordingly, as a
percentage of total revenues, cost of revenues increased to
30.6% in 2004 from 24.3% 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 $6.9 million, or 6.1%, to
$120.9 million in 2004 from $114.0 million in 2003.
This increase was primarily due to a charge in the amount of
$31.4 million for the write-off of excess branded
pharmaceutical products inventory discussed above and an
increase in special items. During 2004, we incurred 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 and a special item resulting in
a charge of $4.6 million primarily related to the recall of
some lots of Levoxyl®. During 2003, cost of revenues from
branded pharmaceutical products included a special item
resulting in a charge in the amount of $3.6 million which
was primarily related to our recall of some lots of
Levoxyl®.

Cost of revenues from Meridian Medical
Technologies decreased $8.0 million, or 21.8%, to
$28.7 million in 2004 from $36.7 million in 2003
partially 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 increased
$0.2 million to $5.7 million in 2004 from
$5.5 million in 2003.

Cost of revenues associated with contract
manufacturing increased $2.8 million, or 18.7%, to
$17.8 million in 2004 from $15.0 million in 2003
primarily due to an increase in fixed overhead costs.

Total selling, general and administrative
expenses increased $5.1 million, or 2.2%, to
$239.1 million in 2004 from $234.0 million in 2003.
This increase was primarily attributable to operating expenses
associated with the expansion of our sales force offset by
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. We incurred special items of $10.7 million
and $14.3 million, respectively, in 2004 and 2003 for
professional fees that were primarily related to the ongoing
investigations of our company by the SEC and the Office of
Inspector General of the Department of Health and Human
Services. In connection with these investigations, we expect to
continue to incur legal and professional fees that could be
material to our cash flows and results of operations.

As a percentage of total revenues, total selling,
general, and administrative expenses increased to 42.3% in 2004
compared to 33.2% in 2003. The increased percentage in 2004 was
primarily due to lower net sales of branded pharmaceutical
products during 2004 for the reasons discussed above in the
section entitled Other Developments in the
subsection entitled Wholesale Inventory Reduction.

Depreciation and amortization expense increased
$39.5 million, or 103.1%, to $77.8 million in 2004
from $38.3 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.

Total research and development expense decreased
$180.2 million, to $33.5 million in 2004 from
$213.7 million in 2003. This decrease was primarily due to
special items that resulted in a charge of $193.0 million
during 2003 due to acquired in-process research and development
associated with our acquisition of Sonata® and
Skelaxin® on June 12, 2003 and our acquisition of
Meridian on January 8, 2003, offset by an increase in
expenses associated with ongoing research and development
programs that have progressed to later stages of clinical
development.

In addition to the special items related to cost
of revenues of branded pharmaceutical products, selling, general
and administrative, and research and development described
above, we incurred other special items

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affecting operating costs and expenses resulting
in a net charge totaling $104.9 million during 2004 and
$111.0 during 2003. These other special items included the
following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An intangible asset impairment charge in the
    first half of 2004 of $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 fludrocoritsone acetate, USP, a product that represents
    additional competition for our Florinef® (fludrocoritsone
    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 that fair value of the intangible assets associated
    with Florinef® and Tapazole® based on our estimated
    discounted cash flows for these products.
|
| |  | As part of our ongoing discussions with the
    Office of Inspector General of the Department of Health and
    Human Services, the SEC, and other state and federal agencies,
    we have begun to discuss with some of the government
    representatives the possibility of settling the matters being
    investigated. We have accrued $65.0 million for estimated
    settlement costs as an operating expense to cover interest,
    costs, fines, penalties and all other amounts in addition to the
    $65.4 million that we have previously accrued for estimated
    underpayments to Medicaid and other government pricing programs.
    Although we have not entered into any agreements or
    understandings with respect to a possible settlement, these
    accruals represent our current best estimate of the aggregate
    payment we would have to make pursuant to a comprehensive
    settlement with the Office of Inspector General of the
    Department of Health and Human Services, the SEC and other
    federal and state agencies. For additional information, please
    see the section entitled Governmental Investigations and
    Securities Litigation in Liquidity and Capital
    Resources.                                                                                                                                                                  
|
| |  | Restructuring charges in the amount of
    $6.2 million in the second quarter of 2004 as a result of
    separation agreements with several of our executives and the
    relocation of our sales and marketing operations from Bristol,
    Tennessee to Princeton, New Jersey. It is anticipated that the
    relocation of key sales and marketing employees to New Jersey
    will be completed within the next year and will require
    additional costs. All of the restructuring charges relate to the
    branded pharmaceutical segment, except for any related to
    contract manufacturing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Income of $4.3 million in 2004 primarily due
    to a gain on the sale of our Anusol-HC® and
    Proctocort® product lines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | A charge of $3.1 million for professional
    fees and expenses related to the merger with Mylan. In
    connection with the planned merger, we expect to continue to
    incur professional fees that could be material to our cash flows
    and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



