KING PHARMACEUTICALS INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-24425

KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(Address of Principal Executive Offices) (Zip Code)

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

Securities registered under Section 12(b) of the Exchange Act:

Securities registered under Section 12(g) of the Exchange Act:
NONE

Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. [X]

The aggregated market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity as of
June 30, 2003 was $3,143,503,811.

The number of shares of Common Stock, no par value, outstanding at July 24,
2003 was 241,036,135.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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EXPLANATORY NOTE

This annual report on Form 10-K for the year ended December 31, 2002,
contains the audited consolidated financial statements of King Pharmaceuticals,
Inc. for the year ended December 31, 2002.

On March 31, 2003, we filed a notification of late filing on Form 12b-25,
disclosing that we were delaying the filing of our annual report on Form 10-K
and the issuance of audited consolidated financial statements for the year ended
December 31, 2002 pending completion of an internal review by the Audit
Committee of our Board of Directors of the issues raised by an ongoing SEC
investigation. On April 15, 2003, we filed a Form 8-K containing unaudited
consolidated financial statements for the year ended December 31, 2002. In the
April 15 Form 8-K, we disclosed that our audited consolidated financial
statements for the year ended December 31, 2002, once issued, might contain
material changes from the unaudited consolidated financial statements contained
in that Form 8-K. The Audit Committee completed the internal review on July 28,
2003, enabling us to prepare our audited consolidated financial statements for
the year ended December 31, 2002 and to file this annual report on Form 10-K.

The audited consolidated financial statements contained in this annual
report on Form 10-K reflect three adjustments arising from the internal review
or otherwise based on information that became available subsequent to the
release of the unaudited consolidated financial statements contained in the
April 15 Form 8-K. These are

(1) a $46.5 million adjustment to our accrual for estimated amounts due
under Medicaid and other governmental pricing programs,

(2) an additional $39.8 million charge relating to Lorabid(R), consisting
of a $49.9 million accrual for Lorabid(R) purchase commitments in excess of
expected demand and a $10.0 million reduction (from $76.8 million to $66.8
million) in the previously announced Lorabid(R) intangible asset impairment
charge, and

(3) a deferral of $4.7 million of revenue associated with a purchase of our
products by the King Benevolent Fund, Inc.

The audited consolidated financial statements contained in this annual
report supersede the unaudited consolidated financial statements contained in
the April 15 Form 8-K. You should no longer rely on the unaudited consolidated
financial statements contained in the April 15 Form 8-K.

For additional information on these adjustments, please see the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments" in this Form 10-K
and Notes 2 and 8 to the audited consolidated financial statements included in
this Form 10-K.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

King Pharmaceuticals, Inc. was incorporated in the State of Tennessee in
1993. Our principal executive offices are located at 501 Fifth Street, Bristol,
Tennessee 37620. Our telephone number is (423) 989-8000 and our facsimile number
is (423) 274-8677. Our website is www.kingpharm.com. We have, since November 15,
2002, made available through our website our annual reports on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments as soon as reasonably practical. Our wholly-owned subsidiaries are
Monarch Pharmaceuticals, Inc.; Jones Pharma Incorporated; Meridian Medical
Technologies, Inc.; Parkedale Pharmaceuticals, Inc.; King Pharmaceuticals
Research and Development, Inc.; King Pharmaceuticals of Nevada, Inc.; and
Monarch Pharmaceuticals Ireland Limited.

King is a vertically integrated pharmaceutical company that develops
manufactures, markets and sells branded prescription pharmaceutical products. By
"vertically integrated," we mean that we have the capabilities of a major
pharmaceutical company, including

- sales and marketing,

- manufacturing,

- packaging,

- distribution,

- quality control and assurance,

- regulatory affairs, and

- research and development.

Through a national sales force of approximately 1,200 individuals and
marketing alliances, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, obstetrician/gynecologists, and hospitals across the United
States and in Puerto Rico.

Our business strategy includes the acquisition of branded pharmaceutical
products and increasing their sales through focused marketing and promotion and
product life cycle management. By "product life cycle management," we mean the
extension of the life of a product, including seeking and gaining all necessary
related governmental approvals, by such means as:

- securing U.S. Food and Drug Administration, or the "FDA," approved new
label indications,

- developing and producing different strengths,

- producing different package sizes,

- developing new dosages, and

- developing new product formulations.

We acquire branded products primarily from larger pharmaceutical companies.
These companies sell products for various reasons including limiting their costs
or eliminating duplicate products.

Our business strategy also includes the development of new branded
prescription pharmaceutical products, including new chemical entities, as well
as the acquisition of compounds already in development, that provide us with
strategic pipeline product opportunities.

We also seek attractive company acquisitions which add products or products
in development, technologies or sales and marketing capabilities to our key
therapeutic areas or that otherwise complement our operations.

1

Unlike many of our competitors, we have a broad therapeutic focus that
provides us with opportunities to purchase a wide variety of products. In
addition, we have well known products in all of our therapeutic categories that
generate high prescription volumes. Our branded pharmaceutical products can be
divided primarily into the following therapeutic areas:

- cardiovascular (including Altace(R), Corzide(R), Procanbid(R) and
Thalitone(R)),

- endocrinology/women's health (including Levoxyl(R), Cytomel(R),
Triostat(R), Prefest(R), Menest(R), Delestrogen(R) and Nordette(R)),

- orthopedic (Skelaxin(R)),

- critical care (including Thrombin-JMI(R), Brevital(R) and Synercid(R)),

- neurology/central nervous system (Sonata(R)),

- anti-infectives (including Bicillin(R), Cortisporin(R), Neosporin(R), and
Coly-Mycin M(R)),

- respiratory (including Intal(R) and Tilade(R)), and

- biodefense (Atropen(R) and ComboPen(R)).

We acquired from Glaxo Wellcome, Inc., predecessor to GlaxoSmithKline plc,
for $54.0 million, including $3.1 million of assumed liabilities, all rights to
the Cortisporin(R) product line in March 1997; the Viroptic(R) product line in
May 1997; and six additional branded products, including Septra(R), and
exclusive licenses, free of royalty obligations, for the prescription
formulations of Neosporin(R) and Polysporin(R) in November 1997.

In February 1998, we acquired from Warner-Lambert Company (predecessor to
Pfizer, Inc.), 15 branded pharmaceutical products, the Parkedale facility
located in Rochester, Michigan and some manufacturing contracts for third
parties for $127.9 million, including $2.9 million of assumed liabilities.

In December 1998, we acquired from Hoechst Marion Roussel, Inc.
(predecessor to Aventis Pharmaceuticals, Inc.), for $362.5 million, the United
States and Puerto Rico rights to Altace(R) and two other small branded
pharmaceutical products. Altace(R) is an Angiotensin Converting Enzyme
inhibitor, which we refer to in this report as an "ACE" inhibitor. We refer to
this acquisition in this report as the "Altace Acquisition." We are currently
manufacturing and packaging Altace(R) in our facility in Bristol, Tennessee.
Aventis also remains a supplier of Altace(R). Altace(R) has United States
patents listed in the FDA's Approved Drug Products with Therapeutic Equivalence
Evaluations, which is known as the "Orange Books" that expire in January 2005,
October 2008 and April 2012. On October 4, 2000, the FDA approved the new
indications for Altace(R) requested under a supplemental New Drug Application.
In this report we refer to a supplemental New Drug Application as an "sNDA." In
addition to the treatment of hypertension, this approval permits the promotion
of Altace(R) to reduce the risk of stroke, myocardial infarction (heart attack)
and death from cardiovascular causes in patients 55 and over either with a
history of coronary artery disease, stroke or peripheral vascular disease or
with diabetes and one other cardiovascular risk factor (hypertension, elevated
total cholesterol levels, low HDL levels, cigarette smoking or documented
microalbuminuria). Altace(R) is also indicated in stable patients who have
demonstrated clinical signs of congestive heart failure after sustaining acute
myocardial infarction. Altace(R) is marketed by our subsidiary Monarch
Pharmaceuticals, Inc. and by Wyeth pursuant to the Co-Promotion Agreement we
entered into in June 2000 described below.

In August 1999, we acquired the antibiotic Lorabid(R) in the United States
and Puerto Rico from Eli Lilly and Company for $91.7 million, including
acquisition costs plus sales performance milestones that could bring the total
value of the transaction to $158.0 million. As of December 31, 2002, no
milestone payments had been made. We have a supply agreement with Eli Lilly
under which we remain obligated to purchase minimum levels of inventory of
Lorabid(R) through August 2006. During the fourth quarter of 2002, we decided to
divest our rights to Lorabid(R) and reviewed the related intangible assets for
impairment. Prior to that, we considered our supply agreement with Eli Lilly and
the need to evaluate it for the effects of potential excess purchase
commitments. Based on changes in estimated prescription
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trends, we believe the minimum purchase commitments under the supply agreement
are greater than inventory quantities which we will be able to sell to our
customers. As a result, we have recorded a $49.9 million charge related to the
liability associated with the amount of the purchase commitments in excess of
expected demand. Based on our review for impairment of intangible assets, as
updated for management's cash flow expectations for Lorabid(R) as of July 2003,
we determined that the Lorabid(R) intangible assets were impaired and recorded
an impairment charge of $66.8 million. Additionally, we donated $15.2 million of
Lorabid(R) inventory to the King Benevolent Fund, Inc. as a result of the
decision to divest our rights to Lorabid(R).

On February 25, 2000, we acquired Medco Research, Inc. in an all stock
transaction accounted for as a pooling of interests valued at approximately
$366.0 million. We exchanged approximately 14.4 million shares of King common
stock for all of the outstanding shares of Medco. Each share of Medco was
exchanged for 1.3514 shares (post subsequent stock splits) of King common stock.
In addition, outstanding Medco stock options were converted at the same exchange
ratio to purchase approximately 1.4 million shares (post subsequent stock
splits) of King common stock. Medco is now one of our wholly owned subsidiaries
and, effective November 1, 2000, was renamed "King Pharmaceuticals Research and
Development, Inc." Through King Research and Development, we are engaged in
product life cycle management to develop new indications and line extensions for
existing and acquired products and working to improve the quality and efficiency
of our manufacturing processes. Additionally, we are engaged in the research and
development of chemical compounds, including new chemical entities, which
provide us with strategic pipeline opportunities that may lead to the
commercialization of new branded prescription pharmaceutical products.

On June 23, 2000, we entered into a marketing alliance with Wyeth to market
Altace(R) in the United States and Puerto Rico. We refer to this agreement in
this report as the "Co-Promotion Agreement." Subject to the terms of the
Co-Promotion Agreement, we pay Wyeth a quarterly fee based on a percentage of
net sales in exchange for its marketing efforts. Wyeth purchased $75.0 million
of our common stock and paid us $25.0 million in cash upon execution of the
Co-Promotion Agreement. Wyeth paid us an additional $50.0 million in November
2000 as a result of the FDA's final approval on October 4, 2000 of new
indications for Altace(R).

On August 31, 2000, we acquired Jones Pharma Incorporated in an all stock
transaction accounted for as a pooling of interests valued at approximately $2.4
billion. We exchanged approximately 98.4 million shares (post subsequent stock
splits) of King common stock for all of the outstanding shares of Jones. Each
share of Jones was exchanged for 1.5 shares (post subsequent stock splits) of
King common stock. In addition, outstanding Jones stock options were converted
at the same exchange ratio to purchase approximately 5.4 million shares (post
subsequent stock splits) of King common stock. Jones is now one of our
wholly-owned subsidiaries.

On January 8, 2001, we entered into a license agreement with Novavax to
promote, market, distribute and sell Estrasorb(TM), Androsorb(TM) and some other
women's health products which may be developed by Novavax, Inc. Under the terms
of this agreement, as amended by our subsequent agreements with Novavax on June
29, 2001, we have an exclusive license with Novavax to promote, market,
distribute and sell, following approval, these products worldwide, except for
the United States and Puerto Rico, where, under a separate agreement, we will
co-market them with Novavax. During the term of the license, we will pay Novavax
a reasonable royalty on net sales of these products in all territories except
the United States and Puerto Rico. Novavax will pay us an amount equal to 50% of
the net sales derived from the sale of these products in the United States and
Puerto Rico. We will share equally with Novavax approved marketing expenses
related to the promotion of these products in the United States and Puerto Rico,
Estrasorb(TM) is a topical estrogen replacement therapy which employs Novavax's
proprietary micellar nanoparticle technology designed to deliver
17-betaestradiol, a naturally occurring hormone, through the skin when applied
in the form of a lotion. Androsorb(TM) is a topical testosterone replacement
therapy for testosterone deficient women.

3

On May 25, 2001, the FDA approved our previously filed New Drug
Application, which we refer to as an "NDA," for Levoxyl(R), our levothyroxine
sodium drug product. We had filed this application as a result of the FDA's
August 14, 1997 announcement 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 Food, Drug and Cosmetic 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 August 8, 2001, we acquired certain rights to three branded
pharmaceutical products and a license to a fourth product from Bristol-Myers
Squibb Company for $285.0 million plus approximately $1.5 million of expenses.
The product rights acquired include Bristol-Myers Squibb's rights in the United
States to Corzide(R), Delestrogen(R) and Florinef(R). We also acquired a fully
paid license to Corgard(R) in the United States. Corzide(R), a combination beta
blocker and thiazide diuretic, is indicated for the management of hypertension.
Corgard(R), a beta blocker, is indicated also for the management of
hypertension, as well as long-term management of patients with angina pectoris.
Delestrogen(R) is an injectable estrogen replacement therapy. Florinef(R) is a
partial replacement therapy for primary and secondary adrenocortical
insufficiency in Addison's disease and for the treatment of salt-losing
adrenogenital syndrome. For information regarding charges related to
Florinef(R), please see the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.

On December 13, 2001, the FDA approved our NDA for Tigan(R) 300mg capsules.
Tigan(R) is indicated for the treatment of post-operative nausea and vomiting
and for nausea associated with gastroenteritis.

On May 29, 2002, we acquired all rights to Ortho-Prefest(R), a branded
pharmaceutical product, from Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson subsidiary, for $108.0 million, plus approximately $3.3 million of
expenses. During February 2003, we paid Ortho-McNeil an additional $7.0 million
upon receipt of the FDA's approval to rename the product "Prefest." Prefest(R)
is a differentiated combination hormone replacement therapy with an intermittent
progestin administration, together with a continuous administration of estrogen,
that complements and expands our women's health portfolio.

On October 8, 2002, we acquired an exclusive license from BeartownPharma,
Inc. to manufacture, promote, market, distribute and sell Tetrac, currently in
development, as a compound for the suppression of pituitary secretion of thyroid
stimulating hormone in the United States, its territories and possessions,
Canada, Mexico, and all countries in Central America and South America for
approximately $1.0 million and potential milestone payments of up to $9.0
million. We will pay Beartown during the term of the license a reasonable
royalty on net sales in each country in the territory covered by the license.

On December 30, 2002, we licensed or acquired the rights to three branded
pharmaceutical products from Aventis for the initial cash payment of $197.5
million, plus $4.3 million of expenses. The products acquired include all rights
in the United States, Puerto Rico, and Canada to Intal(R) and Tilade(R), inhaled
anti-inflammatory agents for the management of asthma, and worldwide rights,
excluding Japan, to Synercid(R), an injectable antibiotic indicated for
treatment of vancomycin-resistant enterococcus faecium and treatment of some
complicated skin and skin structure infections. As additional consideration for
Synercid(R), we have agreed to potential milestone payments to Aventis totaling
$75.1 million.

On January 8, 2003, we acquired Meridian Medical Technologies, Inc. for
$246.8 million in cash paid to its shareholders in exchange for their shares of
Meridian common stock. Meridian pioneered the development, and is the leading
manufacturer, of auto-injectors for the self-administration of injectable drugs.
An auto-injector is a pre-filled, pen-like device that allows a patient or
caregiver to automatically inject a precise drug dosage quickly, easily, safely
and reliably. Meridian's pharmaceutical products include EpiPen(R), an
auto-injector filled with epinephrine for the emergency treatment of anaphylaxis
resulting from severe or allergic reactions to insect stings or bites, foods,
drugs and other allergens, as well as idiopathic or exercise induced
anaphylaxis. Meridian manufactures EpiPen(R) under a supply agreement with Dey,
L.P., which markets the products. Other products include a nerve gas antidote
utilizing Meridian's

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patented dual chambered auto-injector and injection process, and auto-injectors
filled with morphine for pain management and diazepam for treatment of seizures.

On June 12, 2003, we acquired the primary care business of Elan
Corporation, plc and of some of its subsidiaries in the United States and Puerto
Rico, which includes the rights to two branded prescription pharmaceutical
products, including rights to potential new formulations, of Sonata(R) and
Skelaxin(R), together with Elan's United States primary care field sales force.
Product rights subject to the agreement include those related to Sonata(R), a
nonbenzodiazepine treatment for insomnia, and Skelaxin(R), a muscle relaxant, in
the United States, its territories and possessions, and Puerto Rico. Under the
terms of the agreement, Elan's sale of Skelaxin(R) included related NDAs,
copyrights, trademarks, patents and U.S. rights to potential new formulations of
Skelaxin(R). Elan's sale of Sonata(R) included its rights to the product, as
well as certain related copyrights. We also acquired certain intellectual
property, regulatory, and other assets relating to Sonata(R) directly from
Wyeth. Under the terms of the agreement, we secured an exclusive license to the
intellectual property rights, in this territory, of both Wyeth and Elan to the
extent they relate to new formulations of Sonata(R), other than for use in
animals. We paid approximately $750.0 million at closing. The $750.0 million
purchase price included the transfer of inventory with a value of approximately
$40.0 million. We also

- will pay royalties on the current formulation of Skelaxin(R) from the
date of closing and up to $71.0 million if Elan achieves certain
milestones in connection with the development of a reformulated version
of Sonata(R);

- have a potential milestone payment of $15.0 million if annual net sales
of a reformulation version of Sonata(R) exceed $100.0 million; and

- will pay an additional $25.0 million milestone payment to Elan relating
to the ongoing exclusivity of Skelaxin(R) on January 2, 2004.

Prior to the closing of this transaction, we had received a letter on March 13,
2003 from the Federal Trade Commission, which we refer to as the "FTC," stating
that it was conducting an investigation to determine whether any person has
engaged in unfair methods of competition with respect to Elan's product
Skelaxin(R). The focus of this investigation was Elan's listing in the FDA's
Orange Book of at least one patent claiming a method of using metaxalone, and
other actions with regard to FDA regulatory processes. As a result of this new
information, we commenced an investigation and asked Elan to provide additional
information. On March 17, 2003, Elan filed a lawsuit in the Supreme Court of the
State of New York seeking to compel us to close the transaction. On May 8, 2003,
the FTC advised Elan that it was discontinuing a portion of its investigation
with respect to this method of use patent. On May 20, 2003, we reached an
agreement with Elan that restructured the terms of the transaction as described
above, and, as a result, the litigation has since been dismissed.

On April 29, 2003, we received the first patent on our FDA-approved
Levoxyl(R), U.S. Patent No. 6,555,581, a utility patent with composition of
matter claims. We have submitted in excess of 40 patent applications relating to
our novel quick-dissolving formulation of Levoxyl(R).

On June 19, 2003, we received FDA approval of our sNDA covering pediatric
and adult formulations of our nerve gas antidote AtroPen(R). This is the first
time that pediatric formulations of this homeland security product have been
approved for use in the United States. AtroPen(R) utilizes the auto-injector
technology we acquired in our January 2003 acquisition of Meridian. We do not
anticipate being able to distribute pediatric formulations of this product
before the first quarter of 2004.

We manufacture pharmaceutical products under contracts with a variety of
pharmaceutical and biotechnology companies. We intend to enter into additional
manufacturing contracts in cases where we identify contracts that offer
significant volumes and attractive revenues. We have not accepted or renewed
manufacturing contracts for third parties where we perceived insignificant
volumes or revenues.

5

The following summarizes net revenues by operating segment (in thousands).

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(1) We acquired licenses for the exclusive rights in the United States under
various patents to the active ingredient in Altace(R).
(2) We acquired the trademark and patents for Thalitone(R) from Boehringer
Ingelheim Pharmaceuticals, Inc.
(3) We acquired a fully paid license to Corgard(R) in the United States.
(4) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of Neosporin(R) and Polysporin(R).

Net sales of many of our branded prescription products for the year ended
December 31, 2002 are set forth in the table below. Products in our other
therapeutic categories, orthopedic, neurology/central nervous system and
biodefense, are not included in the table below as they were acquired on
December 30, 2002 or thereafter.

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(1) Includes net sales for Prefest(R) following its acquisition on May 28, 2002.

Net sales in the table above reflect (a) a $22.1 million charge for
corrections of immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years 1998 to 2001, (b)
a $12.4 million charge for corrections of immaterial errors related to
underpayments of amounts due under Medicaid and other governmental pricing
programs related to 2002 and recorded in the fourth quarter of 2002, and (c) a
$12.0 million charge arising from changes in accounting estimates related to
Medicaid and other governmental pricing programs. For additional information,
see the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" section under the heading "Recent Developments" and Note 2 to our
audited consolidated financial statements.

ROYALTIES

We have successfully developed two currently marketed adenosine-based
products, Adenocard(R) and Adenoscan(R), for which we receive royalty revenues.
Revenues from royalties increased 24.8% to $58.4 million in 2002 from $46.8
million in 2001. Fujisawa Healthcare, Inc. is the source of substantially all of
our royalty revenues. For additional information on our royalty agreements, see
the "Intellectual Property" section.

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CONTRACT MANUFACTURING

We utilize our excess manufacturing capacity to provide third-party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Dey, L.P., Pfizer,
Centocor, Inc., Santen Incorporated and Hoffman-LaRoche Inc. Many of the
products that we contract manufacture are difficult to manufacture and,
therefore, do not attract significant competition. Contract manufacturing as a
percentage of sales has declined from 85% in 1994 to 3% for the year ended
December 31, 2002 as we have acquired and increased the sales of branded
pharmaceutical products. We believe contract manufacturing provides the
following benefits:

- a stable, recurring source of cash flows;

- a means of absorbing overhead costs and, as such, is an efficient
utilization of excess capacity; and

- experience in manufacturing a broad line of formulations, which is
advantageous to us in pursuing and integrating acquired products.

We also manufacture the EpiPen(R) auto-injector, a product we acquired in
our acquisition of Meridian, pursuant to a supply agreement with Dey, L.P. which
markets the product.

SALES AND MARKETING

We have a national sales force of approximately 1,200 individuals, which
includes the primary care sales force of approximately 350 individuals which we
acquired as part of our acquisition of Elan's primary care business. We
distribute our branded pharmaceutical products primarily through wholesale
pharmaceutical distributors. These products are ordinarily dispensed to the
public through pharmacies by prescription. Our marketing and sales promotions
for branded pharmaceutical products, principally target general/family
practitioners, internal medicine physicians, cardiologists, endocrinologists,
obstetrician/gynecologists and hospitals through detailing and sampling to
encourage physicians to prescribe more of our products. The sales force is
supported and supplemented by co-promotion arrangements, telemarketing and
direct mail, as well as through advertising in trade publications and
representation at regional and national medical conventions. Our telemarketing
and direct mailing efforts are performed primarily by using a computer sampling
system, which we developed to distribute samples to physicians. We identify and
target physicians through data available from IMS America, Ltd. and Scott-Levin,
suppliers of prescriber prescription data. We intend to seek new markets in
which to promote our product lines and will continue expansion of our field
sales force as product growth, product acquisitions or product approvals
warrant. We seek new international markets for product lines for which we have
international rights. The marketing and distribution of these products in
foreign countries generally require the prior registration of the products in
those countries. We generally seek to enter into distribution agreements with
companies with established marketing and distribution capabilities to distribute
the products in foreign countries since we do not have a distribution mechanism
in place for distribution outside the United States and Puerto Rico.

Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation, which has increased our, and other industry participants',
customer concentration. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 2002, approximately 78.4% of our sales were attributable to
three wholesalers: Cardinal/Bindley (32.9%) and Amerisource/Bergen (24.0%) and
McKesson Corporation (21.5%).

MANUFACTURING

Our manufacturing facilities are located in Bristol, Tennessee; Rochester,
Michigan; Middleton, Wisconsin; St. Petersburg, Florida; and St. Louis,
Missouri. These facilities have manufacturing, packaging, laboratory, office and
warehouse space. We are licensed by the Drug Enforcement Agency, known as the
"DEA," to procure and produce controlled substances. We manufacture certain of
our own

14

branded pharmaceutical products, as well as products owned by other
pharmaceutical companies under manufacture and supply contracts.

We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently a portion of our
product lines, including Altace(R), Skelaxin(R), Sonata(R), Bicillin(R),
Prefest(R), Delestrogen(R), Corgard(R), Intal(R), Tilade(R), Synercid(R) and
Cortisporin(R) are manufactured for us by third parties. As of December 31,
2002, capacity utilization was approximately 70% at the Bristol facility,
approximately 25% at the Parkedale facility located in Rochester, Michigan,
approximately 95% at the Middleton facility, approximately 85% at the St.
Petersburg facility and approximately 30% at the St. Louis, Missouri facility.
With the exception of the Middleton and St. Petersburg facilities, we believe
our facilities provide us with substantial manufacturing capacity for future
growth. Thrombin-JMI(R) is the only product we manufacture at our Middleton
facility. We are currently working on long-term strategies to expand our
capacity for Thrombin-JMI(R), which should potentially be completed in the next
two to three years. These long-term strategies may further expand our
manufacturing capacity for Thrombin-JMI(R) upon completion. We intend to
transfer, when advantageous, production of acquired branded pharmaceutical
products and their product line extensions to our manufacturing facilities as
soon as practicable after regulatory requirements and contract manufacturing
requirements are satisfied. We manufacture and distribute the finished dosage
form of our largest product, Altace(R), at our Bristol facility.

In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and logistics. These support systems enable us to maintain high
standards of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies that do not
have such support systems in-house must outsource these services.

We require a supply of quality raw materials and components to manufacture
and package drug products for us and for third parties with which we have
contracted. Generally we have not had difficulty obtaining raw materials and
components from suppliers in the past. Currently, we rely on more than 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe we will be unable to procure adequate supplies of raw
materials and components on a timely basis.

RESEARCH AND DEVELOPMENT

With our acquisition of Medco Research on February 25, 2000, which we have
since renamed "King Pharmaceuticals Research and Development," King established
the foundation for our research and development capability. Today, King Research
and Development's activities are responsible for the discovery and development
of chemical compounds, including new chemical entities, which provide us with
strategic pipeline opportunities for the commercialization of new branded
prescription pharmaceutical products. In addition to discovering and developing
new chemical compounds, we pursue means of enhancing the value of existing
products through new uses and formulations that may provide additional benefits
to patients, and improvements in the quality and efficiency of our manufacturing
processes.

We invest in research and development because we believe it is important to
our long-term growth. We presently employ approximately 50 people in research
and development, which include pre-clinical and toxicology experts, medical
affairs personnel, statisticians and project managers. Our research and
development expenses were $24.8 million in 2000, $26.5 million in 2001 and $40.2
million in 2002.

In the conduct of our research and development, we utilize a project
management model that provides us with substantial flexibility, with a goal of
maximizing efficiency and minimizing internal fixed costs. Utilizing this model,
we supplement our internal efforts by collaborating with independent research
organizations, including educational institutions and research-based
pharmaceutical and biotechnology companies, and contracting with others for the
performance of research in their facilities. We use the services of physicians,
hospitals, medical schools and other research organizations worldwide to conduct
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clinical trials to establish the safety and effectiveness of new products. We
seek out investments in external research and technologies that hold the promise
to complement and strengthen our own research efforts. These investments can
take many forms, including in-licensing arrangements, co-development and co-
marketing agreements, joint ventures, and the acquisition of products in
development.