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

Due to the factors discussed above, we had an
operating loss of $62.6 million during 2004 and an
operating loss of $62.6 million in 2003.



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

Interest income decreased $2.6 million to
$2.1 million in 2004 from $4.7 million in 2003
primarily due to reduced cash balances in 2004.

Interest expense was $6.4 million in 2004
compared to $6.5 million in 2003.

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Special items affecting other income
(expense) include a charge in the amount of
$2.5 million during 2004 to reflect an increase in the
valuation allowance for the convertible notes receivable from
Novavax, Inc. compared to income in the amount of
$15.6 million during 2003 to reflect a decrease in the
valuation allowance. As discussed above, Novavax repurchased the
convertible notes from us in July 2004. The shares we received
as a result of this transaction are restricted and are required
to be held until July 2005.



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

As discussed above, we are now actively marketing
the Prefest® and Nordette® product lines to potential
purchasers. These 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 $167.9 million during 2004 or
$106.6 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
$2.0 million, or $1.3 million net of tax benefit.



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

For the six months ended June 30, 2004, we
had an income tax benefit of $0.9 million, which excludes
any tax benefit related to the Medicaid related charge discussed
above and includes the establishment of a valuation allowance
against state deferred tax assets. For the six months ended
June 30, 2003, we had an income tax benefit of
$8.0 million, which reflects a reduction of
$5.8 million in the tax benefit due to the establishment of
a valuation allowance against state deferred tax assets and
permanent differences generated by the write-off of acquired
in-process research and development.



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

Due to the factors discussed above, we had a net
loss equaling $174.6 million during 2004 compared to a net
loss of $42.2 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.

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. At June 30, 2004 we have
$63.8 million in escrow to satisfy deferred obligations to
Wyeth that we assumed as part of this acquisition. In addition
to the initial purchase price, we paid $25.0 million during
January 2004, as a milestone payment to Elan relating to the

35



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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®.                                                                   

As additional consideration for Synercid®,
an injectable antibiotic acquired on December 30, 2002, we
agreed to potential milestone payments. We will 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, if there is 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.



| |                                                          
| | ---------------------------------------------------------
| | Governmental Investigations 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®.

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 and other federal and
state agencies. 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. As part of our ongoing discussions
with the governmental agencies, we have begun to discuss with
some of the government representatives the possibility of
settling the matters being investigated. Although we have not
reached any agreements or understandings with respect to a
possible settlement, in accordance with generally accepted
accounting principles, we have determined that, solely for
accounting purposes, it is probable, as this term is
defined by SFAS No. 5, Accounting for
Contingencies, that we will enter into a settlement with
respect to the investigations.

Accordingly, we have accrued $65.0 million
for estimated settlement costs as an operating expense during
the second quarter of 2004 to cover interest, costs, fines,
penalties and all other amounts beyond the $65.4 million
that we have previously accrued for our estimated underpayments
to Medicaid and other government pricing programs. Although we
have not entered into any agreements or understandings with
respect to any settlement, these accruals represent our current
best estimate of the aggregate payment we would have to make
pursuant to a comprehensive settlement with the Office of
Inspector General of the Department of Health and Human
Services, the SEC and other federal and state agencies. We
cannot assure you that we will be able to reach a settlement,
whether on these terms or at all, and the ultimate amount that
we will actually have to pay to resolve these matters could be
materially more or less than the total amount we have accrued
for this purpose. This accrual does not apply to the related
pending class actions and derivative

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##### Table of Contents



suits, as to which we are still unable to predict
the outcome or reasonably estimate the range of loss, if any.
The SEC, the Office of Inspector General, and other federal and
state 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. Except to the
limit extent reflected by the accrual for estimated settlement
costs, 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.

On July 13, 2004, the United States
Magistrate Judge issued a report recommendation on the
defendants motions to dismiss in which he recommended that
the motions be denied except as to two individual defendants as
to whom he recommended that the motion be granted. Both
plaintiffs and defendants have the right to object to the report
and ask that it be reviewed de novo by the United States
District Judge presiding over the case. We and those individual
defendants affected by the recommended denials of the motion
have objected to the report of the Magistrate Judge. The
District Court Judge will review these objections and ultimately
may accept all or part of the Magistrate Judges
recommendations, or reject them entirely. In the event that the
District Judge denies the defendants motion to dismiss, we
intend to vigorously defend the lawsuit but cannot predict the
outcome of the case.

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.

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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.

Six Months Ended June 30,
2004

We generated net cash from continuing operations
of $15.9 million for the six months ended June 30,
2004. Our net cash provided from operations was primarily the
result of a $68.0 million net loss from continuing
operations, adjusted for non-cash depreciation and amortization
from continuing operations of $77.8 million, intangible
asset impairment charges from continuing operation of
$34.9 million, a change in deferred taxes of
$31.3 million and changes in working capital. Changes in
working capital include an increase in inventory of
$26.3 million, an increase in accrued expenses of
$88.8 million, a decrease in accounts payable of
$23.2 million, a decrease in income taxes payable of
$53.5 million, an increase in accounts receivable of
$10.2 million, and an increase in prepaid expenses of
$13.8 million.

Investing activities reduced cash flow by
$63.5 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 $28.5 million.

Financing activities contributed
$2.2 million to cash flow due to the exercise of employee
stock options.

Discontinued operations provided
$6.1 million in cash flows. This was primarily the result
of a $106.6 total loss from discontinued operations, adjusted
for non-cash depreciation and amortization of $4.4 million,
a change in deferred taxes of $61.3 million, and an
intangible asset impairment charge of $169.6 million.



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

As of June 30, 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 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 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

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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 of June 30, 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 $28.5 million and $24.8 million for
the six months ended June 30, 2004 and 2003, respectively.
The principal capital expenditures during the six months ended
June 30, 2004 included property and equipment purchases,
new information technology system implementation costs and
building improvements for facility upgrades and increased
capacity.



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

On July 1, 2004, the Emerging Issues Task Force
(EITF) reached a tentative consensus on earnings per
share calculation for issuers of contingently convertible bonds.
In EITF Issue 04-8, Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effects on
Diluted Earnings per Share, the EITF has proposed that the
potential earnings per share (EPS) dilution from
contingently convertible bonds should be considered and included
in the EPS calculation from the date of issue. Currently, we do
not consider the EPS dilution of the Convertible Debentures
until the closing price of our common stock reaches the
threshold to permit conversion of Debentures at the option of
holders of the Convertible Debentures of $55.18 per share (110%
of the conversion price of $50.16 per share) for at least 20
trading days during 30 consecutive trading days. If all of the
Convertible Debentures were converted, we would currently be
required to issue approximately 6,878 shares.



| |                             
| | ----------------------------
| | 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
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 identification 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, our current inventory levels, or purchase
    commitments 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our proposed transaction with Mylan may
    adversely affect our results of operations whether or not the
    merger is completed, and the merger may not be completed on a
    timely basis or at all.

Uncertainty surrounding the proposed transaction
may have an adverse effect on employee morale and retention. In
addition, focus on the merger and related matters has resulted
in, and may continue to result in, the diversion of management
attention and resources. Furthermore, the market value of our
common stock may vary prior to completion of the merger due to
market assessments regarding the expected timing of consummation
of the merger and the risk that the merger will not be
consummated. Due to regulatory or other reasons, the merger may
not be completed on the anticipated timetable, and it is
possible that the merger will not be completed at all. If the
merger is not completed, the price of our common stock may
decline. In addition, our business may be harmed to the extent
that our customers, strategic partners or others believe that we
cannot effectively compete in the marketplace without the merger
or there is customer and employee uncertainty surrounding the
future direction of our strategy on a stand-alone basis. We also
will be required to pay significant costs incurred in connection
with the merger, including legal, accounting and financial
advisory fees, whether or not the merger is completed. Moreover,
under specified circumstances we may be required to pay Mylan a
termination fee of $85.0 million in connection with the
termination of the merger agreement.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, the Public Health Service, the
National Association of Medicaid Fraud Control Units, and other
governmental agencies or authorities. 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.