Drug development is time-consuming, expensive and risky. On average, only a
small percentage of chemical compounds discovered by researchers proves to be
both medically effective and safe enough to become an approved medicine. The
process from discovery to regulatory approval typically takes 10 to 15 years or
longer. Drug candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive regulatory approval.
Potential products of ours which currently have applications under review by the
FDA are:

- Estrasorb(TM), a topical estrogen replacement therapy in a unique lotion
formulation;

- a new Intal(R) inhaler formulation utilizing hydrofluoroalkane, which we
call "HFA," an environmentally friendly propellant;

- and our diazepam-filled auto-injector, which is an adjunctive injectable
therapy for the emergency treatment of status epilepticus and severe
recurrent convulsive seizures associated with epilepsy.

Other pipeline products of ours in various stages of development include
binodenoson, our next generation cardiac pharmacologic stress-imaging agent and
a modified-release formulation of Altace(R) utilizing SkyePharma's patented oral
drug delivery technology Geomatrix(R). We are also investigating new uses,
formulations and manufacturing processes for several of our currently marketed
products, such as Levoxyl(R), Thrombin-JMI(R) and Tigan(R).

GOVERNMENT REGULATION

Our business and our products are subject to extensive and rigorous
regulation at both the federal and state levels. Most importantly, nearly all of
our products are subject to pre-market approval requirements. New drugs are
approved under, and are subject to, the Federal Food, Drug and Cosmetic Act,
known as the "FDC Act," and related regulations. Biological drugs are subject to
both the FDC Act and the Public Health Service Act, known as the "PHS Act," and
related regulations. Biological drugs are licensed under the PHS Act.

At the federal level, we are principally regulated by the FDA as well as by
the DEA, the Consumer Product Safety Commission, the FTC, the U.S. Department of
Agriculture, the Occupation Safety and Health Administration, and the U.S.
Environmental Protection Agency, known as the "EPA." The FDC Act, the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the development, testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our products and those manufactured by and for third parties.
Product development and approval within this regulatory framework requires a
number of years and involves the expenditure of substantial resources.

When we acquire the right to market an existing approved pharmaceutical
product, both we and the former application holder are required to submit
certain information to the FDA. This information, if adequate, results in the
transfer to us of marketing rights to the pharmaceutical products. We are also
required to advise the FDA about any changes in certain conditions in the
approved application as set forth in the FDA's regulations. Our business
strategy includes acquiring branded pharmaceutical products and transferring,
when advantageous, their manufacture to our manufacturing facilities as soon as
practicable after regulatory requirements are satisfied. In order to transfer
manufacturing of the acquired branded products, we must demonstrate, by filing
information with the FDA, that we can manufacture the product in accordance with
current Good Manufacturing Practices, which we refer to in this report as
"cGMPs," and the specifications and conditions of the approved marketing
application. For changes requiring prior approval, there can be no assurance
that the FDA will grant such approval in a timely manner, if at all.

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The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the use of products must be reported to the
FDA and could result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.

The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties. Such a restriction or prohibition on
sales or withdrawal of approval of products marketed by us could materially
adversely affect our business, financial condition and results of operations.

Marketing authority for our products is subject to revocation by the
applicable governmental agencies. In addition, modifications or enhancements of
approved products or changes in manufacturing locations are in many
circumstances subject to additional FDA approvals, which may or may not be
received and which may be subject to a lengthy application process. Our
manufacturing facilities are continually subject to inspection by such
governmental agencies, and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.

We also manufacture and sell pharmaceutical products which are "controlled
substances" as defined in the Controlled Substances Act and related federal and
state laws, which establish certain security, licensing, record keeping,
reporting and personnel requirements administered by the DEA, a division of the
Department of Justice, and state authorities. The DEA has a dual mission of law
enforcement and regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw materials used in
making them. The DEA shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice. The DEA's
regulatory responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled substances, the
substances themselves and the equipment and raw materials used in their
manufacture and packaging in order to prevent such articles from being diverted
into illicit channels of commerce. We maintain appropriate licenses and
certificates with the applicable state authorities in order to engage in
pharmaceutical development, manufacturing and distribution of pharmaceutical
products containing controlled substances. We are licensed by the DEA to
manufacture and distribute certain pharmaceutical products containing controlled
substances.

The distribution of pharmaceutical products is subject to the Prescription
Drug Marketing Act, known as "PDMA," as part of the FDC Act, which regulates
such activities at both the federal and state level. Under the PDMA and its
implementing regulations, states are permitted to require registration of
manufacturers and distributors who provide pharmaceuticals even if such
manufacturers or distributors have no place of business within the state. States
are also permitted to adopt regulations limiting the distribution of product
samples to licensed practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product handling and
facility storage and security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.

Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of
Parkedale in February 1998, it was one of six Pfizer facilities subject to a
consent decree issued by the U.S. District Court of New Jersey in August 1993.
We plan to petition for relief from the consent decree with respect to the
Parkedale facility when appropriate.

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The Parkedale facility was inspected by the FDA in March 2003. During this
inspection, the FDA made cGMP observations in a written report provided to us.
This written report is known as an "FDA Form 483" or simply as a "483." The
observations in a 483 are reported to the manufacturer in order to assist the
manufacturer in complying with the FDC Act and the regulations enforced by the
FDA. Often a pharmaceutical manufacturer receives a 483 after an inspection.
While no law or regulation requires us to respond to a 483, we provided the FDA
with a written response to the 483 related to the March 2003 inspection of the
Parkedale facility, including action plans to address the observations. The 483
from March 2003 does not require us to delay or discontinue the production of
any products made at the Parkedale facility.

We cannot determine what effect changes in regulations or statutes or legal
interpretation, when and if promulgated or enacted, may have on our business in
the future. Changes could, among other things, require changes to manufacturing
methods, expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or 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 and results of operations.

ENVIRONMENTAL MATTERS

Our operations are subject to numerous and increasingly stringent federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for some of
our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future compliance with current environmental law will
have a material adverse effect on our business, financial condition or results
of operations. Our environmental capital expenditures and costs for
environmental compliance may increase in the future as a result of changes in
environmental laws and regulations or as a result of increased manufacturing
activities at any of our facilities.

Under the Comprehensive Environmental Response, Compensation, and Liability
Act, known as "CERCLA," the EPA can impose liability for the entire cost of
cleanup of contaminated properties upon each or any of the current and former
site owners, site operators or parties who sent waste to the site, regardless of
fault or the legality of the original disposal activity. In addition, many
states, including Tennessee, Michigan, Wisconsin, Florida and Missouri have
statutes and regulatory authorities similar to CERCLA and to the EPA. We have
entered into hazardous waste hauling agreements with licensed third parties to
properly dispose of hazardous wastes. We cannot assure you that we will not be
found liable under CERCLA or other applicable state statutes or regulations for
the costs of undertaking a clean up at a site to which our wastes were
transported.

COMPETITION

General

We compete with other pharmaceutical companies for products and product
line acquisitions. Competitors include Biovail Corporation, Forest Laboratories,
Inc., Galen Holdings, plc, Shire Pharmaceuticals Group plc, Medicis
Pharmaceutical Corporation, Watson Pharmaceuticals, Inc., and other companies
which also acquire branded pharmaceutical products and product lines from other
pharmaceutical companies. Additionally, since our products are generally
established and commonly sold, they are subject to competition from products
with similar qualities. Our branded pharmaceutical products may be subject to
competition from alternate therapies during the period of patent protection and
thereafter from generic equivalents. 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. These include
the establishment of a strong brand image with the

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prescriber or the consumer, supported by the development of a broader range of
alternative formulations than the manufacturers of generic products typically
supply.

Generic Substitutes

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 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. 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 products with patent protection, challenging
bioequivalence or complex manufacturing requirements, we are better able to
maintain market share and produce sustainable, high margins and cash flows.

Due to recent regulatory changes effective August 18, 2003, the FDA may
approve generic substitutes of our 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
abbreviated new drug application, which we refer to as 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 from approving the ANDA for 30
months unless specific events occurred sooner. To avoid multiple 30-month stays
for the same branded drug, the FDA's new regulations now only require one such
notice. Under the new regulations, if an ANDA applicant had already provided
patent invalidity or non-infringement notice to us about a particular branded
drug, we will not get a second notice or opportunity for another stay for that
drug. As a result generic substitutes of our branded pharmaceutical products
could be approved sooner.

The FDA's new regulations also significantly change 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 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.

INTELLECTUAL PROPERTY

Patents, Licenses and Proprietary Rights

We consider the protection of discoveries in connection with our
development activities important to our business. The patent positions of
pharmaceutical firms, including ours, are uncertain and involve legal and
factual questions, which can be difficult to resolve. We intend to seek patent
protection in the United States and selected foreign countries where and when
deemed appropriate.

In connection with the Altace(R) product line, we acquired a license for
the exclusive rights in the United States and Puerto Rico to various Aventis
patents, including the rights to the active ingredients in Altace(R) having
patents listed in the FDA Orange Book that expire in January 2005, October 2008
and April 2012. Our rights include the use of the active ingredients in
Altace(R) generally in combination as human therapeutic or human diagnostic
products in the United States. For a discussion of a challenge to our patent by
a generic drug manufacturer, please see the section entitled "Risk Factors -- If
we cannot successfully enforce our rights under the patents relating to three of
our largest products, Altace(R), Levoxyl(R) and Skelaxin(R), against generic
drug manufacturers, our results of operations could be materially adversely
affected." We also own U.S. patents listed in the FDA's Orange Book that expire
in August 2014 for Procanbid(R). Additionally, we own a U.S. patent for
Thalitone(R), which is listed in the FDA's Orange Book and expires in June 2007.

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In connection with the acquisition of Lorabid(R), we acquired, among other
things, all of Eli Lilly's rights in approximately 30 patents and received a
broad royalty-free non-exclusive license in the United States and Puerto Rico to
12 other patents and associated technology. We also received an exclusive
sublicense to four other patents for which we must pay a royalty to Eli Lilly if
certain sales thresholds are met. Lorabid(R) has patent protection through 2005.

We have exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R) and a license expiring February
2038 for the prescription formulation of Anusol-HC(R). These licenses are
subject to early termination in the event we fail to meet specified quality
control standards, including cGMP regulations with respect to the products, or
commit a material breach of other terms and conditions of the licenses which
would have a significant adverse effect on the uses of the licensed products
retained by the licensor, which would include among other things, marketing
products under these trade names outside the prescription field.

In connection with the acquisition of the rights to Prefest(R) on May 29,
2002, we acquired a pharmaceutical preparation patent listed in the FDA's Orange
Book that expires in January 2012, as well as a second Orange Book listed patent
that expires in April 2009.

In connection with the acquisition of Meridian on January 8, 2003, we
acquired the intellectual property rights associated with Meridian's
dual-chambered auto-injector and injection process, which has a patent that
expires in 2010.

In connection with our acquisition of the rights to Intal(R), Tilade(R),
and Synercid(R) on December 30, 2002, we acquired associated intellectual
property rights, including a patent in the United States related to the HFA
formulation of Intal(R) until September 2017, a composition of matter patent in
the United States for Tilade(R) until October 2006 and a formulation patent in
the United States for Synercid(R) until November 2017.

Skelaxin(R) has a method of use patent listed in the FDA's Orange Book,
which does not expire until December 2021. For a discussion of challenges to our
patent by generic drug manufacturers, please see the "Risk Factors" section
under the heading "If we cannot successfully enforce our rights under the
patents relating to three of our largest products, Altace(R), Levoxyl(R), and
Skelaxin(R), against generic drug manufacturers, our results of operations could
be materially adversely affected."

Sonata(R) has a composition of matter patent listed in the FDA's Orange
Book through June 2008.

We are party to an agreement under which Fujisawa manufactures and markets
Adenocard(R) and Adenoscan(R) in the United States and Canada in exchange for
royalties. We have licensed exclusive rights to Sanofi-Synthelabo, France, to
manufacture and market Adenocard(R) in countries other than the United States,
Canada and Japan in exchange for royalties. We have licensed exclusive rights to
Sanofi to manufacture and market Adenoscan(R) worldwide except in the United
States, Canada, Japan, Korea and Taiwan in exchange for royalties. Sanofi has
received marketing approval for Adenoscan(R) in a number of different countries.
We have licensed exclusive rights to Suntory to manufacture and market
Adenocard(R) and Adenoscan(R) in Japan in exchange for royalties. We pay
one-half of all royalties received from Adenocard(R) sales to the University of
Virginia Alumni Patents Foundation from which we acquired rights to
Adenocard(R).

Royalties received by us from sales of Adenocard(R) and Adenoscan(R)
outside of the United States and Canada are shared equally with Fujisawa.
Fujisawa, on its own behalf and ours, obtained a license to additional
intellectual property rights for intravenous adenosine in cardiac imaging and
the right to use intravenous adenosine as a cardioprotectant in combination with
thrombolytic therapy, balloon angioplasty and coronary bypass surgery and
secured intellectual property rights to extend the exclusivity of Adenoscan(R)
until 2015.

We are party to a Development and Commercialization Agreement with
Discovery Therapeutics, Inc. (predecessor to Aderis Pharmaceuticals) dedicated
to the discovery, development and commercialization of compounds that stimulate
the A2a subfamily of adenosine receptors, which we call "A2a-agonists."

20

Under the terms of that agreement, Aderis granted us an exclusive license under
certain U.S. and foreign patents and pending applications relating to
A2a-agonists. We have exclusive rights under this license to market and sell
developed compounds, either directly or through sublicense. In exchange for
these rights, we agreed to pay Aderis licensing fees, development milestones and
royalties on future sales of A2a-agonist products.

We have filed in excess of 40 patent applications related to Levoxyl(R).
The first U.S. patent on Levoxyl(R), U.S. Patent No. 6,555,581, 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. The other pending patent
applications generally cover, among other things, formulation methodologies and
equipment, formulation technologies, biopharmaceutical characteristics, drug
delivery systems and methods-of-use. If these other applications are granted,
the resulting patents will potentially provide us with additional patent
protection on our FDA-approved novel formulation of Levoxyl(R). For a discussion
of a challenge to our patent by a generic drug manufacture, please see the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Overview."

We have filed with the U.S. Patent and Trademark Office an application for
a patent covering our new Tigan(R) technology, including our FDA-approved
Tigan(R) 300mg capsules. The pending patent application is drawn to, among other
things, formulations, dosages, dosage forms, biopharmaceutical characteristics,
methods-of-production, methods-of-use and methods-of-instruction. If the
application is granted, the resulting patent will potentially provide us with
patent protection for our FDA-approved Tigan(R) 300mg capsules for 20 years from
the filing date of the application.

We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and sustain our competitive
position. There can be no assurance that others will not independently develop
substantially equivalent proprietary technology and techniques or otherwise gain
access to our trade secrets or disclose the technology or that we can adequately
protect our trade secrets.

Trademarks

We sell our branded products under a variety of trademarks. We believe that
we have valid proprietary interests in all currently used trademarks, including
those for our principal branded pharmaceutical products registered in the United
States.

BACKLOG

As of July 23, 2003, we had no material backlog.

EMPLOYEES

As of July 24, 2003, we employed 2,733 full-time and 52 part-time persons.
Approximately 230 employees of the Parkedale facility are covered by a
collective bargaining agreement with the Paper, Allied Industrial, Chemical &
Energy Workers, International Union (PACE), Local No. 60178, which expires on
February 28, 2006. Approximately 270 employees of the Meridian facility in St.
Louis, Missouri are covered by a collective bargaining agreement with the
International Brotherhood of Teamsters Chaffeurs, Warehousemen and Helpers of
America Union, Local No. 688, which expires February 28, 2005. We believe our
employee relations are good. We employ two full-time Chaplains for the benefit
of our employees.

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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 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 actually occurs, our business,
results of operations and financial condition could be materially adversely
affected, the trading price, if any, of our securities could decline and you
might lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

THE SEC INVESTIGATION, OTHER POSSIBLE GOVERNMENTAL INVESTIGATIONS, AND
SECURITIES LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

On March 10, 2003, we received a subpoena duces tecum from the SEC with
respect to an SEC investigation of King. The subpoena requested the production
of documents focusing on the years 1999 and 2000 and included all documents
related to sales of our products to VitaRx and Prison Health Services during
1999 and 2000, our "best price" lists, all documents related to the pricing of
our pharmaceutical products provided to any governmental Medicaid agency during
1999, the accrual and payment of rebates on Altace(R) from 2000 to the present,
and other general requests. On May 14, 2003, the SEC issued another subpoena
duces tecum, requesting additional documents pertaining to the products
Fluogen(R) and Lorabid(R), the King Benevolent Fund, our calculations related to
Medicaid rebates, and our Audit Committee's internal review of issues raised by
the SEC investigation. We have cooperated, and will continue to cooperate, in
providing information to the SEC.

In connection with our determination that we have underpaid amounts due
under Medicaid and other governmental pricing programs during the period from
1998 to 2002, we have contacted the Centers for Medicare and Medicaid Services,
the Office of Inspector General at the Department of Health and Human Services,
and the Department of Justice. We expect to engage in more detailed discussions
with these and other appropriate agencies in order to determine the precise
amount of the underpayments. We currently expect to make the requisite payments
in the third or fourth quarter of 2003. The SEC, the Centers for Medicare and
Medicaid Services, the Office of Inspector General, the Department of Justice
and other governmental agencies that might be investigating or might commence an
investigation of us could impose, based on a claim of a violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions, including
fines, penalties and possible exclusion from federal health care programs
(including Medicaid and Medicare). Some of these laws may impose liability even
in the absence of specific intent to defraud. We cannot predict or reasonably
estimate the likelihood or magnitude of any such sanctions at this time. For
additional information, please see this "Risk Factors" section 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section under the
heading "Recent Developments -- SEC Investigation, Medicaid and Other
Governmental Program Accrual Adjustment, and Related Matters."

Subsequent to the announcement of the SEC investigation described above,
beginning in March 2003, 22 purported class action complaints have been filed by
holders of our securities against us, our directors, former directors, executive
officers and former executive officers 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. Plaintiffs allege 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 March 31,
1999 and continuing until March 11, 2003. Additionally, seven purported
shareholder derivative complaints have been filed in federal and state courts in
Tennessee alleging a breach of fiduciary duty, among other things, by some of
our

22

officers and directors. The allegations in these lawsuits are similar to those
in the class action litigation described above. We intend to defend 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 securities 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 SEC in
its investigation, resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the securities
litigation has resulted, and is expected to continue to result, in a significant
diversion of management's attention and resources and an increase in
professional fees.

IF SALES OF OUR MAJOR PRODUCTS OR ROYALTY PAYMENTS TO US DECREASE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED.

Altace(R) accounted for approximately 39.9% and Levoxyl(R) accounted for
approximately 15.0% of our total revenues for the year ended December 31, 2002,
and Altace(R), Levoxyl(R), Thrombin-JMI(R), and royalty revenues collectively
accounted for approximately 68.6% of our total revenues during the same period.
In addition, we acquired Sonata(R) and Skelaxin(R) on June 12, 2003, which
together had net sales in the United States and Puerto Rico of approximately
$238.0 million in 2002. We believe that sales of these products may constitute a
significant portion of our revenues for the foreseeable future. Accordingly, any
factor adversely affecting sales of any of these products or products for which
we receive royalty payments could have a material adverse effect on our
business, financial condition, results of operations and cash flows.

IF WE CANNOT SUCCESSFULLY ENFORCE OUR RIGHTS UNDER THE PATENTS RELATING TO
THREE OF OUR LARGEST PRODUCTS, ALTACE(R), LEVOXYL(R) AND SKELAXIN(R), AGAINST
GENERIC DRUG MANUFACTURERS, OUR RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.

Cobalt Pharmaceuticals, Inc., a generic drug manufacturer located in
Mississauga, Ontario, Canada, has filed an ANDA with the FDA seeking permission
to market a generic version of Altace(R) prior to the expiration of U.S. Patent
No. 5,061,722, the '722 patent, a "composition of matter patent" relating to
Altace(R) which is listed in the FDA's Orange Book. King also recently listed
U.S. Patent No. 5,403,856, the '856 patent, a "method of use patent" relating to
Altace(R) in the FDA's Orange Book. The '722 patent does not expire until
October 2008 and the '856 patent does not expire until April 2012. Under the
federal Hatch-Waxman Act of 1984, Cobalt has filed an ANDA alleging that the
'722 patent is invalid. This allegation is commonly known as a "Paragraph IV
certification." Under the terms of the Hatch-Waxman legislation, any generic
manufacturer may file an ANDA with a Paragraph IV certification after the
pioneer company, or its successor in interest, has marketed a new chemical
entity for four years. Regulations do not require Cobalt to certify against the
'856 patent. If the '722 and '856 patents are successfully challenged, Cobalt
may market a generic equivalent of Altace(R) prior to October 2008, but not
before January 2005, the expiration date of U.S. Patent No. 4,587,258, the '258
patent. The '258 patent is another composition of matter patent that relates to
and is listed in the FDA's Orange Book for Altace(R), but which has not been
challenged by Cobalt. We have filed suit to enforce our rights under the '722
and '856 patents. The filing of the suit provides us an automatic stay of FDA
approval of the ANDA for 30 months. However, should the court grant Cobalt
summary judgment on the '722 patent, we would not receive the benefit of the
automatic stay. Moreover, we have recently amended our complaint, without
opposition, to include an allegation of infringement of the '856 patent by
Cobalt. While we intend to vigorously enforce our rights under the '722 and '856
patents being challenged, we cannot assure you that we will be successful. If we
are not successful in enforcing our patents, our business, financial condition,
results of operations and cash flows could be materially adversely affected.

Mylan Pharmaceuticals, Inc., a generic drug manufacturer, filed an ANDA
with the FDA seeking permission to market a generic version of Levoxyl(R) prior
to the expiration of U.S. Patent No. 6555581, the '581 patent, which was issued
to us on April 29, 2003, relating to Levoxyl(R). We received notice of this
Paragraph IV certification alleging non-infringement no earlier than April 30,
2003. Additionally, on June 24, 2003, we received a notice of Paragraph IV
certification related to the '581 patent from KV
23

Pharmaceutical Company. We intend to enforce our rights under the '581 patent to
the full extent of the law. If we are unsuccessful in enforcing our patent, our
business, financial condition, results of operations and cash flows could be
materially adversely affected.

Eon Labs and CorePharma have each filed an ANDA with the FDA seeking
permission to market a generic version of Skelaxin(R) prior to the expiration of
U.S. Patent No. 6,407,128, the '128 patent, that is listed in the FDA's Orange
Book which does not expire until December 6, 2021. Eon Labs and CorePharma have
each filed Paragraph IV certifications relating to the '128 patent. We intend to
enforce our rights under this patent. If we are unsuccessful in enforcing this
patent, our business financial condition, results of operations and cash flows
could be materially adversely affected.

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 law. Although we have purchased
directors and officers liability insurance 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 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 increases significantly, we may not be able to maintain or
increase our levels of insurance coverage for our directors and officers. This
could make it difficult to attract or retain qualified directors and officers.

WE MAY NOT ACHIEVE OUR INTENDED BENEFITS FROM THE CO-PROMOTION AGREEMENT WITH
WYETH FOR THE PROMOTION OF ALTACE(R).

We entered into the Co-Promotion Agreement with Wyeth for Altace(R)
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(R). By effectively co-marketing the new
indications for Altace(R) 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 and profits of Altace(R) and to optimize the
marketing of the product by coordinating our promotional activities.

Under the Co-Promotion Agreement, Wyeth and we agreed to establish an
annual budget of marketing expenses to cover, among other things,
direct-to-consumer advertising, such as television advertisements and
advertisements in popular magazines and professional journals. One of the goals
of the direct-to-consumer advertising campaign is to encourage the targeted
audience to ask their own physicians about Altace(R) and whether it might be of
benefit for them. The direct-to-consumer campaign may not be effective in
achieving this goal. Physicians may not prescribe Altace(R) for their patients
to the extent we might otherwise hope if patients for whom Altace(R) is
indicated do not ask their physicians about Altace(R).

It is possible that we or Wyeth or both of us will not be successful in
effectively promoting Altace(R) or in optimizing its sales. The content of
agreed-upon promotional messages for Altace(R) may not sufficiently convey the
merits of Altace(R) and may not be successful in convincing physicians to
prescribe Altace(R) 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(R). 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(R) or to lessen their
emphasis on the marketing of Altace(R). 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

24

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

SALES OF ALTACE(R) MAY BE AFFECTED BY THE PERCEPTION OF A CLASS EFFECT, AND
ALTACE(R) AND OUR OTHER PRODUCTS MAY BE SUBJECT TO VARIOUS SOURCES OF
COMPETITION FROM ALTERNATE THERAPIES.

Although the FDA has approved indications for Altace(R) that are unique
among ACE inhibitors, we may be unable to meet investors' expectations regarding
sales of Altace(R) due to a perceived class effect or the inability to market
Altace(R)'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(R) (ramipril) is a member of a
class of products known as ACE inhibitors because ramipril is one of several
chemicals that inhibits 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(R)
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(R) will represent
that their products are equivalent to Altace(R). 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(R) as
demonstrated by the HOPE trial. As a result, sales of Altace(R) may suffer from
the perception of a class effect.

Currently, there is no generic form of Altace(R) available although Cobalt
Pharmaceuticals has filed a Paragraph IV certification pertaining to Altace(R)
which we have described above. That is, there is no product that has the same
active ingredient, ramipril, as Altace(R). Although no generic substitute for
Altace(R) 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(R). 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(R) is used to treat. New ACE
inhibitors or other anti-hypertensive therapies, increased sales of generic
forms of other

25

ACE inhibitors or of other therapeutic agents that compete with Altace(R) may
adversely affect the sales of Altace(R). In these events, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.

OUR CO-PROMOTION AGREEMENT FOR ALTACE(R) 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(R) with Wyeth could be
terminated before we realize all of the benefits of the agreement. Wyeth and we
each have the right to terminate the agreement if annualized net sales of
Altace(R) are not equal to or greater than $300.0 million on October 4, 2003.
There are other reasons why either Wyeth or we could terminate the Co-Promotion
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(R). If we must unwind our marketing alliance efforts because
of the reasons mentioned above, there may be a material adverse effect on the
sales of Altace(R).

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(R) Co-Promotion Agreement to a successor without our prior consent.
However, a successor would be required to first assume in writing the
obligations of Wyeth under the Co-Promotion Agreement before the rights of Wyeth
were assigned to it. Another party might not market Altace(R) 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 a fewer number of 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(R).

When feasible, Wyeth must give us six months' written notice of its intent
to sell, market or distribute any product competitive with Altace(R). Under the
Co-Promotion Agreement, a product competes with Altace(R) 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(R) only if the
level of promotional effort used by Wyeth for the ARB is greater than 50% of
that applied to Altace(R). A product would not compete with Altace(R) if in the
last 12 months it had net sales of less than $100.0 million or 15% of net sales
of Altace(R), whichever was higher. Also, a product would not compete with
Altace(R) 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(R) 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(R). 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(R) 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(R) we would be obligated to pay Wyeth an amount of cash equal to twice
the net sales of Altace(R) 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.

26

OUR SALES OF LEVOXYL(R) COULD BE AFFECTED BY FUTURE ACTIONS OF THE FDA, THE
POSSIBLE DEVELOPMENT AND APPROVAL OF A GENERIC SUBSTITUTE FOR LEVOXYL(R) AND OUR
ABILITY TO MAINTAIN EFFECTIVE PATENT PROTECTION FOR LEVOXYL(R).