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In addition, as part of these ongoing
discussions, we have begun to discuss with some of the
government representatives the possibility of settling the
matters being investigated. Although we have not reached any
agreements or understandings with respect to a possible
settlement, in accordance with generally accepted accounting
principles we have determined that, solely for accounting
purposes, it is probable, as the term is defined in
SFAS No. 5 Accounting for Contingencies, that
we will enter into a settlement with respect to the
investigations. Accordingly, we have accrued $65.0 million
for estimated settlement costs as an operating expense during
the second quarter of 2004, to cover interest, costs, fines,
penalties and all other amounts beyond the $65.4 million
that we have previously accrued for our estimated underpayments
to Medicaid and other government pricing programs. Although we
have not entered into any agreements or understandings with
respect to any settlement, these accruals represent our current
best estimate of the aggregate payment we would have to make
pursuant to a comprehensive settlement with the Office of
Inspector General of the Department of Health and Human
Services, the SEC and other federal and state agencies. We
cannot assure you that we will be able to reach a settlement,
whether on these terms or at all, and the ultimate amount that
we will actually have to pay to resolve these matters could be
materially more or less than the total amounts we have accrued
for this purpose. The SEC, the Office of Inspector General, and
other federal and state 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. Except to the limited extent reflected by the accrual
for estimated settlement costs, 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, the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading
Governmental Investigations and Securities
Litigation, 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.

On July 13, 2004, the United States
Magistrate Judge issued a report recommendation on the
defendants motions to dismiss in which he recommended that
the motions be denied except as to two individual defendants as
to whom he recommended that the motion be granted. Both
plaintiffs and defendants have the right to object to the report
and ask that it be reviewed de novo by the United States
District Judge presiding over the case. We and those individual
defendants affected by the recommended denials of the motion
have objected to the report of the Magistrate Judge. The
District Court Judge will review these objections and ultimately
may accept all or part of the Magistrate Judges
recommendations, or reject them entirely. In the event that the
District Judge denies the defendants motion to dismiss, we
intend to vigorously defend the lawsuit but cannot predict the
outcome of the case.

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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 we cannot successfully enforce our
    rights under the patents relating to three of our largest
    products, Altace®,
    Levoxyl® and Skelaxin®,
    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 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 against the
128 patent and the 102 patent alleging
noninfringement and invalidity of these patents. Mutual has
filed a Paragraph IV certification against the
102 patent alleging

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noninfringement and invalidity of that patent. We
filed separate suits against Eon Labs on January 2, 2003;
CorePharma on March 7, 2003; and Mutual on March 12,
2004. Pursuant to the Hatch-Waxman Act, the filing of the suits
against CorePharma 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 CorePharma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. We filed a Citizen Petition on March 18, 2004
(supplemented on April 15, 2004), requesting the FDA to
rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent,
and prohibit the removal of information about food effect
studies from generic labels. King concurrently filed a Petition
for Stay of Action requesting the FDA to stay approval of any
generic metaxalone products until the FDA has fully evaluated
our Citizen Petition. CorePharma responded to our Citizen
Petition on April 30, 2004.


On March 12, 2004, the FDA sent a letter to
us explaining that our proposed labeling revision, which
includes references to additional clinical studies relating to
food, age, and gender effects, was approvable and only required
certain formatting changes. On April 5, 2004, we submitted
amended labeling text that incorporated those changes. On
April 5, 2004, Mutual filed a Petition for Stay of Action
requesting the FDA to stay approval of our proposed labeling
revision until the FDA has fully evaluated and ruled upon our
Citizen Petition, as well as all comments submitted in response
to that petition. We submitted a response in opposition to
Mutuals request on May 13, 2004. Mutual supplemented
its original petition on May 17, 2004. We replied to both
CorePharmas response and Mutuals supplement on
July 21, 2004.

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.

Mylan and 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 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.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 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®,
Sonata® and royalty revenues for the last twelve months
ended June 30, 2004 accounted for 27.3%, 18.3%, 10.5%, 5.9%
and 5.4% of our total revenues from continuing operations,
respectively, or 67.4% 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.

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| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although we have an obligation to indemnify
    our officers and directors, we may not have sufficient insurance
    coverage available for this purpose and may be forced to pay
    these indemnification costs directly and we may not be able to
    maintain existing levels of coverage, which could make it
    difficult to attract or retain qualified directors and
    officers.

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.