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

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(R). The first U.S. patent on our FDA-approved Levoxyl(R), the '581
patent, a utility patent with composition of matters claims, 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 be granted, or
whether any or all of the resulting patents will provide Levoxyl(R) with
additional protection from possible generic substitution. As noted above, Mylan
Pharmaceuticals, a generic drug manufacturer, filed an ANDA with the FDA seeking
permission to market a generic version of Levoxyl(R) prior to the expiration of
our '581 patent which was issued to us on April 29, 2003. We received notice of
the Paragraph IV certification alleging non-infringement no earlier than April
30, 2003. Additionally, on June 24, 2003, we received a notice of Paragraph IV
certification related to the '581 patent from KV Pharmaceutical. While we intend
to enforce our rights under the '581 patent to the full extent of the law, we
cannot assure you that we will be successful. If we are not successful in
enforcing our '581 patent, sales of our product Levoxyl(R) could be materially
adversely affected, and accordingly our business, financial condition, results
of operations and cash flows could be materially adversely affected.

On March 26, 2002, Jerome Stevens filed a Petition for Stay of Action
(assigned Docket No. 02P1035) with the FDA seeking redress from the FDA for the
public disclosure on the FDA's website of alleged trade secrets relating to the
manufacturing process for Jerome Stevens' orally-administered levothyroxine
sodium drug product Unithroid. While Jerome Stevens does not specifically
request that the FDA stay any action with respect to our levothyroxine sodium
drug product Levoxyl(R), Jerome Stevens does request, among other broad
remedies, that the FDA "immediately and indefinitely stay . . . all grants of
drug pre-market authority that used, relied on, or were based on Jerome
confidential and trade secret manufacturing information . . . " We have filed a
Comment on Jerome Stevens' Petition with the FDA, stating that the NDA for
Levoxyl(R) was filed with the FDA before the disclosure of Jerome Stevens'
alleged trade secrets, and that the approval of the Levoxyl(R) NDA is unrelated
to such disclosure. Based on these facts, we do not believe that Jerome Stevens'
Petition applies to Levoxyl(R). However, if the FDA were to determine that there
is a valid legal basis for suspension or withdrawal of substantial FDA approval
of the Levoxyl(R) NDA, it could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
27

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. If the FDA approves an ANDA for a generic
equivalent of Levoxyl(R) under the current standards, our business, financial
condition, results of operations and cash flows could be materially adversely
affected.

WE CANNOT ASSURE YOU THAT WE WILL NOT HAVE TO TAKE ADDITIONAL CHARGES RELATED
TO THE DIVESTITURE OF LORABID(R) OR THAT SALES OF LORABID(R) WILL INCREASE IN
THE FUTURE.

Under the supply agreement with Eli Lilly, we continue to be obligated to
make minimum purchases of Lorabid(R) inventory. Based on changes in estimated
prescription trends, we believe the minimum purchase commitments under the
supply agreement are greater than inventory quantities we will be able to sell
to our customers. As a result, during the fourth quarter of 2002, we have
recorded a $49.9 million charge related to the liability associated with the
amount of the purchase commitments in excess of expected demand. Additionally,
during the fourth quarter of 2002, we recorded an intangible asset impairment
charge in the amount of $66.8 million and a charge in the amount of $15.2
million attributable to inventory contributions, the latter resulting from our
decision to divest our rights to Lorabid(R). If sales of Lorabid(R) continue to
decline, if we terminate the supply agreement with Eli Lilly, or if we are
unable to secure adequate Lorabid(R) inventory purchase commitments from a buyer
of the Lorabid(R) rights, we may incur additional losses in the future. Further,
in the event of further decline in the fair value of Lorabid(R), we may incur
additional charges. We cannot assure you that we will be able to divest our
rights to Lorabid(R) on acceptable terms or at all or that we will not incur
additional charges in connection with this product. These charges and minimum
purchase requirements could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

SALES OF CERTAIN OF OUR WOMEN'S HEALTH PRODUCTS HAVE BEEN AND MAY CONTINUE TO
BE NEGATIVELY AFFECTED BY THE PERCEPTION OF AN INCREASE IN CERTAIN HEALTH
RISKS ASSOCIATED WITH THE USE OF COMBINATION HORMONE REPLACEMENT THERAPIES AND
ORAL ESTROGEN REPLACEMENT THERAPIES.

From time to time studies 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. For example, an
ongoing clinical trial entitled the Women's Health Initiative is being conducted
by the National Institutes of Health. Data from that 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 replacement therapy and oral estrogen replacement therapy
markets generally, which include our products Prefest(R), Menest(R) and
Delestrogen(R) and may affect our future marketing efforts for Estrasorb(TM). We
cannot assure you that sales of our currently marketed products will not
continue to be negatively affected by the perception created by the data
released to date or any additional data that may be released in the future. If
sales of these products continue to be negatively affected by the perception
created by data associated with the Women's Health Initiative, there may be a
material adverse 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 March 31, 2003, we had $1.4 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.
For example, during the fourth

28

quarter of 2002, we decided to divest our rights to Lorabid(R), resulting in an
impairment charge of $66.8 million. Additionally, the FDA approved for sale
generic substitutes for our product Florinef(R) in March 2002 and in January
2003. During the first quarter of 2003, we recorded an intangible asset
impairment charge of $111.0 million related to this product due to revised sales
projections for Florinef(R) triggered by the entry of a second generic product
into the market. Any impairment of the net book value of any product or
combination of products, depending on the size of the product or products, could
result in a material adverse effect on our business, financial condition,
results of operations and cash flows.

IF WE CANNOT IMPLEMENT OUR STRATEGY TO GROW OUR BUSINESS THROUGH INCREASED
SALES AND ACQUISITIONS, OUR COMPETITIVE POSITION IN THE PHARMACEUTICAL
INDUSTRY MAY SUFFER.

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

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

IF WE CANNOT INTEGRATE THE BUSINESS OF COMPANIES OR PRODUCTS WE ACQUIRE, OUR
BUSINESS MAY SUFFER.

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

IF WE ARE NOT ABLE TO DEVELOP OR LICENSE NEW PRODUCTS, OUR BUSINESS MAY
SUFFER.

We 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 in a cost effective manner; or

- obtain FDA approvals necessary to successfully implement the strategies
described above.
29

For example, we are

- engaged in the development of a modified-release formulation of
Sonata(R);

- engaged in new formulation development for Skelaxin(R);

- in exclusive license agreements with Novavax to promote, market,
distribute and sell Estrasorb(TM), a topical transdermal estrogen
replacement therapy, and Androsorb(TM), a topical testosterone
replacement therapy for testosterone deficient women, and other women's
health products;

- engaged in the development of binodenoson, a myocardial pharmacologic
stress imaging agent;

- engaged in the development of a new inhaler for Intal(R) using the
alternative propellant hydrofluoro-alkane, or "HFA," and a
diazepam-filled auto-injector, each of which is under FDA review;

- in an exclusive licensing agreement with Beartown to manufacture, market,
distribute and sell tetrac, once approved, as a compound for the
suppression of pituitary secretion of thyroid stimulating hormone (TSH);
and

- in a licensing agreement with SkyePharma PLC to develop and commercialize
a modified-release formulation of Altace(R) utilizing SkyePharma's
patented oral drug delivery technology Geomatrix(R).

However, we cannot assure you that we will be successful in any or all of
these projects. If we are not successful, including the failure to obtain any
necessary FDA approval, our business, financial condition and results of
operations could be materially adversely affected.

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

- develop or license their products more rapidly than we can,

- complete any applicable regulatory approval process sooner than we can,

- market or license their products before we can market or license our
products, or

- offer their newly developed or licensed products at prices lower than our
prices,

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

WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS, AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.

Although most of our revenue is generated by products not subject to
competition from generic products, there is no proprietary protection for most
of our branded pharmaceutical products, and generic substitutes for many of
these products are sold by other pharmaceutical companies. Even our products
that currently have no generic substitute could face generic competition if
generics are developed by other companies and approved by the FDA. For example,
Florinef(R) has recently been subjected 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(R) 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(R) 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

30

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.

Effective August 18, 2003, the FDA may approve generic substitutes of
branded pharmaceutical products in a shorter period of time due to recent
regulatory changes. 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 from
approving the ANDA for 30 months unless specific events occurred sooner. To
avoid multiple 30-month stays for the same branded drug, the FDA's new
regulations now only require one such notice. Under the new regulations, if an
ANDA applicant had already provided patent invalidity or non-infringement notice
to us about a particular branded drug, we will not get a second notice or
opportunity for another stay for that drug. As a result generic substitutes of
our branded pharmaceutical products could be approved sooner.

The FDA's new regulations also significantly change 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 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.

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(R), Levoxyl(R) and Thrombin-JMI(R), which together
represent approximately 63.4% of our revenues for the year ended December 31,
2002. 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(R),
Skelaxin(R), Sonata(R), Bicillin(R), Prefest(R), Intal(R), Tilade(R),
Synercid(R) and Cortisporin(R), are currently manufactured by third parties.
Once approved, Estrasorb(TM) will be manufactured for us by Novavax. Our
dependence upon third parties for the manufacture of our products may adversely
impact our profit margins or may result in unforeseen delays or other problems
beyond our control. For example, if any of these third parties are not in
compliance with applicable regulations, the manufacture of our products could be
adversely affected. If for any reason we are unable to obtain or retain
third-party manufacturers on commercially acceptable terms, we may not be able
to distribute our products as planned. If we encounter delays or difficulties
with contract
31

manufacturers in producing or packaging our products, the distribution,
marketing and subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon or sell product
lines on unsatisfactory terms. We might not be able to enter into alternative
supply arrangements at commercially acceptable rates, if at all. We also cannot
assure you that the manufacturers we utilize will be able to provide us with
sufficient quantities of our products or that the products supplied to us will
meet our specifications.

Our supply agreement for Bicillin(R) with Wyeth expires on July 7, 2004.
There are limitations on the number of units over and above current estimated
demand for this product we can order under our supply agreement with Wyeth.
Furthermore, the expiration dating on this product is limited to 24 months. We
may not be able to extend our agreement with Wyeth and we may not be able to
secure a new manufacturing source for sufficient quantities of Bicillin(R) on
commercially acceptable terms. If we are unable to extend the existing supply
agreement or if we are unable to secure a new source of supply, then we may not
be able to distribute this product as planned or the value of the assets could
be impaired, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. For the year ended
December 31, 2002, net sales of Bicillin(R) totaled $40.2 million.

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. We have no reason to believe that we
will be unable to procure adequate supplies of raw materials and components on a
timely basis. 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 back
orders 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 PARKEDALE FACILITY HAS BEEN THE SUBJECT OF FDA CONCERNS. IF WE CANNOT
ADEQUATELY ADDRESS THE FDA'S CONCERNS, WE MAY BE UNABLE TO OPERATE THE
PARKEDALE FACILITY AND, ACCORDINGLY, OUR BUSINESS MAY SUFFER.

Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. The Parkedale 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

32

compliance issues within Pfizer facilities in the period before the decree was
entered. The Parkedale facility continues to be subject to the consent decree.

The Parkedale facility was inspected by the FDA in March 2003. When an FDA
inspector completes an authorized inspection of a manufacturing facility, the
inspector typically provides the owner/operator of the facility with a written
report listing the inspector's observations of objectionable conditions and
practices. This written report is known as an "FDA Form 483" or simply as a
"483." The observations in a 483 are reported to the manufacturer in order to
assist the manufacturer in complying with the FDC Act and the regulations
enforced by the FDA. Often a pharmaceutical manufacturer receives a 483 after an
inspection and our Parkedale 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 Parkedale 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. The 483 from March 2003 does
not require us to delay or discontinue the production of any products made at
the Parkedale facility.

WE ARE NEAR MAXIMUM CAPACITY AT OUR MIDDLETON FACILITY WHICH WILL LIMIT OUR
ABILITY TO INCREASE PRODUCTION OF THROMBIN-JMI(R).

We are currently working on long-term strategies to expand our production
capacity for Thrombin-JMI(R) which should potentially be completed in the next
two to three years. These long-term strategies may further expand our
manufacturing capacity for Thrombin-JMI(R) upon completion. We cannot assure you
that our plans to expand our production capacity for Thrombin-JMI(R) will be
successful and/or timely. If we cannot successfully and timely expand our
production capacity for Thrombin-JMI(R), our ability to increase production of
Thrombin-JMI(R) 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,
including Altace(R) with a composition of matter patent that does not expire
until October 2008 and a method of use patent that does not expire until April
2012. Both of these patents are listed in the FDA's Orange Book. The validity of
patents can be subject to expensive litigation. As we mentioned earlier, Cobalt
Pharmaceuticals, a generic drug manufacturer, has filed an ANDA alleging that
the composition of matter patent related to Altace(R) is invalid. Cobalt is
seeking permission from the FDA to market a generic version of Altace(R) prior
to the expiration of the '722 patent, a composition of matter patent that does
not expire until October 2008, but not before January 2005, the expiration date
of another composition of matter patent that relates to and is listed in the
FDA's Orange Book for Altace(R), but which has not been challenged by Cobalt.
Additionally, as mentioned above, Mylan Pharmaceuticals and KV Pharmaceutical
have each provided us with a notice of Paragraph IV certification alleging
noninfringement of the '581 patent (KV Pharmaceutical also alleges invalidity),
as they are seeking FDA approval to market a generic form of Levoxyl(R) prior to
the expiration of the '581 patent on February 15, 2022. Furthermore, as noted
above, each of Eon Labs and CorePharma

33

has filed an ANDA with the FDA pertaining to metaxalone, the active ingredient
in Skelaxin(R), to which we acquired rights from Elan on June 12, 2003.

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 has started to become operational. In connection with
its implementation, we have incurred related costs of over $30.0 million. This
system is intended to support many of our business functions, including
manufacturing, warehousing, distribution, logistics, sales reporting,
accounting, inventory, quality control, budgeting and other company functions.
Although the new information technology system is intended to significantly
enhance the accuracy of our calculations for estimating amounts due under
Medicaid and other governmental pricing programs, our processes for these
calculations will continue to involve considerable manual input, and, as a
result, these calculations will remain subject to the risk of errors arising
from manual processes at least until mid-2004. Even thereafter, despite our best
efforts, the system could incorrectly calculate amounts due under Medicaid and
other governmental pricing programs. In the event we do not successfully convert
in a timely manner from our existing information system to the new one or in the
event the new system does not operate as expected, our business could be
disrupted. We could lose what we have invested and still have to incur
additional costs for another system. This disruption or additional costs, if
required, could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

WHOLESALER AND DISTRIBUTOR BUYING PATTERNS AND OTHER FACTORS MAY CAUSE OUR
QUARTERLY RESULTS TO FLUCTUATE, AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT
OUR PROFITABILITY.

Our results of operations, including, in particular, product sales revenue,
may vary from quarter to quarter due to many factors. Wholesalers and
distributors represent a substantial portion of our sales. Buying patterns of
our wholesalers and distributors may vary from time to time. In the event
wholesalers and distributors with whom we do business determine to limit their
purchases of our inventory, sales of our products could be adversely affected.
For example, in advance of an anticipated or announced 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. Other factors include expenditures
related to the acquisition, sale and promotion of pharmaceutical products, a
changing customer base, the availability and cost of raw materials,
interruptions in supply by third-party manufacturers, new products introduced by
us or our competitors, the mix of products we sell, sales and marketing
expenditures, product recalls, competitive pricing pressures and general
economic and industry conditions that may affect customer demand. We cannot
assure you that we will be successful in maintaining or improving our
profitability or avoiding losses in any future period.

IF THE STOCK PRICE OF NOVAVAX DECLINES, OUR INVESTMENT IN NOVAVAX CONVERTIBLE
NOTES COULD RESULT IN ADDITIONAL SPECIAL CHARGES RELATED TO A VALUATION
ALLOWANCE FOR THESE NOTES.

During the period from December 2000 through June 2002, we provided $40.0
million in financing to Novavax in the form of notes receivable convertible to
common stock of Novavax. The loan is impaired as

34

defined under Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan." We established a valuation allowance in
the second quarter of 2002 which was adjusted in subsequent quarters during 2002
and in the first quarter of 2003. As of March 31, 2003, the valuation allowance
for the Novavax convertible notes equaled $27.5 million. We will adjust the
amount of the valuation allowance in future periods until the loan is no longer
considered to be impaired. We may incur additional charges related to our
investment in the convertible notes. Accordingly, these charges may adversely
impact our earnings.

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 $60.0 million for aggregate annual claims with a
$10.0 million aggregate annual deductible; however, we cannot assure you that
the level or breadth of any insurance coverage will be sufficient to cover fully
all potential claims. Also, adequate insurance coverage might not be available
in the future at acceptable costs, if at all. For example, we are not able to
obtain product liability insurance with respect to our products Prefest(R),
Menest(R), Delestrogen(R), Pitocin(R) and Nordette(R), each a women's healthcare
product. With respect to any product liability claims relating to these
products, we would be responsible for any monetary damages awarded by any court
or any voluntary monetary settlements. Significant judgments against us for
product liability for which we have no insurance could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

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

Although product returns were approximately 2.7% of gross sales for the
year ended December 31, 2002, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.

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
577 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(R), 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
35

of its 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. 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(R) MAY BE AFFECTED BY THE PERCEPTION OF RISKS ASSOCIATED
WITH SOME OF THE RAW MATERIALS USED IN ITS MANUFACTURE; IF WE ARE UNABLE TO
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(R) comes from bovine
plasma and lung tissue. Bovine-sourced materials 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. Although no BSE has been documented in the United States, the
United States is considered a Category II BSE-risk country, meaning that the
United States is probably BSE-free but has some history of importing cattle from
the United Kingdom and Canada.

We receive the bovine raw materials from a single vendor and any
interruption or delay in the supply of that material could adversely affect the
sales of Thrombin-JMI(R). 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(R) 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(R) 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(R). If BSE spreads
to the United States, the manufacture and sale of Thrombin-JMI(R) 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(R), 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(R) 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.

We issued 2 3/4% Convertible Debentures due November 15, 2021 in February
2002 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.
36

A FAILURE BY DEY, L.P. TO SUCCESSFULLY MARKET THE EPIPEN(R) AUTO-INJECTOR OR
AN INCREASE IN COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS
OF OPERATIONS.

We recently acquired the EpiPen(R) auto-injector through our acquisition of
Meridian. Dey, L.P. markets EpiPen(R) through a supply agreement 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(R) worldwide. Although
demand for EpiPen(R) continues to be strong due to increased awareness of the
health risks associated with allergic reactions, we expect competition to
intensify. We understand that a new competitive product manufactured by
Hollister-Stier Laboratories LLC has received FDA approval. The new product,
TwinJect(R) 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(R). Users of EpiPen(R) would have to obtain a new
prescription in order to substitute TwinJect(R). 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(R)
or an increase in competition could have a material adverse effect on our
business, financial condition, results of operations and cash flows.

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. 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. No claims
are currently pending. 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-injector 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
37

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 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.

We participate in the Federal Medicaid rebate program established by the
Omnibus Budget Reconciliation Act of 1990, as well as several state supplemental
rebate programs. Under the Medicaid rebate program, we pay a rebate to each
state Medicaid program for our products that are reimbursed by those programs.
As a manufacturer currently of single source, innovator multiple source and
non-innovator multiple source products, rebate calculations vary among products
and programs. The calculations are complex and, in certain respects, subject to
interpretation by us, governmental or regulatory agencies and the courts. The
Medicaid rebate amount is computed each quarter based on our submission to the
Centers for Medicare and Medicaid Services at the Department of Health and Human
Services of our current average manufacturer price and best price for each of
our products. Governmental agencies may make changes in program interpretations,
requirements or conditions of participation, some of which may have implications
for amounts previously estimated or paid.

In November 2000, we began the process of implementing a new information
technology system which has started to become operational. Although this new
information technology system is intended to significantly enhance the accuracy
of our calculations for estimating amounts due under Medicaid and other
governmental pricing programs, our processes for these calculations will
continue to involve considerable manual input, and, as a result, these
calculations will remain subject to the risk of errors arising from the manual
processes at least until mid-2004. Even thereafter, despite our best efforts,
the system could incorrectly calculate amounts due under Medicaid and other
governmental pricing programs.

Federal law requires that any company that participates in the Medicaid
rebate program extend comparable discounts to qualified purchasers under the
Public Health Service, or "PHS," pharmaceutical pricing program. The PHS pricing
program extends discounts comparable to the Medicaid rebates to a variety of
community health clinics and other entities that receive health services grants
from the PHS, as well as hospitals that serve a disproportionate share of poor
Medicare and Medicaid beneficiaries.

In addition, we make our products available to authorized users of the
Federal Supply Schedule, or "FSS," of the General Services Administration under
an FSS contract negotiated by the Department of Veterans Affairs. The Veterans
Health Care Act of 1992, or "VHCA," imposes a requirement that the prices we
charge to agencies under the FSS be discounted by a minimum of 24% off the
average

38

manufacturer price charged to non-federal customers. Our computation of the
average manufacturer price to non-federal customers is used in establishing the
FSS price for federal purchasers. The government maintains the right to audit
the accuracy of our computations. Among the remedies available to the government
for failure to accurately calculate FSS pricing and the average manufacturer
price charged to non-federal customers is recoupment of any overpayments made by
FSS purchasers as a result of errors in computations that affect the FSS price.

Failure to comply with our obligations under the Medicaid rebate program or
other governmental pricing programs could subject us to additional
reimbursements, penalties, sanctions and fines which could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. The Medicaid rebate statute and the VHCA also provide that, in
addition to penalties that may be applicable under other federal statutes, civil
monetary penalties may be assessed for knowingly providing false information in
connection with the pricing and reporting requirements under the laws.

As discussed in this "Risk Factors" section under the heading "The SEC
investigation, other possible governmental investigations, and securities
litigation could have a material adverse effect on our business" and in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments -- SEC Investigation,
Medicaid and Other Governmental Program Accrual Adjustment, and Related
Matters," we determined recently that we had underaccrued for estimated 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 represents our best estimate of the extent to which
we underpaid amounts due under Medicaid and other governmental pricing programs
during the period from 1998 to 2002, including amounts owing to the Department
of Veterans Affairs and PHS. We have contacted the Centers for Medicare and
Medicaid Services, the Office of Inspector General at the Department of Health
and Human Services, and the Department of Justice in connection with the
underpayments and expect to engage in more detailed discussions with these and
other appropriate agencies in order to determine the precise amount of the
underpayments. We currently expect to make the requisite payments in the third
or fourth quarter of 2003. The SEC, the Centers for Medicare and Medicaid
Services, the Office of Inspector General, the Department of Justice and other
governmental agencies that might be investigating or might commence an
investigation of King could impose, based on a claim of a violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions, including
fines, penalties and possible exclusion from federal health care programs
(including Medicaid and Medicare). Some of these laws may impose liability even
in the absence of specific intent to defraud. We cannot predict or reasonably
estimate the likelihood or magnitude of any such sanctions at this time.

IF WE ARE UNABLE TO OBTAIN APPROVAL OF NEW HFA PROPELLANTS FOR INTAL(R) AND
TILADE(R), 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(R) and Tilade(R)
currently use these compounds as propellants. A new inhaler for Intal(R) using
the alternative propellant hydrofluoroalkane, or "HFA", is under review by the
FDA. In the event we cannot obtain approval for alternative propellants for both
Intal(R) and Tilade(R) 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 these products prior to this
date, our ability to market these products could be materially adversely
affected, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

THE LOSS OF OUR KEY PERSONNEL OR AN INABILITY TO ATTRACT NEW PERSONNEL COULD
HARM OUR BUSINESS.

We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our strategic
objectives. We cannot assure you that we will be able to attract and retain key
personnel in sufficient numbers, with the requisite skills or on acceptable
terms necessary or advisable to support our continued growth and integration.
The loss of the services of key personnel could have a material adverse effect
on us, especially in light of our recent growth. We do
39

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 the board of directors to designate the terms of and issue
new series of preferred stock;

- advance notice requirements for nominations for election to the board of
directors; and

- special voting requirements for the amendment of our charter and bylaws.

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

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;

- 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

40

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 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 DEA, the FTC, the Consumer
Product Safety Commission, the U.S. Department of Agriculture, the Occupational
Safety and Health Administration, and the EPA, as well as by foreign governments
in countries where we distribute some of our products.

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

41

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 interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to 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.

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 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 are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has reduced prices across the
industry. In addition, many managed care organizations are considering formulary
contracts primarily with those pharmaceutical companies that can offer a full
line of products for a given therapy sector or disease state. We cannot assure
you that our products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry generally will
not negatively impact our operations.

IF WE FAIL TO COMPLY WITH THE SAFE HARBORS PROVIDED UNDER VARIOUS FEDERAL AND
STATE LAWS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.

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

42

(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, which we discuss more fully in this "Risk Factors"
section under the heading of "Sales of certain of our women's health products
have been and may continue to be negatively affected by the perception of an
increase in certain health risks associated with the use of combination hormone
replacement therapies and oral estrogen replacement therapies." 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.

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, reimportation
of prescription products 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.

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, 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, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.

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

Competition for Acquisitions. We compete with other pharmaceutical
companies for product and product line acquisitions. These competitors include
Biovail Corporation, Forest Laboratories, Inc., Galen Holdings plc, Medicis
Pharmaceutical Corporation, Shire Pharmaceuticals Group plc., Watson
Pharmaceuticals, Inc., and other companies which also acquire branded
pharmaceutical products and
43

product lines, including those in development, from other pharmaceutical
companies. We cannot assure you that

- we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies;

- additional competitors will not enter the market; or

- competition for acquisition of products, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.

Product Competition. Additionally, since our products are generally
established and commonly sold, they are subject to competition from products
with similar qualities.

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

- Zestril(R) (AstraZeneca plc),

- Acupril(R) (Pfizer, Inc.),

- Prinivil(R) (Merck & Co., Inc.),

- Lotensin(R) (Novartis AG),

- Monopril(R) (Bristol-Myers Squibb Company),

- Vasotec(R) (Biovail Corporation),

- Capoten(R) (Bristol-Myers Squibb Company), and

- Mavik(R) (Abbott Laboratories).

Our product Levoxyl(R) competes with the following levothyroxine sodium
products:

- Synthroid(R) (Abbott Laboratories),

- Levothroid(R) (Forest Laboratories, Inc.), and

- Unithroid(R) (Jerome Stevens Pharmaceuticals, Inc.).

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

- detailing and sampling to the primary prescribing physician groups, and

- sponsoring physician symposiums, including continuing medical education
seminars.

Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. For example, the FDA approved for sale
generic substitutes for Florinef(R) in March 2002 and in January 2003 and for
Cortisporin(R) ophthalmic suspension in April 2003.

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 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
44

failure of which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

- the future growth potential of, and prescription trends for our branded
pharmaceutical products, particularly Altace(R), Skelaxin(R), Levoxyl(R),
Thrombin-JMI(R) and Sonata(R);

- expectations regarding the enforceability of product-related patents
including in particular patents related to Altace(R), Levoxyl(R) and
Skelaxin(R);

- expected trends with respect to particular income and expense line items;

- the development and potential commercialization of Estrasorb(TM),
Androsorb(TM) and other products by Novavax and King;

- the development and approval of binodenoson, pre-clinical programs, and
product life-cycle development projects;

- the development of a modified-release Altace(R);

- the development of a modified-release Sonata(R);

- the development of new formulations for Skelaxin(R);

- the development and approval of a diazepam-filled auto-injector, and new
inhalers for Intal(R) and Tilade(R) using the alternative propellant HFA;

- our continued successful execution of our growth strategies;

- anticipated developments and expansions of our business;

- anticipated expansion of our manufacturing capacity for Thrombin-JMI(R);

- anticipated increases in sales of acquired products or royalty revenues;

- the success of our Co-Promotion Agreement with Wyeth;

- the high cost and uncertainty of research, clinical trials and other
development activities involving pharmaceutical products;

- the development of product line extensions;

- the unpredictability of the duration or future findings and
determinations of the FDA, including the pending applications related to
Estrasorb(TM); our diazepam-filled auto-injector; and a new Intal(R)
inhaler formulation utilizing HFA, and other regulatory agencies
worldwide;

- the products which we expect to offer;

- the intent, belief or current expectations, primarily with respect to our
future operating performance;
45

- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates;

- expectations regarding patent approvals including those patents pending
for Levoxyl(R) and Tigan(R) 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(R), Levoxyl(R) and Skelaxin(R) patent challenges,
the SEC investigation, 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 2. PROPERTIES

The location and business segments served by our primary facilities are as
follows:

We own each of these primary facilities, with the exception of that portion
of the facilities in St. Louis, Missouri that is associated with our acquisition
of Meridian, which is leased. For information regarding productive capacity and
extent of utilization, please see Item 1, "Manufacturing", on page .