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales of Levoxyl® and our ability
    to maintain effective patent protection for Levoxyl®
    (levothyroxine sodium tablets (USP)) are likely to be affected
    by recent actions of the FDA, approving other levothyroxine
    sodium products as bio-equivalent and therapeutically equivalent
    (AB-Rated).

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, 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.

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.

We filed a Citizen 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.

On June 23, 2004, the FDA denied our Citizen
Petition and approved the sNDA filed by Alara and Jerome under
§ 355(b)(2) of the Federal Food, Drug and Cosmetic
Act, 21 U.S.C. § 355 et seq. seeking to
market their currently approved products (Levo-T® and
Unithroid®, respectively) as bioequivalent and
therapeutically equivalent (i.e., AB rated)
to our Levoxyl®. Neither Alara nor Jerome submitted a
patent certification (under 21 U.S.C.
§ 355(b)(2)(A)) against our 581 patent, despite
its listing in the Orange Book as applicable to Levoxyl®.
In response, we filed an action in the U.S. District Court
for the District of Columbia against FDA seeking preliminary and
permanent injunctive relief in the form of an Order directing
the FDA to withdraw its approval of the two sNDAs. Alara
intervened into the action. In an Order dated July 8, 2004,
however, the Court denied our request for a temporary
restraining order and a preliminary

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injunction on the basis that we could not
demonstrate a likelihood of success on the merits of its claim.
We have yet to appeal that decision. Neither the FDA nor Alara
has filed an Answer to our Complaint.


On July 14, 2004, the FDA approved an sANDA
filed by Mylan under 21 U.S.C. § 355(j), seeking
to market Mylans currently approved levothyroxine sodium
(LS) tablets as AB rated to Levoxyl®. The FDA
did not require Mylan to certify against our 581 patent
because Unithroid®, not Levoxyl®, is the listed drug
referred to in Mylans original ANDA. Presently, we have
taken no action against the FDA in response to the Mylan
approval. Currently pending, however, is our lawsuit against
Mylan for infringement of the 581 patent based on
Mylans submission of a second ANDA, which seeks approval
to a market generic version of Levoxyl®. The pending
infringement action against Mylan, however, will have no effect
on the approval of the supplement (seeking AB rating to
Levoxyl®) Mylan submitted to its earlier ANDA for
Unithroid®. The FDAs decision to designate other
levothyroxine sodium products as AB-Rated to Levoxyl® will
adversely effect net sales of Levoxyl®, our results of
operations and cash flows.



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



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

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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.



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

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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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 June 30, 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, acquisitions, development
    and in-licensing, our business or 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 or in-licensing of products in
development and FDA-approved products, 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 or licensing products in development and FDA-approved
products from other companies.

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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®;                                                                                                                                                                                                    
|
| |  | 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 for which the
    FDA has issued an approvable letter;                                                                                                                          
|
| |  | engaged in the development of an
    Altace®/chlorthalidone combination product; and                                                                                                                                                                                            
|
| |  | engaged in the development of a diazepam-filled
    auto-injector.                                                                                                                                                                                                              

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. The inability to
effect acquisitions or licenses 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. 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.



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

The integration of acquisitions into our business
requires significant management attention and may require the
further expansion of our 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

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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.




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

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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 47.2% of our revenues for the last twelve months
ended June 30, 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. 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.

We anticipate that sales of Levoxyl® will
decline significantly as a result of the FDAs recent
rulings described above concerning AB ratings to Levoxyl®
of certain levothyroxine sodium product competitors.

King has begun construction of facilities to
produce Bicillin® at its Rochester manufacturing facility
in anticipation of the closing by a third party manufacturer
(Wyeth) of its plant that currently produces Bicillin®. In
anticipation of the closing of Wyeths manufacturing
facility and the time it will take to obtain regulatory approval
of our Rochester Bicillin® production facilities, on
July 6, 2004, we executed a Toll Manufacturing Agreement
providing for Wyeth to increase production of Bicillin® for
a six to eight month period. This agreement is currently being
held in escrow pending resolution of certain conditions prior to
Wyeths execution of the agreement. We cannot assure you
that these conditions will be satisfied or that Wyeth will enter
into the Toll Manufacturing Agreement. The terms of this
agreement are less favorable than the prior supply agreement
with Wyeth, and there are no guarantees that the production of
Bicillin® under the Toll