The Bristol, Rochester, and St. Louis owned facilities are pledged as
collateral for our senior secured revolving credit facility dated April 23,
2002.

Our corporate headquarters are located in Bristol, Tennessee. We consider
our properties to be generally in good condition, well maintained, and generally
suitable and adequate to carry on our business.

ITEM 3. LEGAL PROCEEDINGS

SEC Investigation and Securities Litigation

On March 10, 2003, we received a subpoena duces tecum from the SEC with
respect to an SEC investigation of King. The subpoena requested the production
of documents focusing on the years 1999 and 2000 and included all documents
related to sales of our products to VitaRx and Prison Health Services during
1999 and 2000, our "best price" lists, all documents related to the pricing of
our pharmaceutical products provided to any governmental Medicaid agency during
1999, the accrual and payment of rebates on Altace(R) from 2000 to the present,
and other general requests. On May 14, 2003, the SEC issued another subpoena
duces tecum, requesting additional documents pertaining to the products
Fluogen(R) and Lorabid(R), the King Benevolent Fund, our calculations related to
Medicaid rebates, and our Audit Committee's internal review of issues raised by
the SEC investigation. We have cooperated, and will continue to cooperate, in
providing information to the SEC.

In connection with our determination that we have underpaid amounts due
under Medicaid and other governmental pricing programs during the period from
1998 to 2002, we have contacted the Centers for

46

Medicare and Medicaid Services, the Office of Inspector General at the
Department of Health and Human Services, and the Department of Justice. We
expect to engage in more detailed discussions with these and other appropriate
agencies in order to determine the precise amount of the underpayments. We
currently expect to make the requisite payments in the third or fourth quarter
of 2003. The SEC, the Centers for Medicare and Medicaid Services, the Office of
Inspector General, the Department of Justice and other governmental agencies
that might be investigating or might commence an investigation of us could
impose, based on a claim of a violation of fraud and false claims laws or
otherwise, civil and/or criminal sanctions, including fines, penalties and
possible exclusion from federal health care programs (including Medicaid and
Medicare). Some of these laws may impose liability even in the absence of
specific intent to defraud. We cannot predict or reasonably estimate the
likelihood or magnitude of any such sanctions at this time. For additional
information, please see the "Risk Factors" section 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section under the
heading "Recent Developments -- SEC Investigation, Medicaid and Other
Governmental Program Accrual Adjustment, and Related Matters." Please also see
Note 2 to our audited consolidated financial statements.

Subsequent to the announcement of the SEC investigation described above,
beginning in March 2003, 22 purported class action complaints have been filed by
holders of our securities against us, our directors, former directors, executive
officers and former executive officers 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. Plaintiffs allege 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 March 31,
1999 and continuing until March 11, 2003. Additionally, seven purported
shareholder derivative complaints have 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 allegations in these lawsuits are similar to
those in the class action litigation described above. We intend to defend 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 securities 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 SEC in
its investigation, resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the securities
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.

Elan Transaction

On January 30, 2003, we entered into an agreement to acquire the primary
care business of Elan in the United States and Puerto Rico, which includes the
rights to Sonata(R) and Skelaxin(R). On March 13, 2003, we received a letter
from the FTC stating that it was conducting an investigation to determine
whether any person has engaged in unfair methods of competition with respect to
Elan's product Skelaxin(R). The focus of this investigation was Elan's listing
in the FDA's Orange Book of at least one patent claiming a method of using
metaxalone, and other actions with regard to FDA regulatory processes. As a
result of this information, we commenced an investigation and asked Elan to
provide additional information.

On March 17, 2003, Elan filed a lawsuit in the Supreme Court of the State
of New York seeking to compel us to close the transaction. On May 8, 2003, the
FTC advised Elan that it was discontinuing a portion of its investigation with
respect to this method of use patent. On May 20, 2003, we reached an agreement
with Elan that restructured the terms of the transaction as described above and,
as a result, the

47

litigation was suspended until the closing of the transaction, which occurred on
June 12, 2003, and has since been dismissed.

Altace(R) Patent Challenge

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(R) prior to the expiration of U.S. Patent
No. 5061722, the '722 patent, the "composition of matter patent" relating to
Altace(R), which is listed in the FDA's Orange Book. We also recently listed
U.S. Patent No. 5,403,856, the '856 patent, a "method of use patent" relating to
Altace(R) in the FDA's Orange Book. The '722 patent does not expire until
October 2008 and the '856 patent does not expire until April 2012. Under the
federal Hatch-Waxman Act of 1984, Cobalt has filed an ANDA alleging that the
'722 patent is invalid. This allegation is commonly known as a "Paragraph IV
certification." Under the terms of the Hatch-Waxman legislation, any generic
manufacturer may file an ANDA with a Paragraph IV certification after the
pioneer company, or its successor in interest, has marketed the product for four
years. Regulations do not require Cobalt to certify against the '856 patent. If
the '722 and '856 patents are successfully challenged, Cobalt may market a
generic equivalent of Altace(R) prior to October 2008. We have filed suit to
enforce our rights under the '722 patent. The filing of the suit provides us an
automatic stay of FDA approval of the ANDA for 30 months. However, should the
court grant Cobalt summary judgment on the '722 patent, we would not receive the
benefit of the automatic stay. Moreover, we have recently amended our complaint,
without opposition, to include an allegation of infringement of the '856 patent
by Cobalt. We intend to vigorously enforce our rights to our patents being
challenged.

Levoxyl(R) Patent Challenge

Mylan Pharmaceuticals, a generic drug manufacturer, filed an ANDA with the
FDA seeking permission to market a generic version of Levoxyl(R) prior to the
expiration of our '581 patent which was issued to us on April 29, 2003. We
received notice of the Paragraph IV certification no earlier than April 30,
2003. We have filed suit against Mylan and intend to vigorously enforce our
rights under the '581 patent being challenged. Additionally, on June 24, 2003,
we received a notice of Paragraph IV certification related to the '581 patent
from KV Pharmaceutical. We intend to vigorously enforce our rights under the
'581 patent to the full extent of the law. If we are unsuccessful in enforcing
our patent, our business, financial condition, results of operations and cash
flows could be materially adversely affected.

Skelaxin(R) Patent Challenge

Eon Labs and CorePharma have each filed an ANDA with the FDA pertaining to
metaxalone, the active ingredient in Skelaxin(R). The allegations in Eon Labs'
and CorePharma's notices relate to a patent covering a method of using
metaxalone, which does not expire until December 2021. We intend to enforce our
rights under this patent. If we are unsuccessful in enforcing this patent, our
business, financial condition, results of operations and cash flows could be
materially adversely affected.

Thimerosal/Vaccine Related Litigation

King and/or its wholly owned subsidiary, Parkedale Pharmaceuticals have
been named as defendants in California, Mississippi and Illinois, along with
Abbott Laboratories, Wyeth, Aventis Pharmaceuticals, and other pharmaceutical
companies, which 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.

48

King's product liability insurance carrier has been given proper notice of
all of these matters and defense counsel are vigorously defending our interests.
We seek to be dismissed from the litigation due to, among other things, lack of
product identity in plaintiff's complaints. In 2001, King and Parkedale were
dismissed on this basis in a similar case.

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. We are one of many defendants in no more than 10 lawsuits, which
claim damages for personal injury arising from our production of the
anorexigenic drug phentermine under contract for GlaxoSmithKline. We expect to
be named in additional lawsuits related to our production of the anorexigenic
drug under contract for GlaxoSmithKline.

While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all defenses
available to us. We are being indemnified in all of these suits by
GlaxoSmithKline for which we manufactured the anorexigenic product, provided
that neither the lawsuits nor the associated liabilities are based upon our
independent negligence or intentional acts, and intend to submit a claim for all
unreimbursed costs to our product liability insurance carrier. However, in the
event that GlaxoSmithKline is unable to satisfy or fulfill its obligations under
the indemnity, we would have to defend the lawsuit and be responsible for
damages, if any, which are awarded against us or for amounts in excess of our
product liability coverage.

In addition, Jones, a wholly-owned subsidiary of King, is a defendant in
577 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 its 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.

While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all defenses
available to us. 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 Jones' insurance coverage is inadequate to satisfy any
resulting liability, Jones will have to resume defense of these lawsuits and be
responsible for the damages, if any, that are awarded against it.

Other Legal Proceedings

The Parkedale 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.). We acquired the Parkedale facility from Pfizer
in February 1998. The Parkedale facility is currently manufacturing
pharmaceutical products subject to the Consent Decree which prohibits the
manufacture and delivery of specified drug

49

products unless, among other things, the products conform to cGMPs and are
produced in accordance with approved drug applications. We intend, when
appropriate, to petition for relief from the Consent Decree.

We are involved in various routine legal proceedings incident to the
ordinary course of our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

50

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the range of high and low sales prices per
share of our common stock for the periods indicated. Our common stock is listed
on the New York Stock Exchange, where our stock trades under the symbol "KG."
There were approximately 1,200 shareholders on December 31, 2002, based on the
number of record holders of the common stock.

On July 25, 2003, the closing price of our common stock as reported on the
New York Stock Exchange was $15.12.

We have never paid cash dividends on our common stock. The payment of cash
dividends is subject to the discretion of the board of directors and will be
dependent upon many factors, including our earnings, our capital needs, and our
general financial condition. We currently anticipate that for the foreseeable
future, we will retain our earnings.

The following table provides information about our equity compensation
plans.

EQUITY COMPENSATION PLAN INFORMATION

51

ITEM 6. SELECTED FINANCIAL DATA

The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
consolidated financial statements and related notes included elsewhere in this
report.

- ---------------

(1) Results for 2002 reflect (a) a $22,113 charge for corrections of immaterial
errors related to underpayments of amounts due under Medicaid and other
governmental pricing programs for the years 1998 to 2001, (b) a $12,399
charge for corrections of immaterial errors related to underpayments of
amounts due under Medicaid and other governmental pricing programs related
to 2002 and recorded in the fourth quarter of 2002, and (c) an $11,970
charge arising from changes in accounting estimates related to Medicaid and
other governmental pricing programs. For additional information, see the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments" and Note 2 to
our audited consolidated financial statements.
(2) We developed four ANDA's which were filed with the FDA on behalf of
Mallinkrodt Inc., predecessor to Tyco International Ltd., for a maximum of
$2,500 which was paid upon FDA approval and validation of the process.
(3) Reflects loss on early extinguishment of debt in connection with the
repayment of certain debt instruments during 1998, 1999, 2000 and 2001 of
$4,411 (net of taxes of $2,787), $705,000 (net of taxes of $445,000),
$12,768 (net of taxes of $7,580), and $14,383 (net of taxes of $8,520),
respectively. Additionally, reflects an asset impairment charge related to
discontinuing the production and distribution of Fluogen(R) in the amount in
2000 of $9,353 (net of taxes of $5,612).
(4) Reflects the cumulative effect of a change in accounting principle of
$545,000 (net of taxes of $325,000) due to the adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," during the
first quarter of 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the other parts
of this report, the audited consolidated financial statements and related notes.
Historical results and percentage relationships set forth in the statement of
income, including trends that might appear, are not necessarily indicative of
future operations. Please see the "Risk Factors" and "Forward-Looking
Statements" sections for a discussion of the uncertainties, risks and
assumptions associated with these statements.

RECENT DEVELOPMENTS

The audited consolidated financial statements contained in this annual
report on Form 10-K reflect the effects of

(1) a $46.5 million adjustment to our accrual for estimated amounts due
under Medicaid and other governmental pricing programs,

(2) an additional $39.8 million charge relating to Lorabid(R), consisting
of a $49.9 million accrual for Lorabid(R) purchase commitments in
excess of expected demand and a $10.0 million reduction (from $76.8
million to $66.8 million) in the previously announced Lorabid(R)
intangible asset impairment charge, and

(3) a deferral of $4.7 million of revenue associated with a purchase of our
products by the King Benevolent Fund, Inc.

Each of these adjustments arises from the internal review or is otherwise based
on information that became available subsequent to the release of the unaudited
consolidated financial statements for the year

53

ended December 31, 2002, contained in our Form 8-K dated April 15, 2003, and,
under applicable accounting rules, is required to be reflected as of December
31, 2002.

The following table summarizes our 2002 net sales, operating income, net
income and diluted income per common share, as previously reported in our Form
8-K dated April 15, 2003 and as reported in this annual report after accounting
for the three adjustments described above (in thousands, except per share data):

- ---------------

(1) The data labeled "As previously reported" are presented for information
purposes only in order to alert the reader that the 2002 results of
operations previously reported in our Form 8-K dated April 15, 2003 differ
from the audited 2002 results of operations as a result of the three
adjustments described above. These data are not presented in this annual
report as a financial measure of our historical financial performance and
should not be considered by investors and other readers of this annual
report in their decision making.

SEC Investigation, Medicaid and Other Governmental Program Accrual Adjustment,
and Related Matters

As previously reported, in March 2003, the SEC initiated a formal
investigation of King. In light of the SEC investigation, and as recommended by
King's management, the Audit Committee of our Board of Directors initiated an
assessment and internal review of the issues raised by the SEC investigation and
retained independent counsel, who retained an independent accounting firm, to
assist the Audit Committee.

In connection with the internal review, King determined that it had
underaccrued for estimated 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 represents our best
estimate of the extent to which we underpaid amounts due under Medicaid and
other governmental pricing programs during the period from 1998 to 2002. In
connection with the accrual adjustment, we expect to recover on a pre-tax basis
approximately $0.7 million of royalties we previously paid for Altace(R). We
also expect to recover on a pre-tax basis approximately $9.5 million of the
promotional fees we previously paid under our Co-Promotion Agreement for
Altace(R), but we have not completed discussions with our partner and therefore
have not recorded this amount in our results for 2002.

We have contacted the Centers for Medicare and Medicaid Services, the
Office of Inspector General at the Department of Health and Human Services, and
the Department of Justice in connection with the underpayments and expect to
engage in more detailed discussions with these and other appropriate agencies in
order to determine the precise amount of the underpayments. We currently expect
to make the requisite payments in the third or fourth quarter of 2003. Pending
determination of the precise amount of such payments, we have placed $46.5
million in an interest-bearing escrow account. The accrual adjustment relates
solely to the estimated underpayments and excludes any interest, fines,
penalties or other amounts that might be owed in connection with the
underpayments, as we cannot predict or reasonably estimate their likelihood or
magnitude at this time.

Of the aggregate adjustment to the accrual for estimated underpayments of
amounts due under Medicaid and other governmental pricing programs,
approximately $12.0 million reflects changes in accounting estimates under
generally accepted accounting principles made in 2002, and approximately $12.4
million reflects corrections of immaterial errors related to 2002 and recorded
in the fourth quarter of 2002. The remaining $22.1 million reflects corrections
of immaterial errors that occurred during 1998 to

54

2001. Of this total of $22.1 million, approximately $2.5 million relates to
underpayments in 1998, $6.5 million relates to underpayments in 1999, $5.9
million relates to underpayments in 2000 and $7.3 million relates to
underpayments in 2001. The impact of these immaterial errors in each of the
years from 1998 to 2001 on net sales, operating income, net income and diluted
income per common share for those years is set forth below (in thousands, except
per share data):

For information on the impact of the immaterial errors in 2001 and 2002 on
a quarterly basis, see Note 23 to our audited consolidated financial statements.

In connection with the internal review, the Audit Committee determined that
our calculations related to Medicaid and other governmental pricing programs
have not followed all aspects of the prescribed methodology under the applicable
statutes. King's accrual adjustment relates to

(1) modifications to our methodologies for calculating average manufacturer
price and best price (both of which are reported to the government and
used in determining amounts due under Medicaid and other governmental
pricing programs) in response to changes in legal interpretations of
complex and, in certain respects, ambiguous areas of Medicaid rebate
laws,

(2) recently compiled information with respect to the class of trade of our
direct and indirect customers that affects our past calculations of
average manufacturer price, and

(3) the correction of certain immaterial errors in the calculation of
average manufacturer price and best price.

The accrual adjustment reflects both Medicaid underpayments and amounts owing to
other governmental agencies, such as the Department of Veterans Affairs and the
Public Health Service, which utilize payment formulae that are similar to those
applicable to the Medicaid rebate program.

The Audit Committee concluded, after weighing all the information developed
in the course of the internal review, that the underpayments requiring the
accrual adjustment did not arise from an effort on the part of our current or
prior management to mislead investors by manipulating reported financial
results. While the Committee concluded that the errors did not result in any
material financial misstatements, the Committee stated that it believes that we
need to dedicate additional attention and resources to ensure compliance with
all applicable reporting requirements for Medicaid rebates and other
governmental pricing programs. The Committee noted the need to have in place
systems, processes and personnel that provide reasonable assurance that such
errors are unlikely to recur in the future. Management has reviewed with the
Committee the steps we have taken, are now taking and plan to take to address
the issues raised by the incorrect Medicaid and other governmental pricing
programs filings made in the past, and to enhance our capabilities with respect
to future Medicaid and other governmental pricing calculations. The Committee
stated that it intends to monitor carefully our ongoing discussions with
appropriate regulatory authorities, as well as the implementation of proposed
improvements to systems, processes, training and personnel.

The SEC investigation of King is continuing. In addition, as discussed
above, we have contacted the Centers for Medicare and Medicaid Services, the
Office of Inspector General at the Department of Health and Human Services, and
the Department of Justice regarding amounts due under Medicaid and other
governmental pricing programs. The SEC, the Centers for Medicare and Medicaid
Services, the Office of Inspector General, the Department of Justice and other
governmental agencies that might be investigating or might commence an
investigation of King could impose, based on a claim of a violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions, including
fines, penalties and possible

55

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. In addition, 22 purported class action complaints have been filed by
holders of our securities against us, our directors, former directors, executive
officers and former executive officers, and seven purported shareholder
derivative complaints have been filed, respectively alleging violations of
federal securities laws and a breach of fiduciary duty, among other things, by
some of our officers and directors. If any governmental sanctions are imposed,
or if we were not to prevail in the securities 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. For additional information, please see the "Risk Factors" section
under the heading "The SEC investigation, other possible governmental
investigations, and securities litigation could have a material adverse effect
on our business."

We have undertaken a substantial process to enhance our compliance with
Medicaid and other governmental pricing program requirements. In November 2000,
we began the process of implementing a new information technology system which
has recently started to become operational. As part of this effort, we have
engaged outside consultants to ensure that the new information technology system
collects and processes the data that we previously lacked for calculating
average manufacturer price. Although the new information technology system is
intended to significantly enhance the accuracy of our calculations for
estimating amounts due under Medicaid and other governmental pricing programs,
our processes for these calculations will continue to involve considerable
manual input, and, as a result, these calculations will remain subject to the
risk of errors arising from manual processes. We expect to further automate our
processes for these calculations and expect to achieve a high level of
automation in such processes by mid-2004. In addition, we have hired a senior
director knowledgeable with respect to Medicaid and other governmental pricing
programs, and are continuing to search for and hire qualified personnel. We have
engaged outside consultants to assist us in our compliance efforts while we are
in the process of further expanding our internal compliance staff. We are
committed to further enhancements and continue to identify and implement actions
that improve our compliance with Medicaid and other governmental pricing
programs.

Additional Charge Relating to Lorabid(R)

As previously disclosed, during the fourth quarter of 2002, we decided to
divest our rights to Lorabid(R). As a result of a continuing decline of
Lorabid(R) prescriptions and our inability, to date, to divest our rights to
Lorabid(R), subsequent to the release of the unaudited consolidated financial
statements for the year ended December 31, 2002, we determined that we will not
be able to sell all the Lorabid(R) we are required to purchase under our supply
agreement with Eli Lilly. Accordingly, because of these further declines in
Lorabid(R) prescription trends, and because we had not finalized our
consolidated financial statements for the year ended December 31, 2002, we have
revised our unaudited consolidated financial statements for the year ended
December 31, 2002 to record in the fourth quarter of 2002 a $49.9 million charge
related to the liability associated with the amount of the purchase commitments
in excess of expected demand.

Due to the further decline in our revenue projections for Lorabid(R) as of
July 2003, we were also required to reassess the fair value of the Lorabid(R)
intangible assets. Previously, in the unaudited consolidated financial
statements for the year ended December 31, 2002, we reported that during the
fourth quarter of 2002 we had recorded an intangible asset impairment charge of
$51.2 million and an additional intangible asset impairment charge of $25.7
million. Based on our recent reassessment, and as a result of recording the
$49.9 million charge for Lorabid(R) purchase commitments in excess of expected
demand, we determined that the intangible asset impairment charge should be
decreased from the aggregate of $76.8 million, previously presented in the
unaudited consolidated financial statements for the year ended December 31,
2002, to $66.8 million. We determined the fair value of the Lorabid(R)
intangible asset based on the net present value of future estimated Lorabid(R)
cash flows.

The overall adjustment to the Lorabid(R) charge presented in the unaudited
consolidated financial statements for the year ended December 31, 2002 is a net
additional charge of $39.8 million.
56

King Benevolent Fund Transaction

On December 26, 2002, we sold $4,587,571 (net of a 2% prompt pay discount)
of Cortisporin(R), Silvadene(R) and Tigan(R) to a third-party wholesaler, which
in turn resold those products to the King Benevolent Fund in January 2003 for
$4,634,405. As of July 15, 2003, the Benevolent Fund had yet to distribute 77%
of the Cortisporin(R), 59% of the Silvadene(R) and 11% of the Tigan(R) purchased
in January 2003. The expiration dates for the products still in inventory are
July 31, 2004 (or later) for the Cortisporin(R), November 30, 2004 (or later)
for the Silvadene(R) and May 31, 2004 for the Tigan(R). In light of the facts
that a significant percentage of the products had not yet been distributed by
the Benevolent Fund after more than six months and that the Benevolent Fund
might be deemed to have been a "related party" for accounting purposes at the
time of our sale, we have revised our previously released unaudited consolidated
financial statements for the year ended December 31, 2002 to defer recognition
of the revenue from this sale to the third-party wholesaler and to treat this
sale in a manner analogous to the consignment method. As of the date of shipment
of the purchased products to the third-party wholesaler, we have recorded
deferred revenue in the amount of $4,701,195 and classified the purchased
products as if they were consignment inventory at our cost of such inventory. We
will recognize the deferred revenue as the purchased products are distributed by
the Benevolent Fund, which has agreed to provide us with the requisite
information relating to the timing and amount of such distributions. The
deferral of recognition of $4,701,195 of revenue reduced by $4,131,092,
$2,548,884 and $0.01 our previously reported unaudited 2002 operating income,
net income and diluted income per common share, respectively. Based on the
information provided to us by the Benevolent Fund with respect to its charitable
distributions, we expect to recognize in the first and second quarters of 2003
$324,639 and $923,914, respectively, of the deferred revenue.

After weighing all the information developed in the course of the internal
review, our Audit Committee concluded that this transaction did not arise from
an effort to mislead investors by manipulating reported financial results, and
that consummation of the sale had been in the best interests of King. In
connection with this conclusion, the Audit Committee also determined that it
would be desirable for King to provide detailed disclosure of the nature and
extent of our relationship with the Benevolent Fund and this transaction beyond
that required by applicable rules. Please see the "Certain Relationships and
Related Transactions" section.

OVERVIEW

General

Our growth in 2002 primarily resulted from continued increased sales of our
three largest products: Altace(R), Levoxyl(R) and Thrombin-JMI(R). Significant
milestone events occurring since the end of 2001 that we believe expand and
enhance our opportunities for continued growth include the completion of our
acquisition of Meridian Medical Technologies, Inc., our acquisition of rights to
Intal(R), Tilade(R) and Synercid(R) from Aventis and our acquisition of Elan's
primary care business in the United States and Puerto Rico, which includes
Sonata(R) and Skelaxin(R) and Elan's United States primary care sales force. We
believe that these developments, which include expanded pipeline opportunities,
together with the continued sales growth of our existing key products,
especially Altace(R), position King for future growth.

SALES OF KEY PRODUCTS

In the following discussion, net sales for 2002 reflect a $22.1 million
charge for corrections of immaterial errors related to underpayments of amounts
due under Medicaid and other governmental pricing programs for the years 1998 to
2001; a $12.4 million charge for corrections of immaterial errors related to
underpayments of amounts due under Medicaid and other governmental pricing
programs related to 2002 and recorded in the fourth quarter of 2002; and a $12.0
million charge arising from changes made in 2002 in accounting estimates for the
years 1998 to 2002 related to Medicaid and other governmental pricing programs.
For additional information, see this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section under the heading "Recent
Developments."

57

Altace(R)

Net sales of Altace(R), an ACE inhibitor, grew to $450.0 million for the
year ended December 31, 2002, a 58% increase from $284.7 million during the
prior year. Altace(R) new prescriptions totaled approximately 3.5 million and
total prescriptions equaled approximately 10.6 million during 2002, increases of
41% and 50%, respectively, over the prior year according to IMS America monthly
prescription data. Monthly total prescriptions of Altace(R) exceeded one million
for the first time during December 2002 according to IMS America data.
Contributing also to the continued sales growth of Altace(R) is the sustained
shift to 10mg Altace(R), the same dose used in the landmark HOPE trial.
Specifically, total prescriptions for 10mg Altace(R) during 2002 increased
approximately 71% over the prior year, in comparison to an increase of 36% for
the other strengths of Altace combined, according to NDC Health monthly
prescription data. Additionally, price increases contributed to the continued
sales growth of Altace(R) during 2002.

Based on Altace(R)'s differentiating indications, positive clinical data
and prescription trends, along with our marketing strategies and a composition
of matter patent that should protect Altace(R) from generic competition through
2008, we anticipate that annual net sales of Altace(R) should continue to grow,
but not at as high a rate as that achieved in 2002.

Levoxyl(R)

Levoxyl(R) net sales grew to $169.5 million for the year ended December 31,
2002, a 61% increase from $105.1 million during the prior year. In addition to
continued prescription growth, the increase in sales of Levoxyl(R) during 2002
was primarily due to a reduction in discounting and implementation of a branded
pricing strategy. During the first six months of 2003, Levoxyl(R) net sales were
$58.9 million. We have submitted in excess of 40 patent applications relating to
our novel quick-dissolving formulation of Levoxyl(R). The first U.S. patent on
Levoxyl(R), a utility patent with composition of matter claims, was issued on
April 29, 2003 and extends through February 15, 2022.

Thrombin-JMI(R)

Net sales of Thrombin-JMI(R) totaled $96.5 million in 2002, a 51% increase
from $64.1 million during the prior year. Contributing to this growth was our
successful implementation of strategies which increased our unit production
capacity for Thrombin-JMI(R) at our Middleton, Wisconsin facility by
approximately 20% during 2002. We are, however, near capacity at this facility,
which will limit our ability to increase unit production of Thrombin-JMI(R). We
are currently working on long-term strategies to further expand our
manufacturing capacity for Thrombin-JMI(R). Net sales of Thrombin-JMI(R) should
continue to grow during 2003, but not at as high a rate as that achieved in
2002.