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Agreement, if executed with Wyeth, will be
sufficient to supply the demand for the product prior to
receiving regulatory approval and successful production of
Bicillin® at our Rochester facility. If we are unable to
obtain sufficient inventory of Bicillin® to sustain demand
during such period, or if we experience delays in obtaining
regulatory authorizations or experience production difficulties
at our Rochester manufacturing facility, sales of this product
may be reduced or the market for the product may be permanently
diminished, either of which could have a material adverse affect
on our business, financial condition, results of operations and
cash flows. For the last twelve months ended June 30, 2004,
net sales of Bicillin® were $23.3 million representing
1.7% 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. Some of the contracts we
have for the supply of raw materials have short terms, and there
is no assurance that we will be able to secure extension of the
terms of such agreements. 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.



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

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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®. 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.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. All
of these patents are listed in the FDAs Orange Book. A
challenge to these patents can be subject to expensive
litigation.

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
$30.9 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.

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



| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 745 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. We understand that a new
competitive product manufactured by Hollister-Stier Laboratories
LLC received FDA approval over one year ago but has yet to enter
the market. 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 SEC and other
federal and state agencies. 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. As part of our ongoing discussions
with these agencies, we have begun to discuss with some of the
government representatives the possibility of settling the
matters being investigated. Although we have not reached any
agreements or understandings with respect to a possible
settlement, in accordance with generally accepted accounting
principles, we have determined that, solely for accounting
purposes, it is probable, as this term is defined by
SFAS No. 5 Accounting for Contingencies, that
we will enter into a settlement with respect to the
investigations. Accordingly, we have accrued $65.0 million
for estimated settlement costs as an operating expense during
the second quarter of 2004 representing interest, costs, fines,
penalties and all other amounts beyond the $65.4 million
that we have previously accrued for our estimated underpayments
to Medicaid and other government pricing programs. Although we
have not entered into any agreements or understandings with
respect to any settlement, these accruals represent our current
best estimate of the aggregate payment we would have to make
pursuant to a comprehensive settlement with the Office of
Inspector General of the Department of Health and Human
Services, the SEC and other federal and state agencies. We
cannot assure you that we will be able to reach a settlement,
whether on these terms or at all, and the ultimate amount that
we will actually have to pay to resolve these matters could be
materially more or less than the total amount we have accrued
for this purpose. In addition, these agencies and other
governmental agencies that might be investigating or might
commence

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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. Except to the
limited extent reflected by the accrual for estimated settlement
costs, 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.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 which is located in Bristol,
Tennessee. An interruption in operations at this facility 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. 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.



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

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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.



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

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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 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.

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| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | 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 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 now 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 could 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 7.9% of gross
sales for the last twelve months ended June 30, 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

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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 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®. 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.

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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 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

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

Product Competition.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 a
very competitive and highly genericized market with other
cardiovascular therapies.

Our product Levoxyl® competes in a
competitive and highly genericized market with other
levothyroxine sodium products.

Our product Skelaxin® competes in a highly
genericized market with other muscle relaxants.

Our product Sonata® competes with other
insomnia treatments, including in particular Ambien®, a
product of Sanofi-Synthelabo Inc. Additionally, other potential
competitive insomnia products are in development and could enter
the market as early as 2004 and over the next couple of years.

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 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.

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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, a new inhaler for Intal® using the
    alternative propellant HFA and an Altace®-chlorthalidone
    combination product;                                                                                                                                                              
|
| |  | 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
    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.

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As of June 30, 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
June 30, 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 Control. 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 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |      |  |  |   |  |                                                                                                                                                                            
| | ---- |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  |  |  | Certification of Brian A. Markison, President and
    Chief Executive Officer of King Pharmaceuticals, Inc. Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002. 
| | 31.2 |  |  |  |  | Certification of 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 Brian A. Markison, President and
    Chief Executive Officer of King Pharmaceuticals, Inc., Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.
| | 32.2 |  |  |  |  | Certification of 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 June 30, 2004:

(1) On May 6, 2004, a Current Report on
Form 8-K furnished under Item 12 a press release announcing
our first quarter 2004 financial results.

67



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##### Table of Contents






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: August 9, 2004

| |     |                      
| | --- | ---------------------
| | By: | /s/ BRIAN A. MARKISON

| |                                          
| | -----------------------------------------
| |                                          
| | Brian A. Markison                        
| | President and Chief Executive
    Officer

Date: August 9, 2004

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

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

68