STRATEGIC DEVELOPMENTS

Elan's Primary Care Business

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
to potential new formulations of Sonata(R) Skelaxin(R), together with Elan's
United States primary care field sales force. Product rights subject to the
agreement include those related to Sonata(R), a nonbenzodiazepine treatment for
insomnia, and Skelaxin(R), a muscle relaxant, in the United States, its
territories and possessions, and Puerto Rico. Under the terms of the agreement,
Elan's sale of Skelaxin(R) included related NDAs, copyrights, trademarks,
patents and U.S. rights to potential new formulations of Skelaxin(R). Elan's
sale of Sonata(R) included its rights to the product, as well as certain related
copyrights. We also acquired certain intellectual property, regulatory, and
other assets relating to Sonata(R) directly from Wyeth. Under the terms of the
agreement, we secured an exclusive license to the intellectual property rights,
in this territory, of both Wyeth and Elan to the extent they relate to new
formulations of Sonata(R), other than for use in animals.

58

We paid approximately $750.0 million at closing. The $750.0 million
purchase price included the transfer of inventory with a value of approximately
$40.0 million. We also

- will pay royalties on the current formulation of Skelaxin(R) from the
date of closing and up to $71.0 million if Elan achieves certain
milestones in connection with the development of a reformulated version
of Sonata(R);

- have a potential milestone payment of $15.0 million if annual net sales
of a reformulation of Sonata(R) exceed $100.0 million; and

- potentially will pay an additional $25.0 million milestone payment to
Elan relating to the ongoing exclusivity of Skelaxin(R) on January 2,
2004.

Prior to the closing of this transaction, we had received a letter on March 13,
2003 from the FTC stating that it was conducting an investigation to determine
whether any person has engaged in unfair methods of competition with respect to
Elan's product Skelaxin(R). The focus of this investigation was Elan's listing
in the FDA's Orange Book of at least one patent claiming a method of using
metaxalone, and other actions with regard to FDA regulatory processes. As a
result of this new information, we commenced an investigation and asked Elan to
provide additional information. On March 17, 2003, Elan filed a lawsuit in the
Supreme Court of the State of New York seeking to compel us to close the
transaction. On May 8, 2003, the FTC advised Elan that it was discontinuing a
portion of its investigation with respect to this method of use patent. On May
20, 2003, we reached an agreement with Elan that restructured the terms of the
transaction as described above, and, as a result, the litigation has since been
dismissed.

Eon Labs and CorePharma have each filed an ANDA with the FDA pertaining to
metaxalone, the active ingredient in Skelaxin(R), to which we acquired certain
rights from Elan on June 12, 2003. The allegations in Eon Labs' and CorePharma's
notice relate to a patent covering a method of using metaxalone, which does not
expire until December 2021. We intend to vigorously enforce our rights under
this patent.

Meridian Medical Technologies, Inc.

On January 8, 2003, we completed our acquisition of Meridian, for a cash
price totaling $246.8 million. Meridian pioneered the development, and is a
leading manufacturer, of auto-injectors for the self-administration of
injectable drugs. An auto-injector is a pre-filled, pen-like device that allows
a patient or caregiver to automatically inject a precise drug dosage quickly,
easily, safely, and reliably. This acquisition provides us with additional lines
of growing exclusive pharmaceutical products, auto-injector technology, and
enhanced pipeline opportunities. Meridian had net sales of $82.4 million for its
fiscal year ended July 31, 2002.

Meridian's growing commercial pharmaceutical business primarily consists of
EpiPen(R), an auto-injector filled with epinephrine for the emergency treatment
of anaphylaxis resulting from severe or allergic reactions to insect stings or
bites, foods, drugs, and other allergens, as well as idiopathic or exercise
induced anaphylaxis. Dey, L.P. markets EpiPen(R) pursuant to a supply agreement
that expires December 31, 2010. Under the terms of the supply agreement, we
grant Dey the exclusive right and license to market, distribute, and sell
EpiPen(R) worldwide.

Meridian also has growing lines of pharmaceutical products that are
presently sold primarily to the U.S. Department of Defense under an Industrial
Base Maintenance Contract. These products include AtroPen(R), an atropine filled
auto-injector, and ComboPen(R), a pralidoxime filled auto-injector, both used as
nerve gas antidotes; a diazepam-filled auto-injector for treatment of seizures;
and a morphine filled auto-injector for pain management. Additionally, Meridian
is completing the development of a dual-chambered auto-injector and injection
process, with patent protection to 2010, which should provide an improved, more
efficient means of delivering nerve gas antidotes.

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Intal(R), Tilade(R) and Synercid(R)

On December 30, 2002, we acquired the rights to three branded prescription
pharmaceutical products from Aventis. The products include the rights in the
United States, Puerto Rico and Canada to Intal(R) and Tilade(R), and worldwide
rights, excluding Japan, to Synercid(R). Total upfront cash consideration paid
by King for the three branded pharmaceutical products totaled $197.5 million.

Intal(R) and Tilade(R) are non-steroidal anti-inflammatory agents for the
treatment of asthma. The differentiating attributes of Intal(R) and Tilade(R)
include their unique mechanism of action and excellent safety profiles, the
latter of which is extremely important for pediatric patients and in other
patient sub-populations for whom safety is a particular concern. A new Intal(R)
inhaler formulation utilizing HFA, an environmentally friendly propellant, is
currently under review by the FDA. The HFA formulation of Intal(R) is patented
in the United States until September 2017. Tilade(R) has a composition-of-matter
patent in the United States until October 2006. We believe our acquisition of
Intal(R) and Tilade(R) provides us with access to the respiratory pharmaceutical
market, which is currently experiencing significant growth and is the fourth
largest therapeutic market in the world.

Synercid(R) is an injectable antibiotic indicated for treatment of
vancomycin-resistant enterococcus faecium and treatment of some complicated skin
and skin structure infections. Synercid(R), which is primarily administered in
hospitals, has a formulation patent in the United States until November 2017. As
additional consideration to Aventis for Synercid(R), King has agreed to
potential milestone payments totaling $75.1 million. King will potentially pay
Aventis milestone payments totaling $50.1 million over the next three years,
payable in annual installments of $10.3 million, $21.2 million, and $18.6
million beginning on December 31, 2003, which relate to the continued
recognition of Synercid(R) as an effective treatment for vancomycin-resistant
enterococcus faecium. The remaining $25.0 million milestone is payable to
Aventis if Synercid(R) should receive FDA approval to treat methicillin
resistant staphylococcus aureus, or King will pay Aventis a one-time payment of
$5.0 million the first time during any twelve-month period net sales of
Synercid(R) 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(R) exceed $75.0
million.

AtroPen(R)

On June 19, 2003, we received FDA approval of our sNDA covering pediatric
and adult formulations of our nerve gas antidote AtroPen(R). Our receipt of this
approval is significant in that this is the first time that pediatric
formulations of this important homeland security product have been approved for
use in the United States. AtroPen(R) utilizes the auto-injector technology we
acquired in our January 2003 acquisition of Meridian. We do not anticipate being
able to distribute pediatric formulations of this product before the first
quarter of 2004.

PIPELINE OPPORTUNITIES

While continuing to execute our acquisition growth strategies with respect
to currently marketed products, we have also continued to expand and enhance our
pipeline opportunities. We currently have three pipeline product applications
submitted and under review by the FDA, and other compounds in various stages of
development.

Estrasorb(TM)

In September 2002, Novavax resubmitted to the FDA an NDA for Estrasorb(TM),
a topical estrogen replacement therapy in a unique lotion formulation for
symptomatic menopausal women. King has an exclusive worldwide license to
promote, market, distribute, and sell Estrasorb(TM), following approval, except
in the United States and Puerto Rico, where King and Novavax will co-market the
product. FDA approval for Estrasorb(TM) is anticipated during the second half of
2003.

60

Intal(R) HFA

As part of the transaction with Aventis on December 30, 2002, we acquired
rights to a new inhaler formulation of Intal(R) utilizing HFA, an
environmentally friendly propellant. The HFA formulation of Intal(R) is
currently under review by the FDA and is patented in the United States until
September 2017. We anticipate FDA approval of this product during 2004.

Diazepam-Filled Auto-Injector

An ANDA for our diazepam-filled auto-injector, now sold primarily to the
U.S. Department of Defense, is currently under review by the FDA. Once approved,
King plans to market this product commercially as the only adjunctive injectable
therapy, outside of a hospital setting, for the emergency treatment of status
epilepticus and severe recurrent convulsive seizures associated with epilepsy.
Currently, the only competing, self-administered therapy requires a rectal
administration. FDA approval for our diazepam-filled auto-injector is
anticipated during the second half of 2003.

Sonata(R)

We have entered into an agreement with Elan for the development of a
modified-release formulation of Sonata(R).

Skelaxin(R)

We have entered into an agreement with Elan relating to new formulation
development for Skelaxin(R).

Binodenoson

We recently completed the Phase II dose-ranging study for binodenoson, our
second-generation cardiac pharmacologic stress-imaging agent. The results of the
Phase II dose-ranging study are being used to plan protocols for two pivotal
Phase III studies involving binodenoson, the first of which is expected to begin
during the second half of 2003.

Modified Release Altace(R)

We have a license agreement with SkyePharma to develop and commercialize a
modified release formulation of Altace(R) utilizing SkyePharma's patented oral
drug delivery technology Geomatrix(R).

OTHER DEVELOPMENTS

Decision to Divest Lorabid(R) Assets

We have a supply agreement with Eli Lilly to produce Lorabid(R). This
supply agreement requires us to purchase minimum levels of inventory of
Lorabid(R) through August 2006. During the fourth quarter of 2002, we decided to
divest our rights to Lorabid(R) and reviewed the related intangible assets for
impairment. Prior to that, we considered our supply agreement with Eli Lilly and
the need to evaluate it for the effects of potential excess purchase
commitments. Based on changes in estimated prescription trends, we believe the
minimum purchase commitments under the supply agreement are greater than
inventory quantities we will be able to sell to our customers. As a result, we
have recorded a $49.9 million charge related to the liability associated with
the amount of purchase commitments in excess of expected demand. Based on our
review for impairment of intangible assets, as updated for management's cash
flow expectations as of July 2003, we have determined that the Lorabid(R)
intangible assets were impaired and have recorded an impairment charge of $66.8
million to write down the assets to their estimated fair value as of December
31, 2002. We donated $15.2 million of Lorabid(R) inventory to a charitable
organization as a result of the decision to divest our rights to Lorabid(R). If
sales of Lorabid(R) continue to decline, if we terminate the supply agreement
with Eli Lilly, or if we are unable to secure adequate Lorabid(R) inventory
purchase commitments from a buyer of Lorabid(R) rights, we may incur additional
losses in the future.

61

Generic Competition

On March 18, 2002, the FDA approved Impax Labs' ANDA for Fludrocortisone
Acetate Tablets, a generic for Florinef(R). On January 21, 2003, the FDA
approved Barr Laboratories' ANDA for a second generic for Florinef(R). As of
December 31, 2002, we had intangible assets related to Florinef(R) with carrying
values of $135.0 million. We have completed our impairment review and have
recorded an impairment charge in the amount of $111.0 million in the first
quarter of 2003 reflecting the reduction in the fair value of the Florinef(R)
intangible assets. We determined the fair value of our Florinef(R) product based
on management's current discounted cash flow projections for the product.

In March 2003, we also became aware that an ANDA for Cortisporin(R)
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(R) ophthalmic suspension. The
entry of the generic has negatively affected our market share for this product.
At December 31, 2002, we had intangible assets related to Cortisporin(R) of
approximately $19.2 million. At this point in time, we do not anticipate an
intangible asset impairment charge related to Cortisporin(R) ophthalmic
suspension.

Altace(R) Patent Challenge

Cobalt Pharmaceuticals 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(R) prior to the expiration of U. S. Patent No.
5061722, the '772 patent, a "composition of matter patent" relating to
Altace(R), which is listed in the FDA's Orange Book. We also recently listed
U.S. Patent No. 5,403,856, the '856 patent, a "method of use patent" relating to
Altace(R) in the FDA's Orange Book. The '722 patent does not expire until
October 2008 and the '856 patent does not expire until 2012. Under the federal
Hatch-Waxman Act of 1984, Cobalt has filed an ANDA alleging that the '722 patent
is invalid. This allegation is commonly known as a "Paragraph IV certification."
Under the terms of the Hatch-Waxman legislation, any generic manufacturer may
file an ANDA with a Paragraph IV certification after the pioneer company, or its
successor in interest, has marketed the product for four years. Regulations do
not require Cobalt to certify against the '856 patent. We are privy to the
conclusions of well-qualified patent counsel who have concluded that the '722
patent should prove clearly enforceable. Based on this opinion and other
opinions, we have a high degree of confidence that the composition of matter
patent should be enforceable, and we intend to vigorously enforce the patent
against this challenge. We have filed suit to enforce our rights to the patent.
Moreover, we has recently amended our complaint, without opposition, to include
an allegation of infringement of the '856 patent by Cobalt. If these patents, we
successfully challenged, Cobalt may market a generic equivalent of Altace(R)
prior to October 2008 but not before January 2005, the expiration date of U.S.
Patent No. 4,587,258, the '258 patent, which is another composition of matter
patent that relates to and is listed in the FDA's Orange Book for Altace(R) and
which has not been challenged by Cobalt. The filing of our suit provides us an
automatic stay of FDA approval of the ANDA for 30 months. However, should the
court grant Cobalt summary judgment on the '722 patent, we would not receive the
benefit of the automatic stay.

Levoxyl(R) Patent Challenge

Mylan Pharmaceuticals, a generic drug manufacturer, filed an ANDA with the
FDA seeking permission to market a generic version of Levoxyl(R) prior to the
expiration of our '581 patent which was issued to us on April 29, 2003. We
received notice of the Paragraph IV certification on April 30, 2003 and have
subsequently filed suit to enforce our rights under the '581 patent being
challenged. Additionally, on June 24, 2003, we received a notice of Paragraph IV
certification related to the '581 patent from KV Pharmaceuticals. We intend to
enforce our rights under the '581 patent to the fullest extent of the law.

62

Prefest(R)

On May 29, 2002, we acquired from Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson subsidiary, all the rights to Prefest(R) tablets in the United
States, its territories and possessions, and the Commonwealth of Puerto Rico,
including the related NDA, Investigational NDA, copyrights and patents or
licenses to these patents for which we paid $108.0 million at closing. During
February 2003, we paid Ortho-McNeil an additional $7.0 million upon receipt of
the FDA's approval to rename the product "Prefest", which was formerly named
"Ortho-Prefest". This product, a single tablet combination hormone replacement
therapy with an intermittent progestin administration, together with a
continuous administration of estrogen, has a preparation patent listed in the
FDA's Orange Book that expires in January 2012, as well as a second Orange Book
listed patent that expires in April 2009. The progestin in Prefest(R) tablets
represents the lowest dose of progestin in any of these products. This
characteristic, combined with the product's lipid and triglyceride level
profile, differentiates Prefest(R) tablets from competing therapies.

Women's Health Initiative Clinical Trial

An ongoing clinical trial, the Women's Health Initiative, is being
conducted by the National Institutes of Health. Data from that 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 replacement therapy and the oral
estrogen replacement therapy, which include our products Prefest(R),
Delestrogen(R) and Menest(R) and may affect our future marketing efforts for
Estrasorb(TM).

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

- ---------------

(1) Branded pharmaceuticals segment net revenues for 2002 reflect (a) a $22,113
charge for corrections of immaterial errors related to underpayments of
amounts due under Medicaid and other governmental pricing programs for the
years 1998 to 2001, (b) a $12,399 charge for corrections of immaterial
errors related to underpayments of amounts due under Medicaid and other
governmental pricing programs related to 2002 and recorded in the fourth
quarter of 2002, and (c) an $11,970 charge arising from changes in
accounting estimates related to Medicaid and other governmental pricing
programs. For additional information, see the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section under the
heading "Recent Developments" and Note 2 to our audited consolidated
financial statements.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues

Total net revenue increased $256.1 million, or 29.4%, to $1,128.3 million
in 2002 from $872.3 million in 2001, due primarily to the growth and acquisition
of branded pharmaceutical products.

Net sales from branded pharmaceutical products increased $239.3 million, or
30.1%, to $1,032.8 million in 2002 from $793.5 million in 2001. This increase
was due primarily to growth in net sales of Altace(R), Levoxyl and
Thrombin-JMI(R), the acquisition of Corzide(R), Delestrogen(R) and Florinef(R)
and a license to Corgard(R) in August 2001, and the acquisition of Prefest(R) on
May 29, 2002. This increase was

63

partially offset by a $22.1 million charge for corrections of immaterial errors
related to underpayments of amounts due under Medicaid and other governmental
pricing programs for the years 1998 to 2001; a $12.4 million charge for
corrections of immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs related to 2002 and recorded in
the fourth quarter of 2002; a $12.0 million charge arising from changes made in
2002 in accounting estimates for the years 1998 to 2002 related to Medicaid and
other governmental pricing programs; and decreases in net sales of Lorabid(R),
Tapazole(R) and several women's health products. Net sales from branded
pharmaceutical products for 2001 have not been reduced by estimated
underpayments of amounts due under Medicaid and other governmental pricing
programs for that year. We expect continued growth in net sales of our branded
pharmaceuticals, due primarily to the anticipated increase in net sales of
Altace(R), the Intal(R), Tilade(R) and Synercid(R) product acquisition on
December 30, 2002 and the acquisition of Sonata(R) and Skelaxin(R) on June 12,
2003. Although we expect overall net sales of our branded pharmaceuticals to
grow, we expect sales of Lorabid(R), Florinef(R), Cortisporin(R) ophthalmic
suspension and women's health products to decrease due to the developments
explained above. We refer you to the "Risk Factors" section in this annual
report where we describe events that could cause results to materially differ.

Revenue from royalties is derived from payments we receive based on sales
of Adenoscan(R) and Adenocard(R). Revenues from royalties increased $11.6
million, or 24.8%, to $58.4 million in 2002 from $46.8 million in 2001 primarily
due to an increase in unit sales of Adenoscan(R). While we anticipate continued
growth from royalty revenues, we are not responsible for the marketing of these
products and, thus, are not able to predict whether growth in 2003 will continue
at the rate experienced in 2002.

Revenues from contract manufacturing increased $6.3 million, or 21.1%, to
$35.9 million in 2002 from $29.7 million in 2001. The majority of the increase
was due to increased unit volume of products manufactured for third parties in
2002 compared to 2001. We anticipate a significant increase in contract
manufacturing revenue in 2003 due to the acquisition of Meridian on January 8,
2003.

Revenue from all other sources, which primarily includes the sale of
generic pharmaceuticals, decreased $1.1 million, or 47.3%, to $1.2 million in
2002 from $2.3 million in 2001 primarily due to decreased sales of a
private-label generic product line to another pharmaceutical company.

Operating Costs and Expenses

Total operating costs and expenses increased $328.1 million, or 64.8%, to
$834.1 million in 2002 from $506.0 million in 2001. The increase was primarily
due to special items during 2002 resulting in a net charge of $152.8 million,
cost of revenues associated with increased unit sales of our branded
pharmaceutical products, and increased fees associated with the promotion of
Altace(R) under our Co-Promotion Agreement with Wyeth, offset by special items
during 2001 resulting in a net charge of $12.1 million. 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 adjustments charges; charges resulting from the early extinguishment
of debt; asset impairment charges; expenses of drug recalls; and gains and
losses resulting from the divestiture of assets. We believe the identification
of special items enhances an investor's 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 our management.

Cost of revenues increased $108.4 million, or 58.1%, to $295.0 million in
2002 from $186.6 million in 2001. The increase was primarily due to costs
associated with increased unit sales of our branded pharmaceutical products,
including Altace(R), Levoxyl(R) and Thrombin-JMI(R), and an increase in special

64

items related to inventory totaling $68.1 million during 2002, as compared to a
net charge totaling $8.0 million during 2001. Special items were as follows:

- As a result of a continuing decline of Lorabid(R) prescriptions and our
inability, to date, to divest our rights to Lorabid(R), we have
determined that we will be unable to sell all of the Lorabid(R) inventory
that we are required to purchase under our supply agreement with Eli
Lilly. Accordingly, we have recorded in the fourth quarter of 2002 a
$49.9 million charge related to the liability associated with the amount
of the purchase commitments in excess of expected demand.

- We incurred a charge of $15.2 million relating to inventory donations
during the fourth quarter of 2002, attributable to our decision to divest
our rights to Lorabid(R).

- We incurred a charge in the amount of $5.9 million during the fourth
quarter of 2001 and $1.2 million in 2002 related to our voluntary recall
of products manufactured for us by DSM Pharmaceuticals as a result of
regulatory issues related to DSM's manufacturing facility in Greenville,
North Carolina. Distribution of the affected products was resumed during
2002.

- We incurred a charge in the amount of $1.8 million during the
second-quarter of 2002, due primarily to the voluntary recalls of
Liqui-Char(R) and Theravac(R), two of our smaller products.

- We incurred a charge in the amount of $2.1 million during the third
quarter of 2001, relating to the write off of obsolete Levoxyl(R)
inventory. The FDA approved the NDA for our new formulation of Levoxyl(R)
on May 25, 2001. Pursuant to FDA guidance, we have distributed only the
FDA approved new formulation of Levoxyl(R) since August 14, 2001.

Cost of revenues from branded pharmaceutical products increased $110.2
million, or 79.2%, to $249.4 million in 2002 from $139.2 million in 2001. This
increase was primarily due to an increase in special items affecting cost of
revenues in 2002 as described above, as well as increases in cost of revenues
due to increased unit sales of our branded pharmaceutical products, especially
the Altace(R), Levoxyl(R) and Thrombin(R) product lines. We expect an increase
in cost of revenues related to branded pharmaceutical products due to our
anticipated growth in sales from branded pharmaceutical products; the Intal(R),
Tilade(R), Synercid(R) product acquisition on December 30, 2002; the acquisition
of Meridian on January 8, 2003; and the acquisition of Sonata(R) and Skelaxin(R)
on June 12, 2003.

Cost of revenues from royalties increased $2.2 million, or 26.5%, to $10.5
million in 2002 from $8.3 million in 2001. The increase is primarily due to our
increased royalty expense that is directly related to the increase in royalty
revenue attributable to Adenocard(R) and Adenoscan(R).

Cost of revenues associated with contract manufacturing increased $6.8
million, or 18.4%, to $43.7 million in 2002 from $36.9 million in 2001 due
primarily to an increase in contract manufacturing unit sales.

Cost of revenues from generic and other products decreased $0.8 million, or
38.1%, to $1.3 million in 2002 from $2.1 million in 2001 primarily due to
decreased sales of a private-label generic product line to another
pharmaceutical company.

As a percentage of revenues, cost of revenues increased to 26.1% in 2002
from 21.4% in 2001 due to the increase in special items as described above,
partially offset by an increase in sales of higher margin products. We
anticipate cost of revenues as a percentage of revenues may increase slightly
during 2003 due primarily to our acquisition of Meridian in January 2003.

Total selling, general and administrative expenses increased $126.0
million, or 52.3%, to $366.9 million in 2002 from $240.9 million in 2001. As a
percentage of total revenues, selling, general and administrative expenses
increased to 32.5% in 2002 from 27.6% in 2001. These increases were primarily
attributable to fees and expenses associated with the promotion of Altace(R)
under the Co-Promotion Agreement with Wyeth. We believe that selling, general,
and administrative expenses will continue to grow due to increased fees and
expenses associated with the promotion of Altace(R) under the Co-Promotion
Agreement with Wyeth based on the anticipated continued growth in net sales of
Altace(R); increased

65

expenses associated with the expansion of our sales force to approximately 1,200
individuals in 2003 from 715 individuals in 2002; our acquisition of Meridian on
January 8, 2003; and increased marketing expenses due to our acquisition of
Meridian's products; our acquisition of Intal(R), Tilade(R) and Synercid(R) on
December 30, 2002; and our acquisition of Sonata(R) and Skelaxin(R) on June 12,
2003.

Depreciation and amortization expense increased $11.3 million, or 23.5%, to
$59.3 million in 2002 from $48.0 million in 2001. This increase was primarily
attributable to capital expenditures in 2001 and 2002, a full year of
amortization of the intangible assets related to the acquisitions of Corzide(R),
Delestrogen(R) and Florinef(R) and a license to Corgard(R) from Bristol-Myers
Squibb in August 2001, and the acquisition of Prefest(R) from Ortho-McNeil on
May 29, 2002. As a percentage of total revenues, depreciation and amortization
expenses decreased modestly to 5.3% in 2002 compared to 5.5% in 2001.

Research and development expenses increased $13.7 million to $40.2 million
in 2002 from $26.5 million in 2001. The increase is primarily due to a special
item resulting in a charge of $12.0 million for in-process research and
development related to the acquisition of Intal(R) on December 30, 2002. We
continue to increase our commitment to research and development. Therefore, we
anticipate that research and development expense will increase to a range of $45
million to $55 million during 2003, excluding special items such as the
write-off of the value of in-process research and development associated with
our acquisitions. We expect to incur a charge for in-process research and
development during the second quarter of 2003 in connection with the acquisition
of the Elan primary care business unit.

In addition to the special items related to inventory and research and
development described above, King incurred other special items affecting
operating costs and expenses resulting in a net charge totaling $72.7 million
during 2002 compared to a net charge totaling $4.1 million during the same
period of the prior year. These other special items included the following:

- During the year ended December 31, 2002, we incurred an intangible asset
impairment charge of $66.8 million related to our decision to divest
Lorabid(R), reflecting management's cash flow expectations as of July
2003.

- During the year ended December 31, 2002, we incurred merger,
restructuring and executive retirement charges of $5.9 million primarily
resulting from the consolidation of our international division into our
operations in Bristol, Tennessee, and the retirement of two executives.

- During the year ended December 31, 2001, we incurred merger,
restructuring and other charges of $4.1 million resulting from the
further integration of Jones Pharma Incorporated.

Operating Income

Operating income decreased $72.1 million, or 19.7%, to $294.2 million in
2002 from $366.3 million in 2001. As a percentage of net revenues, operating
income decreased to 26.1% in 2002 from 42.0% in 2001 due primarily to an
increase in the net charge related to special items during 2002 and the
reduction in total revenue during 2002 due to (a) a $22.1 million charge for
corrections of immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years 1998 to 2001, (b)
a $12.4 million charge for corrections of immaterial errors related to
underpayments of amounts due under Medicaid and other governmental pricing
programs related to 2002 and recorded in the fourth quarter of 2002, and (c) a
$12.0 million charge arising from changes made in 2002 in accounting estimates
for the years 1998 to 2002 related to Medicaid and other governmental pricing
programs. Operating income for 2001 has not been reduced to reflect the
estimated underpayments of amounts due under Medicaid and other governmental
pricing programs for that year as the underpayments were immaterial. While we
believe operating income in 2003 will grow due to increased net sales from our
branded pharmaceutical segment, we refer you to the "Risk Factors" section in
this report where we describe events that could cause results to materially
differ.

66

Other Income (Expense)

Interest income increased $11.4 million, or 103.6%, to $22.4 million in
2002 from $11.0 million in 2001. This increase was primarily due to higher
average investments, offset by reduced rates of return on investments in 2002.

Interest expense decreased $0.3 million, or 2.4%, to $12.4 million in 2002
from $12.7 million in 2001 due primarily to substantially lower interest rates
on long-term debt.

Special items during 2002 also included a charge of $35.6 million relating
to the establishment of a valuation allowance against the convertible notes
receivable from Novavax. SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan -- an amendment of FASB Statements No. 5 and 15" requires that we
treat the Novavax convertible notes as an impaired loan because of the decline
in the share price of Novavax common stock to levels below that established by
our common stock conversion options associated with the convertible notes. We
will adjust the amount of the valuation allowance in future periods until the
loan is no longer considered to be impaired. If the Novavax common stock price
continues to decline, we may incur additional charges related to the investment
in the convertible notes.

We recorded other expenses of $0.9 million in 2002 as compared to other
income of $6.3 million in 2001. During 2001, other income related primarily to
unrealized gains on the conversion options associated with our Novavax
convertible notes.

Income Tax Expense

The effective tax rate was 31.8% in 2002 and 37.2% in 2001. The effective
tax rate in 2002 was different than the federal statutory rate of 35.0%
primarily due to favorable adjustments in the overall state tax rate, research
and development tax credits, donations of branded prescription pharmaceutical
products and tax-exempt interest. The effective rate in 2001 was different than
the federal statutory rate of 35.0% primarily due to state income taxes. We
anticipate a tax rate in 2003 more similar to the tax rate experienced in 2001.

Income before Extraordinary Items and Cumulative Effect of Change in
Accounting Principle

Due to the factors set forth above, income before extraordinary items and
the cumulative effect of change in accounting principle decreased $50.4 million,
or 21.6%, to $182.5 million in 2002 from $232.9 million in 2001.

Extraordinary Items

During the year ended December 31, 2001, we recognized an extraordinary
loss of $22.9 million ($14.4 million net of income taxes) due to the write-off
of unamortized financing costs and premiums paid resulting from the repayment of
debt during this period.

Cumulative Effect of Change in Accounting Principle

We recognized the cumulative effect of a change in accounting principle of
$0.5 million, net of income taxes of $0.3 million, during the first quarter of
2001, due to the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities.

Net Income

Due to the factors set forth above, net income decreased $35.4 million, or
16.2%, to $182.5 million in 2002 from $217.9 million in 2001.

67

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues

Total net revenue increased $252.1 million, or 40.6%, to $872.3 million in
2001 from $620.2 million in 2000, due primarily to the growth and acquisition of
branded pharmaceutical products.

Net sales from branded pharmaceutical products increased $264.4 million, or
50.0%, to $793.5 million in 2001 from $529.1 million in 2000. The continued
growth in net sales of Altace(R) and Levoxyl(R), together with the acquisitions
of Nordette(R) and Bicillin(R) from Wyeth in July 2000, and the acquisition of
Corzide(R), Delestrogen(R) and Florinef(R) and a license to Corgard(R) from
Bristol-Myers Squibb in August 2001, accounted for the majority of the increase
in net sales of our branded pharmaceutical products.

Revenue from royalties is derived from payments we receive based on sales
of Adenoscan(R) and Adenocard(R). Revenues from royalties increased $5.3
million, or 12.8%, to $46.8 million in 2001 from $41.5 million in 2000.

Revenues from contract manufacturing decreased $13.1 million, or 30.6%, to
$29.7 million in 2001 from $42.8 million in 2000. The majority of the decrease
was due to the expiration in October 2000 of a distribution agreement pursuant
to which Jones previously supplied Thrombogen(R), a line of thrombin-based
products, to Ethicon, Inc., a subsidiary of Johnson & Johnson. We believe sales
of our branded pharmaceutical product, Thrombin-JMI(R), benefited from the
expiration of the distribution agreement.

Net sales from generic and other sources decreased $4.7 million, or 67.1%,
to $2.3 million in 2001 from $7.0 million in 2000 primarily due to decreased
sales of a private-label generic product line to another pharmaceutical company.

Operating Costs and Expenses

Total operating costs and expenses increased $70.5 million, or 16.2%, to
$506.0 million in 2001 from $435.5 million in 2000. The increase was primarily
due to increased fees and expenses associated with the promotion of Altace(R)
under the Co-Promotion Agreement with Wyeth, offset by a $60.6 million reduction
in merger, restructuring, and other nonrecurring charges.

Cost of revenues, increased $15.3 million, or 8.9%, to $186.6 million in
2001 from $171.3 million in 2000. The increase was primarily due to costs
associated with increased unit sales of our branded pharmaceutical products,
including Altace(R) and Levoxyl(R), the acquisition of Nordette(R) and
Bicillin(R) from Wyeth in July 2000, and the acquisition of Corzide(R),
Delestrogen(R) and Florinef(R) and a license to Corgard(R) from Bristol-Myers
Squibb in August 2001, partially offset by a reduction in net charges resulting
from special items in 2001 as compared to 2000. The special items in 2001 and
2000 are as follows:

- We incurred a charge in the amount of $5.9 million during the fourth
quarter 2001 related to our voluntary recall of products manufactured for
us by DSM Pharmaceuticals as a result of regulatory issues related to
DSM's manufacturing facility in Greenville, North Carolina.

- During the third quarter of 2001, we incurred a charge in the amount of
$2.1 million related to the write-off of obsolete Levoxyl(R) inventory.
The FDA approved the NDA for a new formulation of Levoxyl(R) on May 25,
2001. Pursuant to FDA guidance, we have distributed only the FDA approved
new formulation of Levoxyl(R) after August 14, 2001.

- During the third quarter of 2000, we incurred a charge in the amount of
$28.7 million related to the write-off of inventory in association with
our decision to discontinue Fluogen(R), an influenza virus vaccine.

Cost of revenues from branded pharmaceutical products increased $15.5
million, or 12.5%, to $139.2 million in 2001 from $123.7 million in 2000. This
increase was primarily due to increases in cost of revenues from Altace(R),
Levoxyl(R) and Thrombin-JMI(R) product lines partially offset by a decrease in
special inventory items from 2000 to 2001 described above.

68

Cost of revenues from royalties increased 1.3 million, or 18.6%, to $8.3
million in 2001 from $7.0 million in 2000. The increase in cost of revenues from
royalties is due to the increase in royalty revenue.

Cost of revenues associated with contract manufacturing remained generally
consistent at $36.9 million in 2001 compared to $36.4 million in 2000.

Cost of revenues from generic and other products decreased $2.1 million, or
50.0%, to $2.1 million in 2001 from $4.2 million in 2000 primarily due to
decreased sales of a private-label generic product line to another
pharmaceutical company.

As a percentage of revenues, cost of revenues decreased to 21.4% in 2001
from 27.6% in 2000 due to an increase in sales of higher margin products and
lower net charges due primarily to the write-off of product inventory in 2001
compared to 2000.

Selling, general and administrative expenses increased $108.0 million, or
81.3%, to $240.9 million in 2001 from $132.9 million in 2000. As a percentage of
total revenues, selling, general and administrative expenses increased to 27.6%
in 2001 from 21.4% in 2000. This increase was primarily attributable to fees and
expenses associated with the promotion of Altace(R) under the Co-Promotion
Agreement with Wyeth and the growth of our dedicated national field sales force
from approximately 520 to 715 representatives during 2001.

Depreciation and amortization expense increased $6.1 million, or 14.6%, to
$48.0 million in 2001 from $41.9 million in 2000. This increase was primarily
attributable to the amortization of the intangible assets related to the
acquisitions of Nordette(R) and Bicillin(R) from Wyeth in July 2000, and the
acquisition of Corzide(R), Delestrogen(R) and Florinef(R) and a license to
Corgard(R) from Bristol-Myers Squibb in August 2001.

Research and development expenses increased $1.7 million to $26.5 million
in 2001 from $24.8 million in 2000. Research and development includes special
items of $3.0 million in 2001 and $6.6 million in 2000. During 2001, we paid
$3.0 million to Novavax for the license rights to promote, market and distribute
Estrasorb(TM) and Androsorb(TM) in several countries. During 2000, we incurred
costs of $6.1 million relating to the discontinuance of the development of
Pallacor(TM).

In addition to the special items related to the write-off of inventory
described above, King incurred the following additional special items:

- During the year ended December 31, 2001, we incurred merger and
restructuring charges of $4.1 million resulting from the further
integration of Jones.

- During the year ended December 31, 2000, we incurred merger,
restructuring, and other nonrecurring charges of $56.1 million relating
to the tax-free pooling of interests transactions with King
Pharmaceuticals Research and Development in February 2000 and Jones in
August 2000. In addition, we incurred nonrecurring charges of $8.6
million relating to our decision to discontinue Fluogen(R) and $6.1
million relating to our decision to discontinue the development of
Pallacor(TM).

Operating Income

Operating income increased $181.6 million, or 98.3%, to $366.3 million in
2001 from $184.7 million in 2000. This increase was primarily due to decreases
in net charges resulting from the special items described above and increased
revenues from Altace(R) and Levoxyl(R), plus the acquisition of Nordette(R) and
Bicillin(R) from Wyeth in July 2000, and the acquisition of Corzide(R),
Delestrogen(R) and Florinef(R) and a license to Corgard(R) from Bristol-Myers
Squibb in August 2001. As a percentage of net revenues, operating income
increased to 42.0% in 2001 from 29.8% in 2000 due to a reduction in the amount
of special charges.

69

Other Income (Expense)

Interest income decreased $0.9 million, or 7.6%, to $11.0 million in 2001
from $11.9 million in 2000. This decrease was primarily due to lower average
investments and reduced rates of return on investments in 2001.

Interest expense decreased $24.3 million, or 65.7%, to $12.7 million in
2001 from $37.0 million in 2000, due to a significant reduction in average
borrowings outstanding.

Other income increased $3.0 million, or 90.9%, to $6.3 million in 2001 from
$3.3 million in 2000. During 2001, other income related primarily to unrealized
gains on our Novavax convertible notes. During 2000, other income was due
primarily to the gain realized on an interest rate swap.

Income Tax Expense

The effective tax rate in 2001 of 37.2% and 2000 of 46.8% was higher than
the federal statutory rate of 35.0% primarily due to permanent differences
related to certain nondeductible merger related costs in 2000 as well as state
income taxes in both 2001 and 2000.

Income before Extraordinary Items and Cumulative Effect of Change in
Accounting Principle

Due to the factors set forth above, income before extraordinary items and
the cumulative effect of change in accounting principle increased $146.3
million, or 168.9%, to $232.9 million in 2001 from $86.6 million in 2000.

Extraordinary Items

During the year ended December 31, 2001, we recognized an extraordinary
loss of $22.9 million ($14.4 million net of income taxes) due to the write-off
of unamortized financing costs and premiums paid resulting from the repayment of
debt during this period.

We recognized an extraordinary loss of $20.3 million ($12.8 million net of
income taxes) during the year ended December 31, 2000 due to the write-off of
unamortized financing costs and premiums paid in connection with the repayment
of debt during the period. Also during 2000, we recorded extraordinary losses on
disposed and impaired assets totaling $9.4 million (net of income tax benefit of
$5.6 million) in connection with our decision to discontinue Fluogen(R).

Cumulative Effect of Change in Accounting Principle

We recognized the cumulative effect of a change in accounting principle of
$0.5 million, net of income taxes of $0.3 million, during the first quarter of
2001, due to the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities.

Net Income

Due to the factors set forth above, net income increased $153.4 million, or
237.8%, to $217.9 million in 2001 from $64.5 million in 2000.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements, except for operating
leases in the normal course of business as described in Note 10 to the our
audited consolidated financial statements included in this report, and as
reflected in the table below.

70

Contractual Obligations and Commercial Commitments

The following summarizes contractual obligations and commitments as of
December 31, 2002 (in thousands):

Our unconditional purchase obligations are primarily related to minimum
purchase requirements under contracts with suppliers to purchase raw materials
and finished goods related to our branded pharmaceutical products.

We have a supply agreement with Eli Lilly to produce Lorabid(R). This
supply agreement requires us to purchase certain minimum levels of inventory of
Lorabid(R) through August 2006 unless terminated earlier by us under certain
notification clauses. Based on changes in estimated prescription trends, we
believe the minimum purchase commitments under the supply agreement are greater
than inventory quantities we will be able to sell to our customers. As a result,
we have recorded a $49.9 million charge related to the liability associated with
the amount of the purchase commitments in excess of expected demand. If sales of
Lorabid(R) continue to decline, if we terminate the supply agreement with Eli
Lilly, or if we are unable to secure adequate Lorabid(R) inventory purchase
commitments from a buyer of the Lorabid(R) rights, we may incur additional
losses in the future. In the event Lorabid(R) prescriptions decline, there may
be a material adverse effect upon our results of operations and cash flows,
including, but not limited to an additional write-off of excess inventory.

LIQUIDITY AND CAPITAL RESOURCES

General

We believe that existing balances of cash, cash equivalents and marketable
securities, cash generated from operations, 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 May 13, 2002, our board of directors authorized a plan to repurchase up
to 7.5 million shares of King's common stock. Under the plan, we were authorized
to repurchase shares of our common stock in the open-market from time to time,
depending on market conditions, share price and other factors. During the year
ended December 31, 2002, we repurchased 7.5 million shares for $166.3 million.
At December 31, 2002 there was no additional authorization for the repurchase of
our common stock.

On May 29, 2002, we acquired the exclusive rights to Prefest(R) tablets in
the United States, its territories and possessions and the Commonwealth of
Puerto Rico, including the related NDA, Investigational NDA, copyrights, and
patents or licenses to the related patents from Ortho-McNeil, a Johnson &
Johnson subsidiary. We paid $108.0 million for the product rights upon closing
plus approximately $3.3 million of expenses. During February 2003, subsequent to
year end, we paid Ortho-McNeil an additional $7.0 million upon receipt of the
FDA's approval to rename the product "Prefest(R)", which was formerly named
"Ortho-Prefest(R)." The acquisition was financed with cash on hand.

On December 30, 2002, we licensed or acquired the rights to three branded
prescription pharmaceutical products from Aventis for $197.5 million, plus $4.3
million in expenses. The products
71

include the rights in the United States, Puerto Rico, and Canada to Intal(R) and
Tilade(R), inhaled non-steroidal anti-inflammatory agents for the management of
asthma, and worldwide rights, excluding Japan, to Synercid(R), an injectable
antibiotic. As additional consideration to Aventis for Synercid(R), we have
agreed to potential milestone payments totaling $75.1 million. We will
potentially pay Aventis milestone payments totaling $50.1 million over the next
three years, payable in annual installments of $10.3 million, $21.2 million, and
$18.6 million beginning on December 31, 2003, which relate to the continued
recognition of Synercid(R) as an effective treatment for vancomycin-resistant
enterococcus faecium. The remaining $25.0 million milestone is payable to
Aventis if Synercid(R) 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(R) 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(R) exceed $75.0
million. During 2002, we wrote off $12.0 million of in-process research and
development related to our acquisition of Intal(R).

On January 8, 2003, we completed our acquisition of Meridian. We paid
$44.50 per common share to Meridian shareholders, totaling approximately $246.8
million. We financed the acquisition using our available cash.

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
to potential new formulations, of Sonata(R) and Skelaxin(R), together with
Elan's United States primary care field sales force. Product rights subject to
the agreement include those related to Sonata(R), a nonbenzodiazepine treatment
for insomnia, and Skelaxin(R), a muscle relaxant, in the United States, its
territories and possessions, and Puerto Rico. Under the terms of the agreement,
Elan's sale of Skelaxin(R) included related NDAs, copyrights, patents and U.S.
rights to potential new formulations of Skelaxin(R). Elan's sale of Sonata(R)
included its rights to the product, as well as certain related copyrights. We
also acquired certain intellectual property, regulatory, and other assets
relating to Sonata(R) directly from Wyeth. Under the terms of the agreement, we
secured an exclusive license to the intellectual property rights, in this
territory, of both Wyeth and Elan to the extent they relate to new formulations
of Sonata(R), other than for use in animals. We paid approximately $750.0
million at closing. The $750.0 million purchase price included the transfer of
inventory with a value of approximately $40.0 million. We also

- will pay royalties on the current formulation of Skelaxin(R) from the
date of closing and up to $71.0 million if Elan achieves specific
milestones in connection with the development of new formulations of
Sonata(R);

- have a potential milestone payment of $15.0 million if annual net sales
of a reformulation of Sonata(R) exceed $100.0 million;

- potentially will pay an additional $25.0 million milestone payment to
Elan relating to the ongoing exclusivity of Skelaxin(R) on January 2,
2004.

Prior to the closing of this transaction, we had received a letter on March 13,
2003 from the FTC stating that the it was conducting an investigation to
determine whether any person has engaged in unfair methods of competition with
respect to Elan's product Skelaxin(R). The focus of this investigation was
Elan's listing in the FDA's Orange Book of at least one patent purportedly
claiming a method of using metaxalone, and other actions with regard to FDA
regulatory processes. As a result of this new information, we commenced an
investigation and asked Elan to provide additional information. On March 17,
2003, Elan filed a lawsuit in the Supreme Court of the State of New York seeking
to compel us to close the transaction. On May 8, 2003, the FTC advised Elan that
it was discontinuing a portion of its investigation with respect to this method
of use patent. On May 20, 2003, we reached an agreement with Elan that
restructured the terms of the transaction as described above, and, as a result,
the litigation has since been dismissed.

On March 10, 2003, we received a subpoena duces tecum from the SEC with
respect to an SEC investigation of King. The subpoena requested the production
of documents focusing on the years 1999

72

and 2000 and included all documents related to sales of our products to VitaRx
and Prison Health Services during 1999 and 2000, our "best price" lists, all
documents related to the pricing of our pharmaceutical products provided to any
governmental Medicaid agency during 1999, the accrual and payment of rebates on
Altace(R) from 2000 to the present, and other general requests. On May 14, 2003,
the SEC issued another subpoena duces tecum, requesting additional documents
pertaining to the products Fluogen(R) and Lorabid(R), the King Benevolent Fund,
Inc., our calculations related to Medicaid rebates, and our Audit Committee's
internal review of issues raised by the SEC investigation. We have cooperated,
and will continue to cooperate, in providing information to the SEC.

In connection with our determination that we have underpaid amounts due
under Medicaid and other governmental pricing programs during the period from
1998 to 2002, we have contacted the Centers for Medicare and Medicaid Services,
the Office of Inspector General at the Department of Health and Human Services,
and the Department of Justice. We expect to engage in more detailed discussions
with these and other appropriate agencies in order to determine the precise
amount of the underpayments. We currently expect to make the requisite payments
in the third or fourth quarter of 2003. The SEC, the Centers for Medicare and
Medicaid Services, the Office of Inspector General, the Department of Justice
and other governmental agencies that might be investigating or might commence an
investigation of the Company could impose, based on a claim of a violation of
fraud and false claims laws or otherwise, civil and/or criminal sanctions,
including fines, penalties and possible exclusion from federal health care
programs (including Medicaid and Medicare). Some of these laws may impose
liability even in the absence of specific intent to defraud. We cannot predict
or reasonably estimate the likelihood or magnitude of any such sanctions at this
time. For additional information, please see the "Risk Factors" section 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 this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments--SEC Investigation,
Medicaid and Other Governmental Programs Accrual Adjustment, and Related
Matters."

Subsequent to the announcement of the SEC investigation described above,
beginning in March 2003, 22 purported class action complaints have been filed by
holders of our securities against us, our directors, former directors, executive
officers and former executive officers 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. Plaintiffs allege 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 March 31,
1999 and continuing until March 11, 2003. Additionally, seven purported
shareholder derivative complaints have 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 allegations in these lawsuits are similar to
those in the class action litigation described above. We intend to defend 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 securities 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 SEC in
its investigation, resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the securities
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.

We drew down $125.0 million on our $400.0 million senior secured revolving
credit facility on June 3 and June 6, 2003, the proceeds of which were used to
fund a portion of the Elan acquisition on June 12, 2003.

We have placed $46.5 million of our cash on hand in an interest-bearing
escrow account, which represents our best estimate of the extent to which we
underpaid amounts due under Medicaid and other

73

governmental pricing programs during the period from 1998 to 2002, which we
accrued during the fourth quarter of 2002. The accrual adjustment relates solely
to the estimated underpayments and excludes any interest, fines, penalties or
other amounts that might be owed in connection with the underpayments, as we
cannot predict or reasonably estimate their likelihood or magnitude at this
time. We have contacted the Centers for Medicare and Medicaid Services, the
Office of Inspector General at the Department of Health and Human Services, and
the Department of Justice in connection with the underpayments and expect to
engage in more detailed discussions with these and other appropriate agencies in
order to determine the precise amount of the underpayments. We expect to make
the requisite payments in the third or fourth quarter of 2003.

Year ended December 31, 2002

We generated net cash from operations of $456.0 million for the year ended
December 31, 2002. Our net cash provided from operations was primarily the
result of $182.5 million in net income, adjusted for non-cash depreciation and
amortization of $62.9 million, an increase in accrued expenses and other
liabilities of $197.3 million, the write-off of in-process research and
development of $12.0 million, the impairment charge for intangible assets of
$66.8 million, the reserve on convertible senior notes of $35.4 million, and an
increase in accounts payable of $31.3 million. Primary decreases of cash flow
from operations included an increase in inventory of $70.7 million, a change in
deferred income taxes of $78.1 million and non-cash amortization of deferred
revenue of $9.1 million.

Cash flows used in investing activities was $574.3 million primarily due to
the purchase of intangible assets of $322.1 million, capital expenditures of
$73.6 million, the net purchase of investment securities of $177.3 million, and
the purchase of Novavax convertible senior notes of $10.0 million.

Financing activities used $168.1 million of cash flow comprised principally
of the repurchase of our common stock of $166.3 million.

Year ended December 31, 2001

We generated net cash from operations of $279.6 million for the year ended
December 31, 2001. Our net cash provided from operations was primarily the
result of $217.9 million in net income, adjusted for non-cash depreciation and
amortization of $48.0 million, extraordinary charges of $22.9 million, a change
in deferred income taxes of $15.2 million, tax benefits of stock options
exercised of $12.4 million, an increase in accrued expenses and other
liabilities of $41.5 million and an increase in income taxes payable of $29.0
million. Primary uses of cash flow included an increase in accounts receivable
of $44.1 million, an increase in inventories of $46.5 million, a decrease in
accounts payable of $9.7 million, non-cash amortization of deferred revenue of
$9.2 million, and a non-cash unrealized gain of $8.5 million on the Novavax
convertible senior notes.

Cash flows used in investing activities was $382.7 million primarily due to
the purchase of intangible assets of $286.5 million, capital expenditures of
$40.2 million, the purchase of investment securities of $49.9 million, loans of
$15.0 million to a supplier, and the purchase of Novavax convertible senior
notes of $10.0 million offset by $14.1 million representing proceeds from the
repayment of loans made to a supplier.

Financing activities provided $901.3 million of cash flow comprised
principally of $75.0 million in proceeds from the revolving credit facility,
$684.4 million in proceeds from the issuance of common shares and the exercise
of stock options and $345.0 million in proceeds from the issuance of convertible
debentures, offset by repayments of $75.0 million on the revolving credit
facility, $115.1 million on the senior subordinated notes, and $11.1 million of
debt issuance costs.

Year ended December 31, 2000

We generated net cash from operations of $181.4 million for the year ended
December 31, 2000. Our net cash provided from operations was primarily the
result of $64.5 million in net income, adjusted for non-cash depreciation and
amortization of $41.9 million, amortization of deferred financing costs of

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$1.9 million, non-cash extraordinary charges of $28.3 million, non-cash
nonrecurring charges of $37.2 million, an increase in accounts receivable of
$31.2 million, an increase in inventories of $48.8 million, an increase in
accrued expenses of $15.5 million, an increase in deferred revenue of $71.2
million, and a decrease in income taxes payable of $31.4 million.

Cash flows used in investing activities was $153.8 million primarily due to
the purchase of intangible assets, a Novavax convertible senior note, and loans
made to a supplier of $207.0 million, $20.0 million, and $15.4 million,
respectively, $25.1 million of capital expenditures, and $142.9 million of
investment security purchases offset by proceeds from the maturity and sale of
investment securities of $256.1 million.

Financing activities used $82.9 million of cash flow comprised principally
of $159.0 million in proceeds from the revolving credit facility and $387.8
million in proceeds from the issuance of common shares and the exercise of stock
options, offset by repayments of $204.0 million on the revolving credit
facility, $53.6 million on the senior subordinated notes, and $368.7 million on
other long-term debt.

Certain Indebtedness and Other Matters

As of December 31, 2002, we had $346.4 million of long-term debt (including
current portion), up to $400.0 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 SEC. This universal shelf
registration statement allows us to sell any combination of debt and/or equity
securities in one or more offerings up to a total of $1.3 billion. During
November 2001, we completed the sale of 17,992,000 newly issued shares of common
stock for $38.00 per share ($36.67 per share net of commissions and expenses)
resulting in net proceeds of $659.8 million. At December 31, 2002, approximately
$616.0 million remains available to us under the $1.3 billion universal shelf
registration statement. Additionally, during November 2001, we issued $345.0
million of 2 3/4% Convertible Debentures due November 15, 2021 in a private
placement.

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 certain 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 prime rate or 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 $4.9 million of deferred financing costs which are being amortized over
five years, the life of the 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 maintain a funded debt
to EBITDA ratio of no greater than 3.50 to 1.00 prior to April 24, 2004 and of
no greater than 3.00 to 1.00 on or after April 24, 2004. As of December 31, 2002
and currently, we have complied with these covenants. Currently $125.0 million
is outstanding under the $400.0 million senior secured revolving credit
facility, the proceeds of which were used to fund a portion of the acquisition
of Elan's primary care business on June 12, 2003.

We have placed $46.5 million of our cash on hand in an interest-bearing
escrow account. This amount, which we accrued during the fourth quarter of 2002,
represents our best estimate of the extent to which we underpaid amounts due
under Medicaid and other governmental pricing programs during the period from
1998 to 2002. The accrual adjustment relates solely to the estimated
underpayments and excludes any interest, fines, penalties or other amounts that
might be owed in connection with the underpayments, as we cannot predict or
reasonably estimate their likelihood or magnitude at this time. We

75

have contacted the Centers for Medicare and Medicaid Services, the Office of
Inspector General at the Department of Health and Human Services, and the
Department of Justice in connection with the underpayments and expect to engage
in more detailed discussions with these and other appropriate agencies in order
to determine the precise amount of the underpayments. We expect to make the
requisite payments in the third or fourth quarter of 2003.

Capital Expenditures

Capital expenditures, including capital lease obligations, were $73.6
million for the year ended December 31, 2002 and $40.2 million for the year
ended December 31, 2001. The principal capital expenditures included property
and equipment purchases, new information technology system implementation costs,
and building improvements for facility upgrades and increased capacity.

We anticipate capital expenditures, including capital lease obligations,
for the year ending December 31, 2003 of approximately $60 million. The
principle capital expenditures are anticipated to include property and equipment
purchases, new information technology system implementation costs, building
improvements for facility upgrades, cost associated with improving our
production capabilities, and costs associated with moving production of some of
our pharmaceutical products to our facilities in St. Louis, Missouri, and
Rochester, Michigan.

Impact of Inflation

We have experienced only moderate raw material and labor price increases in
recent years. While we have passed some price increases along to our customers,
we have primarily benefited from sales growth negating most inflationary
pressures.

Recent Accounting Pronouncements

In the first quarter of 2002, we adopted SFAS No. 141 "Business
Combinations", and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires all business combinations to be accounted for under the purchase
method of accounting. SFAS No. 141 was effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized, but evaluated annually for impairment. The results for the
year ended December 31, 2002 include the effect of adopting SFAS Nos. 141 and
142, which resulted in a $1.6 million reduction in expenses, or $1.1 million net
of tax, and no increase in basic and diluted earnings per share.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted these standards
effective January 1, 2002. The implementation of these standards did not have
any effect on our financial statements.

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections as of April 2002." SFAS No. 145 is effective for
fiscal periods beginning after May 15, 2002. The primary effect of our adopting
SFAS No. 145 will be that gains and losses incurred upon the extinguishment of
debt will no longer qualify for extraordinary items treatment in the income
statement but will be presented as non-operating gain or loss. Accordingly, for
purposes of comparison in our 2003 Form 10-K, we will reclassify the loss
incurred on the extinguishment of debt during the year ended December 31, 2001
as other expense.

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In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 will be effective for exit or disposal
activities that we initiate after December 31, 2002. The adoption of SFAS No.
146 will not have a material impact on our financial position or results of
operations.

In January 2003, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods
of transition to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements of SFAS No.
123. We adopted disclosure provisions of SFAS No. 148 for the fiscal year ending
December 31, 2002. The adoption of SFAS No. 148 did not have any impact on our
financial statements.

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
we apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note 3 to our audited consolidated
financial statements.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to 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 allowances for doubtful accounts, values of inventories and
intangible assets, impairment, accruals for rebates, returns and chargebacks, as
well as estimates used in applying the revenue recognition policy and accounting
for Novavax convertible senior notes and the Co-Promotion Agreement with Wyeth.
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 the preparation of our consolidated financial
statements.

- Allowance for doubtful accounts. We maintain an allowance for doubtful
receivables for estimated losses resulting from the inability of our
trade customers to make required payments. We provide an allowance for
specific customer accounts where collection is doubtful and also provide
a general allowance for other accounts based on historical collection and
write-off experience. Judgment is necessary and if the financial
condition of our customers were to worsen, additional allowances may be
required.

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

- Intangible assets. When we purchase products we classify the purchase
price, including expenses and assumed liabilities, as intangible assets.
The purchase price is allocated to product rights, trademarks, patents
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
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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.

- Long-lived assets. 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. 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 rebates, rebate payments remain subject
to retroactive adjustment. Returns are accrued based on historical
experience. 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. For the year ended December 31, 2002,
we deferred recognition of revenue associated with a purchase of our
products by the King Benevolent Fund. We will recognize the deferred
revenue as the purchased products are distributed by the Benevolent Fund.
See Note 2 to our audited consolidated financial statements.

- Novavax convertible senior notes. Our Novavax 4% convertible senior
notes are carried at cost, with a valuation allowance which reduces the
convertible senior notes to estimated fair value. The estimated fair
value was determined by the quoted market price of the underlying
securities at the end of the period. The amount of the valuation
allowance will be adjusted in future periods based on the value of the
underlying collateral (Novavax common stock) as of the last business day
of each respective calendar quarter or until such time as the loan is no
longer considered to be impaired.

- Co-Promotion Agreement with Wyeth. We have a Co-Promotion Agreement with
Wyeth to promote Altace(R). A $75.0 million upfront fee was paid to us by
Wyeth and this fee is being amortized on a straight line basis over the
life of the agreement as a reduction of co-promotion

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marketing expenses. Co-promotion fees are paid to Wyeth based on a
percentage of net sales of Altace(R). We accrue co-promotion fees paid by
us at the rate expected for the entire year. The rate is adjusted during
the year, if necessary, as it becomes clearer what the actual rate will
be. Co-promotion marketing expenses are marketing costs incurred by
either us or Wyeth in accordance with the Co-Promotion Agreement.
Co-promotion marketing expenses are expensed ratably throughout the year
based on our expected portion of the total co-marketing expenses incurred
by both parties.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

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 would be impacted by our
stock price. The estimated fair value of our total long-term debt at December
31, 2002 was $310.5 million. Fair values were determined from available market
prices, using current interest rates and terms to maturity. If interest rates
were to increase or decrease 1%, the fair value of our long-term debt would
increase or decrease by approximately $12.0 million.

At December 31, 2002, 2001 and 2000, we did not hold any derivative
financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited consolidated financial statements and related notes for the
year ended December 31, 2002 are included under Item 15 and begin on page F-1.

ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENT ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and directors as of July 1, 2003 were as follows:

Jefferson J. Gregory has served as Chairman of the Board of King since June
2002 and as Chief Executive Office since January 2002. He has served as a
director of King since 1995. He had served as President of King since 1993. He
was formerly the Director of Regulatory Affairs and Product Information for
General Injectables and Vaccines, Inc. from 1991 to 1993 and was a consultant to
the pharmaceutical industry from 1989 to 1991. He formerly served as a
registered pharmacist in retail pharmacies in the Washington D.C. and Baltimore,
Maryland metropolitan areas. He graduated from the University of Maryland School
of Law with a Juris Doctor in 1985, University of Maryland School of Pharmacy
with a Bachelor of Science degree in Pharmacy in 1979, and Montgomery College
with an Associate of Arts degree in 1976.

Kyle P. Macione has served as President of King since April 2002. He had
served as Executive Vice President, Corporate Affairs since January 1998 and as
Corporate Counsel since March 1996. He was formerly a corporate attorney with
the law firm of Elliott Lawson & Pomrenke in Bristol, Virginia from 1992 to
1996. He graduated from Washington & Lee University School of Law with a Juris
Doctor in 1991, University of Alabama with a Masters of Accountancy in 1987, and
University of Mississippi with a Bachelor of Accountancy in 1986. He is a
Certified Public Accountant and licensed to practice law in Tennessee and
Virginia.

James R. Lattanzi has served as King's Chief Financial Officer since
September 2000 and as a director since October 2002. Prior to joining King, Mr.
Lattanzi, a licensed Certified Public Accountant, was a partner with
PricewaterhouseCoopers for 11 years, serving most recently as the managing
partner of PricewaterhouseCoopers' Greensboro, North Carolina office. Mr.
Lattanzi is a member of the American Institute of Certified Public Accountants.
He graduated from Indiana University of Pennsylvania in 1976 with a degree in
accounting.

John A. A. Bellamy has served as Executive Vice President of Legal Affairs
and General Counsel since February 1995. He was formerly a corporate attorney
with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from 1990 to
1995. He graduated from the University of Tennessee College of Law with a Juris
Doctor with Honors in 1990, and graduated Summa Cum Laude with Honors in
Independent Study from King College in 1984 with a Bachelor of Arts degree in
Classics and English. He is a member of the Licensing Executives Society and
related professional organizations.

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Earnest W. Deavenport, Jr., has served as a director since May 2000. He was
formerly Chairman of the Board and Chief Executive Officer of Eastman Chemical
Company, Kingsport, Tennessee, where he had served in various capacities since
1960. He was Chairman of the National Association of Manufacturers in 1998 and
is currently a member of the National Academy of Engineering. Mr. Deavenport is
also a member of the boards of directors of Acuity Brands, Inc., AmSouth
Bancorporation and Theragenics Corporation, each a publicly-held corporation.
Mr. Deavenport graduated from Massachusetts Institute of Technology with a
Masters of Science in Management in 1985 and from Mississippi State University
with a Bachelor of Science in Chemical Engineering in 1960.

Frank W. DeFriece, Jr. has served as a director since October 1997. He has
served as President, Vice President, fund administrator and board member of the
Massengill DeFriece Foundation, Inc. since 1950. Since 1946 he served in various
capacities with the S.E. Massengill Company. He served as President of S.E.
Massengill from 1960 to 1971 when the company was purchased by Beecham, Inc.
From 1971 to 1973, he served as Board Member and Vice Chairman of Beecham. He
graduated from Roanoke College with a Bachelor of Science in Chemistry in 1946.

James E. Gregory has served as a director since June 2002. He was formerly
Executive Vice President of King from 1995 until 2000 and served as Executive
Vice President/General Manager from 1998 to 2000. He earned a Master's degree in
Public Administration from American University in Washington, D.C. in 1979 and a
Bachelor of Arts degree with a major in History from the University of Maryland
in 1973.

Gregory D. Jordan has served as a director since June 2001. He has served
as President of King College in Bristol, Tennessee since 1997, having joined the
King College faculty in 1980. He received a Bachelor of Arts degree from
Belhaven College and Masters of Arts and Divinity degrees from Trinity
Evangelical Divinity School. He earned his Doctorate in Hebraic and Cognate
Studies from Hebrew Union College -- Jewish Institute of Religion.

R. Charles Moyer, Ph.D., has served as a director of King since December
2000. Dr. Moyer also currently serves as the Dean of the Babcock Graduate School
of Management at Wake Forest University, a position he has held since 1996, and
presently holds the GMAC Insurance Chair of Finance. Prior to joining the
faculty at Wake Forest in 1988, Dr. Moyer was Finance Department Chairman at
Texas Tech University. Dr. Moyer earned his Doctorate in Finance and Managerial
Economics from the University of Pittsburgh in 1971, his Masters of Business
Administration from the University of Pittsburgh in 1968, and his Bachelor of
Arts degree in Economics from Howard University in 1967.

Philip M. Pfeffer has served as a director of King since February 2003. Mr.
Pfeffer is President and Chief Executive Officer of Treemont Capital, Inc., a
private equity investment company, which he founded in 1999. He previously
served as Chief Executive Officer of Borders Group, Inc., a publicly-held book,
music and video retailer from November 1998 to April 1999. Mr. Pfeffer was also
a Director and President and Chief Operating Officer of Random House, Inc., a
privately-held publishing company, from May 1996 to September 1998 and a member
of the board of directors of Ingram Micro, Inc., a company that became
publicly-held in November 1986, from April 1982 to June 2001. Prior to that, Mr.
Pfeffer was Executive Vice President and a director of Ingram Industries from
January 1987 to March 1996 and served in various other positions including
Chairman and Chief Executive Officer of Ingram Distribution Group Inc. from
January 1987 to March 1996. Mr. Pfeffer earned his Master of Arts degree in
Economics and his Bachelor of Arts degree in Mathematics and Chemistry from
Southern Illinois University.

D. Greg Rooker has served as a director of King since October 1997. Mr.
Rooker is the former owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia, which consists of six community
newspapers and a national monthly motor sports magazine. He is a co-founder of
the Jason Foundation and Brain Injury Services of SWVA, Inc., each a non-profit
organization providing services to brain injury survivors. Mr. Rooker serves
without compensation as Secretary/ Treasurer of the Jason Foundation and the
President of Brain Injury Services of SWVA, Inc. Mr. Rooker is a graduate of
Northwestern University with a degree in Journalism.

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Messrs. Jefferson and James Gregory are brothers.

COMPENSATION OF DIRECTORS

For 2002 each non-employee director of King received annual fees of $24,000
payable quarterly plus a fee of $1,000 for participation in each board meeting.
Non-employee directors also received $1,000 for each committee meeting that is
held on a day when a meeting of the board was not convened and $500 for each
meeting attended that was held on a day when a meeting of the board was
convened. The chairman of the Audit Committee was paid an annual fee of $6,000
and the chairman of the Compensation Committee was paid an annual fee of $3,000.
The chairman of the Audit Committee was also provided use of corporate aircraft
during 2002 valued at $7,500. A non-employee director who performed special
assignments at the direction of the chairman of the board received a fee of
$2,000 per day when at least one-half of the business day had been completely
devoted to the assignment requested by the chairman. Travel expenses related to
board or committee meetings were reimbursed. The 1998 Non-Employee Director
Stock Option Plan was adopted by the Board of Directors in February 1998.
Options exercisable for 203,332 shares of common stock have been issued to our
current non-employee directors.

MEETINGS OF DIRECTORS

The Board of Directors held 14 meetings during 2002. No director attended
less than 75% of all meetings held.

CLASSIFICATION OF BOARD OF DIRECTORS

Pursuant to our Bylaws, the Board of Directors is divided into three
classes of directors, each containing, as nearly as possible, an equal number of
directors. Directors within each class are elected to serve three-year terms and
approximately one-third of the directors sit for election at each annual meeting
of the shareholders. A classified board of directors may have the effect of
deterring or delaying any attempt by any group to obtain control of King by a
proxy contest since such third party would be required to have its nominees
elected at two separate meetings of the shareholders in order to elect a
majority of the members of the Board of Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has appointed an Audit Committee, a Compensation
Committee and a Nominating/Corporate Governance Committee.

Audit Committee. The Audit Committee, which currently consists of D. Greg
Rooker, Earnest W. Deavenport, Jr., Frank W. DeFriece, Jr., Gregory D. Jordan,
R. Charles Moyer, and Philip M. Pfeffer has the authority and responsibility to
hire one or more independent public accountants to audit our books, records and
financial statements and to review our systems of accounting (including our
systems of internal control); to discuss with the independent accountants the
results of the annual audit and quarterly reviews; to conduct periodic
independent reviews of the systems of accounting (including systems of internal
control); and to make reports periodically to the Board of Directors with
respect to its findings. The Audit Committee met five times in 2002.

Compensation Committee. The Compensation Committee, which currently
consists of Earnest W. Deavenport, Jr., Frank W. DeFriece, Jr., Gregory D.
Jordan, R. Charles Moyer, Philip M. Pfeffer and D. Greg Rooker, is responsible
for administering and determining executive compensation and all awards under
our stock option plans. The Compensation Committee met two times in 2002.

Nominating/Corporate Governance Committee. The Nominating/Corporate
Governance Committee was formed in the fourth quarter of 2002. Currently its
sole member is Gregory D. Jordan who has been authorized to oversee the
organization of the Nominating/Corporate Governance Committee, including the
drafting of the Nominating/Corporate Governance Committee's charter. Upon its
adoption by the Board

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of Directors, additional members will be appointed. This committee is
responsible for nominating persons to serve as directors and for developing and
administering our corporate governance policies.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation earned by our chief
executive officer and by each of the four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 for
services rendered in all capacities for the year ended December 31, 2002.

SUMMARY COMPENSATION TABLE

- ---------------

(1) Bonuses paid in the current year are in consideration of performance in the
prior year.

(2) Reflects matching contribution to the 401(k) plan, relocation expense
reimbursement and income related to the personal use of corporate aircraft.

(3) During 2002, John M. Gregory served as Chairman of the Board until his
retirement effective June 28, 2002.

(4) Joseph R. Gregory retired effective February 28, 2003. He received a bonus
payment of $1.2 million upon his retirement.

(5) Mr. Macione was named President of King in April 2002. He formerly was
Executive Vice President, Corporate Affairs.

(6) Mr. Bourne resigned effective October 4, 2002. He received a severance
payment of $2.9 million.

(7) Mr. Lattanzi became Chief Financial Officer during 2000.

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The following table sets forth the number of options to purchase shares of
common stock that had been granted to executive officers named in the Summary
Compensation Table above as of December 31, 2002.

OPTIONS/SARS GRANTED IN LAST FISCAL YEAR

The following table discloses information regarding stock options held at
the end of or exercised in fiscal year 2002 for executive officers named in the
summary Compensation Table above as of December 31, 2002.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

- ---------------

(1) Based on $17.19 per share, the closing price of the common stock as quoted
on the New York Stock Exchange at December 31, 2002.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors, created in February
2002, is responsible for developing and administering compensation philosophy.
Committee members in 2002 were Earnest W. Deavenport, Jr., Frank W. DeFriece,
Jr., Gregory D. Jordan, R. Charles Moyer and D. Greg Rooker. No current member
of the Compensation Committee is a current or former officer of King.

Prior to February 2002, the Board of Directors served as the Compensation
Committee.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership
of the common stock as of July 1, 2003, for (i) each person who owns more than
5% of the common stock, (ii) each director and executive officer of King, and
(iii) all executive officers and directors of King as a group.

- ---------------

* Less than 1%

(1) Unless otherwise indicated, beneficial ownership consists of sole voting
and investing power based on 241,033,727 shares issued and outstanding as
of July 1, 2003. Options to purchase shares which are exercisable or become
exercisable within 60 days of July 1, 2003 are deemed to be outstanding for
the purpose of computing the percentage of outstanding shares owned by each
person to whom a portion of such options relate but are not deemed to be
outstanding for the purpose of computing the percentage owned by any other
person.

(2) Includes 1,539,880 shares jointly owned with Mr. Gregory's spouse and
87,333 shares beneficially owned by Gregory Investments, L.P., the general
partners of which are Mr. Gregory and his spouse and 213,331 shares
issuable upon the exercise of options granted to Mr. Gregory.

(3) Includes 62,000 shares issuable upon the exercise of options.

(4) Includes 300 shares jointly owned with Mr. Lattanzi's spouse, 2,004 shares
held in Mr. Lattanzi's 401(k) retirement plan account and 66,665 shares
issuable upon the exercise of options.

(5) Includes 62,499 shares issuable upon the exercise of options.

(6) Includes 23,333 shares issuable upon the exercise of options.

(7) Includes 73,333 shares issuable upon the exercise of options.

(8) Includes 10,000 shares issuable upon the exercise of options.

(9) Includes 23,333 shares issuable upon the exercise of options.

(10) Includes 33,332 shares held in trust for the benefit of Mr. Rooker's
children, 8,549 shares owned by Mr. Rooker's spouse, 13,420 shares owned by
The Jason Foundation, a private foundation controlled by Mr. Rooker and
73,333 shares issuable upon the exercise of options.

85

(11) Includes 607,827 shares subject to options exercisable within 60 days.

(12) Based on a Schedule 13G filed in February 2003 with the SEC on behalf of
Putnam Investments, LLC; Marsh & McLennan Companies, Inc.; Putnam
Investment Management, LLC; and The Putnam Advisory Company, LLC, One Post
Office Square, Boston, Massachusetts 02109.

(13) Based on a Schedule 13G filed in February 2003 with the SEC on behalf of
The Summit Fund, LLC, The United Company, United Management Company, LLC,
Nicholas D. Street, James W. McGlothlin, Lois A. Clarke and Ted G. Wood.
The address of The Summit Fund, LLC is 1005 Glenway Avenue, Bristol,
Virginia 24201. The United Company, United Management Company, LLC,
Nicholas D. Street, James W. McGlothlin, Lois A. Clarke and Ted G. Wood,
affiliates of The Summit Fund, LLC, own 28,333 shares; 0 shares; 1,564,799
shares; 1,107,332 shares; 183,507 shares; and 42,666 shares, respectively.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In June 2003 we acquired Elan's primary care business. Jefferson J.
Gregory, our Chairman and Chief Executive Officer, has owned 45,000 shares of
Elan since February 2002. D. Greg Rooker, the Chairman of our Audit Committee,
has owned 1,500 shares of Elan for several years.

During 2002 James E. Gregory, one of our directors, received $73,000 for
consulting services to King. Of that amount $23,000 was for personal use of the
corporate aircraft.

SJ Strategic Investments LLC, an affiliate of John M. Gregory, our former
Chairman of the Board and a brother of Jefferson J. and James E. Gregory,
purchased, in January 2003, 4.75 million shares of Novavax. Including additional
open market purchases, SJ currently owns approximately 20% of the outstanding
shares of Novavax. King currently has a right to convert debt into approximately
5.0 million shares of Novavax.

The King Benevolent Fund, Inc. is a nonprofit corporation organized under
the laws of the Commonwealth of Virginia and is exempt from taxation under
Section 501(c)(3) of the Internal Revenue Code. The Benevolent Fund obtains
pharmaceutical products either as gifts-in-kind from manufacturers or by
purchase from third-party distributors or wholesalers. The Benevolent Fund
donates the pharmaceutical products purchased or received as gifts-in-kind to
medical missions in the United States and in foreign countries to advance its
humanitarian aid efforts. The Benevolent Fund was founded in 1994 by John M.
Gregory, who also founded King and was our Chairman of the Board until June 28,
2002 and our Chief Executive Officer until January 1, 2002. John M. Gregory
owned more than 5% of our common stock until May 6, 2002. John M. Gregory, who
serves as President of the Board of Directors of the Benevolent Fund, is the
brother of Jefferson J. Gregory, who became our Chief Executive Officer on
January 1, 2002 and our Chairman of the Board on June 28, 2002, and James E.
Gregory, one of our current directors. In addition, Mary Ann Blessing, a sister
of Jefferson J. Gregory and James E. Gregory, served as the Chief Operating
Officer of the Benevolent Fund until approximately January 2001 and presently
serves as a director and Treasurer of the Board of the Directors of the
Benevolent Fund. Carol Shrader, mother of Brian Shrader, Chief Financial Officer
of King until September 2000, is presently a director of the Benevolent Fund.

Jefferson J. Gregory and James E. Gregory were members of the Board of
Directors of the Benevolent Fund in 1999, 2000, 2001 and 2002, but no longer
hold those positions. In addition, Joseph R. Gregory, who was Vice Chairman of
our Board and President of our wholly-owned subsidiary Monarch Pharmaceuticals,
Inc. until February 2003, served as a director of the Benevolent Fund in 1999,
2000, 2001 and 2002, but no longer holds that position. Joseph R. Gregory is the
brother of Jefferson J. Gregory, James E. Gregory, John M. Gregory and Mary Ann
Blessing. Herschel Blessing, Executive Vice-President of King until July 1,
2002, is the husband of Mary Ann Blessing and a director of the Benevolent Fund.

We occasionally donate our products to the Benevolent Fund. We donated
inventory with a carrying value of $1.8 million in 1999, $3.3 million in 2000,
$4.1 million in 2001 and $22.6 million in 2002. Based upon information provided
to us by the Benevolent Fund, we understand that (consistent with industry
86

practice) it has valued these donations based on average wholesale prices of the
donated product in the approximate amounts of $9.8 million, $20.8 million, $65.6
million, and $120.5 million, respectively. Also based upon information provided
to us by the Benevolent Fund, we understand that the total value based on
average wholesale price of products donated to the Benevolent Fund by all
pharmaceutical manufacturers and other donors was $30.5 million, $44.0 million,
$124.5 million and $232.8 million in 1999, 2000, 2001 and 2002, respectively.

In addition to receiving donations of products directly from pharmaceutical
manufacturers, the Benevolent Fund also purchases pharmaceutical products,
including those manufactured by King, from third-party distributors or
wholesalers. Based upon information provided to us by the Benevolent Fund, we
understand that the total purchase price of all pharmaceutical products
purchased by the Benevolent Fund was $3.0 million, $1.0 million, $142,000,
$317,000 and $4.8 million in 1999, 2000, 2001, 2002 and the period from January
1, 2003 to June 30, 2003, respectively. We are aware of three occasions on which
the Benevolent Fund purchased our products from third-party distributors or
wholesalers. These three purchases accounted for $2.8 million of the Benevolent
Fund's $3.0 million of purchases in 1999; $0.9 million of the Benevolent Fund's
$1.0 million of purchases in 2000; and $4.6 million of the Benevolent Fund's
$4.8 million of purchases in the first half of 2003.

On November 22, 1999, we sold $2,775,000 of Fluogen(R) vials to a
third-party distributor, which in turn resold those vials to the Benevolent Fund
for $2,779,500. The Benevolent Fund donated the vials to Global Resource
Services for use in North Korea. The unit price paid by the third-party
distributor was $18.50, which was approximately 14% below our average unit price
for Fluogen(R) vials in November 1999. The unit prices at which we sold
Fluogen(R) vials in November 1999 ranged from $17.50 to $46.95. Prior to the
November 22 transaction, we had sold 1,068,157 vials of Fluogen(R) beginning in
August of 1999. At the time of the November 22 transaction, we had an existing
inventory of approximately 158,000 Fluogen(R) vials, of which 150,000 vials were
sold in the transaction, leaving approximately 8,000 vials in inventory. Of the
remaining inventory, approximately 2,300 vials were sold prior to December 31,
1999. At December 31, 1999, we wrote off the remaining 5,700 Fluogen(R) vials.
Other than the November 22 sale, our next largest single sale of Fluogen(R)
vials during the 1999-2000 flu season consisted of 63,945 vials.

On December 27, 1999, we sold $825,075 (net of a 5% prompt pay discount) of
Fluogen(R) syringes to the same third-party distributor, which in turn resold
those syringes to the Benevolent Fund in January 2000 for $871,500. The
Benevolent Fund donated the syringes to the Feed the Children(R) organization on
January 28, 2000 for use in Venezuela. The unit price paid by the third-party
distributor before the 5% prompt pay discount was $28.95, which was
approximately 20% above our average unit price for Fluogen(R) syringes in
December 1999. The unit prices at which we sold Fluogen(R) syringes in December
1999 ranged from $21.95 to $41.47. Prior to the December 27 transaction, we had
sold 187,286 Fluogen(R) syringes beginning in August of 1999. At the time of the
December 27 transaction, we had an existing inventory of approximately 33,000
Fluogen(R) syringes, of which 30,000 syringes were sold in the transaction,
leaving approximately 3,000 syringes in inventory. Of the remaining inventory,
approximately 300 syringes were sold prior to December 31, 1999. At December 31,
1999, we wrote off the remaining 2,700 Fluogen(R) syringes. This sale
represented our third largest single sale of Fluogen(R) syringes during the
1999-2000 flu season; our largest single sale consisted of 30,977 syringes.

Due to the seasonal nature of flu vaccine sales, we generally would have
attempted to generate the substantial majority of our sales of Fluogen(R) by
mid-November. During the 1998-1999 flu season, which was the only other season
during which we sold Fluogen(R), we sold an aggregate of $18.9 million of
Fluogen(R) before November 22, and $1.5 million of Fluogen(R) on or after
November 22. The two 1999 Fluogen(R) sales involving the Benevolent Fund had
gross margins of 30.4% and 13.3% (net of the 5% prompt pay discount),
respectively, as compared to our overall 1999 gross margin (on a pre-pooling
basis) of 67.5%. In the aggregate, the gross margin on the two sales was
$954,165, and the cost at which the products were carried on our books was
$2,645,910. The two Fluogen(R) sales contributed $601,124 to our 1999 net
income, or 4.3% of our fourth quarter 1999 and 1.3% of our full-year 1999 net
income on a pre-pooling basis. On a per share basis, the two Fluogen(R) sales
represented $0.012, or 4.1% of our fourth quarter 1999 and 1.3% of our full-year
1999 diluted income per common share on a pre-pooling basis.
87

Because of an FDA requirement that we cease manufacturing and distributing
Fluogen(R), we discontinued our Fluogen(R) product in September 2000. For more
information, see Note 22 to our audited consolidated financial statements
included in this Form 10-K.

On December 26, 2002, we sold $4,587,571 (net of a 2% prompt pay discount)
of Cortisporin(R), Silvadene(R) and Tigan(R) to a third-party wholesaler, which
in turn resold those products to the Benevolent Fund in January 2003 for
$4,634,405. For a description of our accounting for this transaction, please see
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments--King Benevolent Fund
Transaction." This transaction represented our largest single sale for each of
the relevant products in 2002. We sold the products to the third-party
wholesaler at wholesaler acquisition cost, which is the amount we generally
charge our wholesale customers. We had offered a temporary 10% discount price on
Cortisporin(R) for orders received between December 12 and December 18, 2002. We
have also sold these products to certain contract customers at prices lower than
wholesaler acquisition cost. We offer discounted contract pricing to a limited
number of distributor customers who assure us of incremental sales volumes.

After weighing all the information developed in the course of the internal
review, our Audit Committee concluded that the three sales described above did
not arise from an effort to mislead investors by manipulating reported financial
results, and that consummation of the sales had been in the best interests of
King. In connection with this conclusion, the Audit Committee also determined
that it would be desirable for King to provide detailed disclosure of the nature
and extent of our relationship with the Benevolent Fund and these three sales
beyond that required by applicable rules, as set forth in this "Certain
Relationships and Related Transactions" section in this Form 10-K.

Because the Benevolent Fund is not managed or controlled by King and
maintains its own books and records, we do not in the ordinary course of our
business have access to or a need for information relating to pharmaceutical
purchases by the Benevolent Fund from third parties. Much of the information in
this section relating to the Benevolent Fund has been developed in connection
with the internal review. In the future, the Benevolent Fund may make additional
purchases of our products from third-party distributors or wholesalers, and such
purchases may or may not be brought to our attention. We expect that all or
nearly all such purchases by the Benevolent Fund are likely to be of product
sold by us in the ordinary course of our business. Absent special circumstances
that would make those sales material to investors, we would not intend to
disclose future indirect sales to the Benevolent Fund even if we do become aware
of them.

King made charitable contributions during 2001 to King College, Bristol,
Tennessee, of $103,000. Gregory D. Jordan, one of our directors, serves as the
President of King College.

During the year ended December 31, 2002, we paid $171,000 to the Wake
Forest University School of Medicine for research and development activities. R.
Charles Moyer, one of our directors, is the Dean of the Babcock Graduate School
of Management at Wake Forest University.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness of
the designs and operation of our disclosure controls and procedures (as
defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of
the filing date of this annual report. Based on that evaluation, the
chief executive officer and chief financial officer have concluded that
our disclosure controls and procedures are effective to ensure that
material information relating to King and our consolidated subsidiaries
is made known to these officers by others within these entities,
particularly during the period this annual report was prepared, in
order to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. As set forth in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments," we have
undertaken a substantial process to enhance our compliance with
Medicaid and other governmental pricing program requirements. This
process partially constitutes corrective
88

action with respect to a condition that our auditors, as part of their
audit of the consolidated financial statements for the year ended
December 31, 2002, have identified as a significant deficiency (as
defined under standards established by the American Institute of
Certified Public Accountants). Other than as described in such section,
there have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluation.

89

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report:

(1) Financial Statements

All other schedules have been omitted because of the absence of conditions
under which they are required or because the required information is given in
the above-listed financial statements or notes thereto.

(b) Reports on Form 8-K.

During the quarter ended December 31, 2002, we filed one Current Report on
Form 8-K. A report was filed on December 31, 2002 under Item 5 including a press
release announcing our acquisition of the rights to three branded prescription
pharmaceutical products from Aventis.

(c) Exhibits

The following Exhibits are filed herewith or incorporated herein by
reference:

- ---------------

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

(2) Incorporated by reference to King's Current Report on Form 8-K filed June
30, 2000.

(3) Incorporated by reference to King's Registration Statement on Form S-4
(Registration No. 333-42568) filed July 20, 2000.

(4) Incorporated by reference to King's Schedule 13-D filed December 29, 2000.

(5) Incorporated by reference to King's Current Report on Form 8-K/A filed
August 24, 2001.

(6) Incorporated by reference to King's Registration Statement on Form S-3
(Registration No. 333-82126) filed February 4, 2002.

(7) Incorporated by reference to King's Registration Statement on Form S-8
filed February 26, 1999.

(8) Incorporated by reference to King's Registration Statement on Form S-8
filed March 9, 2000.

(9) Incorporated by reference to King's Registration Statement on Form S-8
filed September 6, 2000.

(10) Incorporated by reference to King's Quarterly Report on Form 10-Q filed May
14, 2002.

91

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of King Pharmaceuticals, Inc. and its subsidiaries at
December 31, 2001 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, in 2001
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138 and interpreted by certain Financial Accounting Standards Board
Derivative Implementation Group issues.

As discussed in Note 21 to the consolidated financial statements, in 2002
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets.

PricewaterhouseCoopers LLP
Greensboro, North Carolina
July 28, 2003

F-1

KING PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-2

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)

1. THE COMPANY

King Pharmaceuticals, Inc. ("King" or the "Company") is a vertically
integrated pharmaceutical company that develops, manufactures, markets and sells
branded prescription pharmaceutical products. Through a national sales force and
co-promotion arrangements, King markets its branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, obstetrician/gynecologists, and hospitals across the United
States and in Puerto Rico. The Company also provides contract manufacturing for
a number of the world's leading pharmaceutical and biotechnology companies. In
addition, the Company receives royalties from the rights of certain products
(Adenocard(R) and Adenoscan(R)) previously sold.

These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries Monarch Pharmaceuticals, Inc., Parkedale
Pharmaceuticals, Inc., King Pharmaceuticals Research and Development, Inc.,
Jones Pharma Incorporated, King Pharmaceuticals of Nevada, Inc., and Monarch
Pharmaceuticals Ireland Limited. All intercompany transactions and balances have
been eliminated in consolidation.

2. INTERNAL REVIEW AND FORM 8-K FILING

As discussed more fully below, the Audit Committee of the Company's Board
of Directors (the "Audit Committee") conducted an assessment and internal review
of the issues raised by the Securities and Exchange Commission (the "SEC")
investigation commenced in March 2003. On April 15, 2003, while the internal
review was in progress, the Company released unaudited consolidated financial
statements for the year ended December 31, 2002, contained in a Form 8-K filed
with the SEC. The Audit Committee completed the internal review on July 28,
2003. These consolidated financial statements reflect the effects of adjustments
arising from the findings of the internal review, as well as the effects of
subsequent events related to Lorabid(R) (see Note 8). Specifically, these
consolidated financial statements reflect the effects of (1) a $46.5 million
adjustment to the Company's accrual for estimated amounts due under Medicaid and
other governmental pricing programs, (2) an additional $39.8 million charge
related to Lorabid(R), and (3) a deferral of $4.7 million of revenue associated
with a purchase of the Company's products by the King Benevolent Fund, Inc. (the
"Benevolent Fund").

(a) SEC Investigation, Medicaid and Other Governmental Program Accrual
Adjustment, and Related Matters

On March 10, 2003, the Company received a subpoena duces tecum from the SEC
with respect to an SEC investigation of King. The subpoena requested the
production of documents focusing on the years 1999 and 2000 and included all
documents related to sales of King's products to VitaRx and Prison Health
Services during 1999 and 2000, the Company's "best price" lists, all documents
related to the pricing of the Company's pharmaceutical products provided to any
governmental Medicaid agency during 1999, the accrual and payment of rebates on
Altace(R) from 2000 to the present, and other general requests. On May 14, 2003,
the SEC issued another subpoena duces tecum, requesting additional documents
pertaining to the products Fluogen(R) and Lorabid(R), the Benevolent Fund, the
Company's calculations related to Medicaid rebates, and the Audit Committee's
internal review of issues raised by the SEC investigation. The Company has
cooperated, and will continue to cooperate, in providing information to the SEC.

In light of the SEC investigation, and as recommended by King's management,
the Audit Committee initiated an assessment and internal review of the issues
raised by the SEC investigation and retained independent counsel, who retained
an independent accounting firm, to assist the Audit Committee.

In connection with the internal review, the Company determined that it had
underaccrued for estimated 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

F-6

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

represents the Company's best estimate of the amount of the Company's
underpayments under Medicaid and other governmental pricing programs during the
period from 1998 to 2002. In connection with the accrual adjustment, the Company
expects to recover on a pre-tax basis approximately $0.7 million of royalties it
previously paid for Altace(R). The Company also expects to recover on a pre-tax
basis approximately $9.5 million of the promotional fees it previously paid
under its Co-Promotion Agreement for Altace(R), but the Company has not
completed discussions with its partner and therefore has not recorded this
amount in our results for 2002.

The Company has contacted the Centers for Medicare and Medicaid Services,
the Office of Inspector General at the Department of Health and Human Services,
and the Department of Justice in connection with the underpayments and expects
to engage in more detailed discussions with these and other appropriate agencies
in order to determine the precise amount of the underpayments. The Company
currently expects to make the requisite payments in the third or fourth quarter
of 2003. Pending determination of the precise amount of such payments, the
Company has placed $46.5 million in an interest-bearing escrow account. The
accrual adjustment relates solely to the estimated underpayments and excludes
any interest, fines, penalties or other amounts that might be owed in connection
with the underpayments, as the Company cannot predict or reasonably estimate
their likelihood, magnitude, or range of possible loss at this time. Due to the
nature of the underpayments and uncertainties regarding the resolution of these
matters, any such additional amounts are not subject to estimation.

Of the aggregate adjustment to the accrual for estimated underpayments of
amounts due under Medicaid and other governmental pricing programs,
approximately $12.0 million reflects changes in accounting estimates under
generally accepted accounting principles made in 2002, and approximately $12.4
million reflects corrections of immaterial errors related to 2002 and recorded
in the fourth quarter of 2002. The remaining $22.1 million reflects corrections
of immaterial errors that occurred during 1998 to 2001. Of this total of $22.1
million, approximately $2.5 million relates to underpayments in 1998, $6.5
million relates to underpayments in 1999, $5.9 million relates to underpayments
in 2000, and $7.3 million relates to underpayments in 2001.

In connection with the internal review, the Audit Committee determined that
the Company's calculations related to Medicaid and other governmental pricing
programs have not followed all aspects of the prescribed methodology under the
applicable statutes. The Company's $46.5 million accrual adjustment relates to
(1) modifications to the Company's methodologies for calculating average
manufacturer price and best price (both of which are reported to the government
and used in determining amounts due under Medicaid and other governmental
pricing programs) in response to changes in legal interpretations of complex
and, in certain respects, ambiguous areas of Medicaid rebate laws, (2) recently
compiled information with respect to the class of trade of the Company's direct
and indirect customers that affects the Company's past calculations of average
manufacturer price, and (3) the correction of certain immaterial errors in the
calculation of average manufacturer price and best price. The accrual adjustment
reflects both Medicaid underpayments and amounts owing to other governmental
agencies, such as the Department of Veterans Affairs and the Public Health
Service, which utilize payment formulae that are similar to those applicable to
the Medicaid rebate program.

The Audit Committee concluded, after weighing all the information developed
in the course of the internal review, that the underpayments requiring the
accrual adjustment did not arise from an effort on the part of the Company's
current or prior management to mislead investors by manipulating reported
financial results. While the Committee concluded that the errors did not result
in any material financial misstatements, the Committee stated that it believes
that the Company needs to dedicate additional attention and resources to ensure
compliance with all applicable reporting requirements for Medicaid rebates and
other governmental pricing programs. The Committee noted the need to have in
place systems, processes and personnel that provide reasonable assurance that
such errors are unlikely to recur in the future. Management has reviewed with
the Committee the steps the Company has taken, is now taking

F-7

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and plans to take to address the issues raised by the incorrect Medicaid and
other governmental pricing programs filings made in the past, and to enhance the
Company's capabilities with respect to future Medicaid and other governmental
pricing calculations. The Committee stated that it intends to monitor carefully
the Company's ongoing discussions with appropriate regulatory authorities, as
well as the implementation of proposed improvements to systems, processes,
training and personnel.

In accordance with standard governance practice, the Audit Committee's
independent conclusion regarding the absence of material financial misstatements
was reached after management of the Company, having consulted with counsel,
first concluded that the errors did not result in any material financial
misstatements and had reported its conclusion to the Audit Committee.

The SEC investigation of the Company is continuing. In addition, as
discussed above, the Company has contacted the Centers for Medicare and Medicaid
Services, the Office of Inspector General at the Department of Health and Human
Services, and the Department of Justice regarding amounts due under Medicaid and
other governmental pricing programs. The SEC, the Centers for Medicare and
Medicaid Services, the Office of Inspector General, the Department of Justice
and other governmental agencies that might be investigating or might commence an
investigation of the Company 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. In addition,
beginning in March 2003, 22 purported class action complaints have been filed by
holders of the Company's securities against the Company, its directors, former
directors, executive officers and former executive officers, and seven purported
shareholder derivative complaints have been filed, respectively alleging
violations of federal securities laws and a breach of fiduciary duty, among
other things, by some of its officers and directors. If any governmental
sanctions are imposed, or if the Company were not to prevail in the securities
litigation, neither of which the Company can predict or reasonably estimate at
this time, its business, financial condition, results of operations and cash
flows could be materially adversely affected.

The Company has undertaken a substantial process to enhance its compliance
with Medicaid and other government pricing program requirements. In November
2000, the Company began the process of implementing a new information technology
system which has recently started to become operational. As part of this effort,
King has engaged outside consultants to ensure that the new information
technology system collects and processes the data that it previously lacked for
calculating average manufacturer price. Although the new information technology
system is intended to significantly enhance the accuracy of the Company's
calculations for estimating amounts due under Medicaid and other governmental
pricing programs, its processes for these calculations will continue to involve
considerable manual input, and, as a result, these calculations will remain
subject to the risk of errors arising from manual processes. The Company expects
to further automate its processes for these calculations and expects to achieve
a high level of automation in such processes by mid-2004. In addition, the
Company has hired a senior director knowledgeable with respect to Medicaid and
other governmental pricing programs, and is continuing to search for and hire
qualified personnel. King has engaged outside consultants to assist in its
compliance efforts while it is in the process of further expanding its internal
compliance staff. The Company is committed to further enhancements and continues
to identify and implement actions that improve its compliance with Medicaid and
other governmental pricing programs.

(b) King Benevolent Fund Transaction

On December 26, 2002, the Company sold $4,588 (net of a 2% prompt pay
discount) of Cortisporin(R), Silvadene(R) and Tigan(R) to a third-party
wholesaler, which in turn resold those products to the King Benevolent Fund,
Inc. in January 2003 for $4,634. As of July 15, 2003, the Benevolent Fund had
yet to distribute 77% of the Cortisporin(R), 59% of the Silvadene(R) and 11% of
the Tigan(R) purchased in January 2003. The expiration date of the products
still in inventory are July 31, 2004 (or later) for the

F-8

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cortisporin(R), November 30, 2004 (or later) for the Silvadene(R) and May 31,
2004 for the Tigan(R). In light of these facts, the Company has deferred
recognition of the revenue from this sale to the third-party wholesaler and
treated this sale in a manner analogous to the consignment method. After
weighing all the information developed in the course of the internal review, the
Audit Committee concluded that this transaction did not arise from an effort to
mislead investors by manipulating reported financial results, and that
consummation of the sale had been in the best interests of King. In connection
with this conclusion, the Audit Committee also determined that it would be
desirable for King to provide in the 2002 Form 10-K detailed disclosure of the
nature and extent of its relationship with the Benevolent Fund and this
transaction beyond that required by applicable rules. The Company will recognize
the deferred revenue as the purchased products are distributed by the Benevolent
Fund, which has agreed to provide King with the requisite information relating
to the timing and amount of such distributions.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to 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 allowances for doubtful accounts,
values of inventories and intangible assets, impairment, accruals for rebates,
returns and chargebacks, as well as estimates used in applying the revenue
recognition policy and accounting for the Novavax convertible senior notes and
the Co-Promotion Agreement with Wyeth. The Company is subject to risks and
uncertainties that may cause actual results to differ from those estimates.

Revenue Recognition. Revenue is recognized when title and risk of loss are
transferred to customers, collection of sales is reasonably assured and the
Company has 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. For the year ended December 31, 2002, the Company
deferred recognition of revenue associated with a purchase of our products by
the Benevolent Fund. The Company will recognize the deferred revenue as the
purchased products are distributed by the Benevolent Fund. See Note 2 to these
consolidated financial statements.

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. Returns are accrued based on historical experience.
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

F-9

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Shipping and Handling Costs. The Company incurred $1,619, $2,455, and
$2,072 in 2000, 2001 and 2002, respectively, related to shipping and handling
costs classified with selling, general and administrative expenses in the
consolidated statements of operations. The Company does not bill customers for
such costs.

Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks, which limits the amount of credit exposure.

Marketable Securities. The Company classifies its existing marketable
securities as available-for-sale. These securities are carried at fair market
value based on current market quotes, with unrealized gains and losses reported
in shareholders' equity as a component of other comprehensive income. Gains or
losses on securities sold are based on the specific identification method. The
Company's policy is to only invest in high-grade corporate bonds, government
agencies and municipalities. The Company reviews its investment portfolio as
deemed necessary and, where appropriate, adjusts individual securities for
other-than-temporary impairments. The Company does not hold these securities for
speculative or trading purposes.

Inventories. Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. Product samples held
for distribution to third parties represent 17% and 11% of inventory as of
December 31, 2001 and December 31, 2002, respectively. Product sample costs are
charged to selling, general and administrative costs in the accompanying
consolidated statement of income upon distribution to a third party.

Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when, in
the opinion of management, it is more likely than not that some or all of the
deferred tax assets will not be realized.

Financial Instruments and Derivatives. The Company does not use financial
instruments for trading purposes. Interest rate protection agreements, which are
a type of derivative instrument, are sometimes used to manage interest rate
risks. The notional amounts of the interest rate protection agreements entered
into by the Company are used to measure the interest to be paid or received and
do not represent the amount of exposure to loss. At December 31, 2001 and 2002,
the Company did not have any interest rate protection agreements or other
derivatives outstanding.

The fair value of financial instruments is determined by reference to
various market data or other valuation techniques as appropriate. Unless
otherwise disclosed, the fair values of financial instruments approximate their
recorded values.

The Company recognized the cumulative effect of a change in accounting
principle of $545, net of income taxes of $325, during the first quarter of
2001, due to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, which establishes accounting and
reporting standards for derivative instruments and hedging activities. As of
December 31, 2001 and 2002, the Company held no derivative financial
instruments.

Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Maintenance and repairs are expensed as incurred. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. The estimated useful lives are principally 15 to 40 years for
buildings and improvements and 3 to 15 years for machinery and equipment.

F-10

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company capitalizes certain computer software and development costs
incurred in connection with developing or obtaining computer software for
internal use. Capitalized software costs are amortized over the estimated useful
lives of the software which generally range from 3 to 5 years.

In the event that facts and circumstances indicate that the carrying amount
of property, plant and equipment may be impaired, evaluation of recoverability
is performed using the estimated future undiscounted cash flows associated with
the asset compared to the asset's carrying amount to determine if a write-down
is required. To the extent such projection indicates that undiscounted cash flow
is not expected to be adequate to recover the carrying amount, the asset would
be written down to its fair value.

Capitalized Interest. For the years ended December 31, 2000, 2001 and
2002, the Company capitalized interest of approximately $645, $1,256, and
$1,127, respectively.

Intangible Assets and Goodwill. Intangible assets, which include primarily
acquired product rights and patents, are stated at cost, net of accumulated
amortization. Amortization is computed over the estimated useful lives, ranging
from 5 to 36 years, using primarily the straight-line method. Beginning in 2002,
goodwill and certain other intangible assets are not amortized, but are tested
for impairment on an annual basis, or more frequently if conditions warrant
interim testing.

Research and Development Costs. Research and development costs are
expensed as incurred. Upfront and milestone payments made to third parties in
connection with research and development collaborations are expensed as incurred
up to the point of regulatory approval. Payments made to third parties
subsequent to regulatory approval are capitalized and amortized over the
remaining useful life. Amounts capitalized for such payments are included in
intangibles assets. Acquired research and development projects for products that
have not received regulatory approval and that do not have alternative future
use are expensed.

Deferred Financing Costs. Financing costs related to the $345,000
convertible debt are being amortized over five years to the first date the debt
can be put by the holders to the Company. Financing costs related to the Senior
Secured Revolving Credit Facility (Note 12) are being amortized over five years,
the term of the facility.

Insurance. The Company is self-insured with respect to its healthcare
benefit program. The Company pays a fee to a third party to administer the plan.
The Company has stop loss coverage on a per employee basis as well as in the
aggregate. Self-insured costs are accrued based upon reported claims and an
estimated liability for claims incurred but not reported.

At December 31, 2002, the Company maintained product liability insurance in
the amount of $60,000 for aggregate annual claims with a $100 deductible per
incident and a $10,000 aggregate annual deductible. The Company's product
liability insurance does not cover the following products: Prefest(R),
Menest(R), Delestrogen(R), Pitocin(R) and Nordette(R).

Advertising. The Company expenses advertising costs as incurred and these
costs are included as selling, general and administrative expenses. Advertising
costs for the years ended December 31, 2000, 2001, and 2002 were $28,035,
$48,460, and $56,532, respectively.

Promotional Fees to Wyeth. On June 22, 2000, the Company entered into a
Co-Promotion Agreement with Wyeth to promote Altace(R) in the United States and
Puerto Rico through October 29, 2008. Under the agreement, Wyeth paid an upfront
fee of $75,000 to King, which was classified as other liabilities and is being
amortized as a reduction of marketing expenses over the term of the agreement.

In connection with the Co-Promotion Agreement with Wyeth, the Company
agreed to pay Wyeth an annual promotional fee as follows:

- For 2000, an amount equal to a prorated portion based on 50% of
annualized Altace(R) net sales from October 5, 2000 through December 31,
2000 in excess of $165,000.

F-11

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- For 2001 and 2002, 20% of Altace(R) net sales up to $165,000, 50% of
Altace(R) net sales from $165,000 to $465,000 and 52.5% of Altace(R) net
sales in excess of $465,000.

- For years subsequent to 2002 through 2008, the fee is based on the same
formula as for 2001 and 2002, except the fee for the first $165,000 will
be 15% of Altace(R) net sales.

The co-promotion fee is accrued quarterly based on a percentage of
Altace(R) net sales at a rate equal to the expected relationship of the expected
co-promotion fee for the year to applicable expected Altace(R) net sales for the
year.

Stock Compensation. The Company has adopted the disclosure only provision
of SFAS No. 123, "Accounting for Stock Based Compensation." Accordingly, since
options were granted at fair value, no compensation cost has been recognized for
stock options granted to date. Had compensation cost for these plans been
determined for options granted, consistent with SFAS No. 123, the Company's net
income and diluted income per share would have decreased to the following pro
forma amounts for the years ended December 31, 2000, 2001 and 2002:

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 2001 and 2002:

The weighted average fair values of options granted during 2000, 2001 and
2002 are $21.45, $19.38, and $10.91, respectively.

Accounting Standards Not Yet Adopted. In May 2002, the Financial
Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002." SFAS No. 145 is effective for fiscal periods beginning after
May 15, 2002. The primary impact on the Company of adopting SFAS No. 145 will be
that gains and losses incurred upon the extinguishment of debt will no longer
qualify for

F-12

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

extraordinary item treatment in the income statement but will normally be
presented as a non-operating gain or loss. Accordingly, for purposes of
comparison in the Company's 2003 Form 10-K, the Company will reclassify the loss
incurred upon the extinguishment of debt during the year ended December 31, 2001
as other expense.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 will be effective for exit or disposal
activities of the Company that are initiated after December 31, 2002.

Reclassifications. Certain amounts from the prior consolidated financial
statements have been reclassified to conform to the presentation adopted in
2002.

4. CONCENTRATIONS OF CREDIT RISK

A significant portion of the Company's sales is to customers in the
pharmaceutical industry. The Company monitors the extension of credit to
customers and has not experienced significant credit losses. The following table
represents the relative percentage of accounts receivable from significant
customers compared to net accounts receivable:

n/a -- receivable balances were less than 10% for the year.

The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:

The Company invests its excess cash primarily in government, municipal
obligations and high-quality corporate debt securities and commercial paper. The
commercial paper securities are highly liquid and the remaining investments
typically mature within two years (although there is an established secondary
market for sales at any given time). Based on the nature of the financial
instruments and/or historical realization of these financial instruments,
management believes they bear minimal risk.

5. MARKETABLE SECURITIES

The following table represents the contractual maturities of marketable
securities held as of December 31, 2001 and 2002:

F-13

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All available-for-sale securities are considered current, as the Company
intends to use them for current operating and investing purposes. At December
31, 2001 and 2002, approximately $757,625 and $498,229, respectively, of
available-for-sale securities with original maturities of 90 days or less were
included in cash and cash equivalents. The remaining amounts totaling
approximately $49,880 and $227,263 at December 31, 2001 and 2002, respectively,
are classified as marketable securities on the Company's balance sheet.

The carrying amount of available-for-sale securities and their approximate
fair values at December 31, 2002 were as follows:

During 2000, the Company liquidated its marketable securities and
recognized a net loss of $707. At December 31, 2001, the market value of the
marketable securities approximated cost. There were no realized gains or losses
in 2001. At December 31, 2002, the Company had net unrealized gains from
marketable securities of $45, net of tax, recorded in other comprehensive
income. The Company realized $1,960 of net gains on marketable securities during
2002.

6. INVENTORY

Inventory consists of the following:

DSM Pharmaceuticals, Inc. ("DSM") one of the Company's third-party
manufacturers, informed the Company on November 21, 2001, that they ceased
operations at their sterile manufacturing facilities in Greenville, North
Carolina, as a result of U.S. Food and Drug Administration ("FDA") concerns
relating to compliance issues. Due to the compliance issues, DSM recommended
that the Company initiate a voluntary recall of all products that they
manufacture for King. The Company initiated a voluntary recall of these products
on December 18, 2001. As a result, the Company recorded special charges,
included as cost of revenues, of $5,933 and $1,206 during 2001 and 2002,
respectively, primarily to provide for product returns and the write-off of
inventory.

During 2001, the Company wrote-off obsolete Levoxyl(R) inventory of $2,059.
The FDA approved the New Drug Application ("NDA") for a new formulation of
Levoxyl(R) on May 25, 2001. Pursuant to FDA guidance, the Company may distribute
only the FDA-approved new formulation of Levoxyl(R) after August 14, 2001.

F-14

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company recorded a special charge in the amount of $1,827 during 2002
relating primarily to the Company's voluntary recall of Liqui-Char(R) and
Theravac(R), two of the Company's smaller volume products.

As discussed in Note 8 below, the Company donated $15,152 of Lorabid(R)
inventory to a charitable organization as a result of the decision in the fourth
quarter of 2002 to divest the Lorabid(R) intangible assets and accrued a $49,877
liability related to the excess purchase commitments under the Lorabid(R) supply
agreement.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

- ---------------

(a) Capital projects in process at December 31, 2002 primarily include the new
information technology system, building improvements for facility upgrades
and increased capacity, and other property and equipment purchases.

Depreciation expense for the years ended December 31, 2000, 2001 and 2002
was $8,888, $9,749, and $11,233, respectively.

8. ACQUISITIONS/INTANGIBLE ASSETS

On December 30, 2002, the Company acquired or licensed the exclusive
rights, including the NDA, trademarks, product rights and certain patents, to
three branded prescription pharmaceutical products from Aventis for $197,500,
plus $4,300 in expenses. The products include the rights in the United States,
Puerto Rico, and Canada to Intal(R) and Tilade(R), inhaled anti-inflammatory
agents for the management of asthma, and worldwide rights, excluding Japan, to
Synercid(R), an injectable antibiotic. The acquisition was financed with cash on
hand. The Company has recorded $43,185 of the acquisition as patents and
$146,615 of the acquisition as product rights within intangible assets. The
purchase price allocation among the assets acquired and the assignment of lives
to the intangible assets are preliminary and subject to further evaluation as
the Company has not yet finalized its valuation of the intangible assets.

In connection with the acquisition, $12,000 of the purchase price was
allocated to an in-process research and development project. The value of the
in-process research and development project was expensed on the date of
acquisition as it had not received regulatory approval and had no alternative
future use. The project was for a new formulation of Intal(R) using a new
propellant that was valued through the application of a probability-weighted,
discounted cash flow approach by independent valuation specialists. The
estimated cash flows were projected over periods ranging from zero to 16 years
using a discount rate of 20.5%. Operating margins were assumed to be similar to
historical margins of similar products. The estimated cost to complete the
project was less than $2,000 and the project was expected to be completed during
2004. The project was substantially complete as of the valuation date. The
success of the project is dependent upon whether the Company receives FDA
approval. The Company is not aware of any issues

F-15

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with respect to the FDA's review of the project. If the project is not
successfully completed it would not materially adversely affect the Company's
results of operations.

As additional consideration to Aventis for Synercid(R), the Company has
agreed to potential milestone payments totaling $75,000. The Company will
potentially pay Aventis milestone payments totaling $50,100 over the next three
years, payable in annual installments of $10,300, $21,200, and $18,600 beginning
on December 31, 2003, which relate to the continued recognition of Synercid(R)
as an effective treatment for vancomycin-resistant enterococcus faecium. The
remaining $25,000 milestone is payable to Aventis if Synercid(R) should receive
FDA approval to treat methicillin resistant staphylococcus aureus, or King will
pay Aventis a one-time payment of $5,000 the first time during any twelve-month
period net sales of Synercid(R) exceed $60,000, and a one-time payment of
$20,000 the first time during any twelve-month period net sales of Synercid(R)
exceed $75,000.

On May 29, 2002, the Company acquired the exclusive rights to Prefest(R)
tablets in the United States, its territories and possessions and Puerto Rico,
including the related NDA, Investigational NDA, copyrights, and patents or
licenses to the related patents from Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson subsidiary. The Company paid $108,000 for the product rights
upon closing plus approximately $3,300 of expenses. During February 2003,
subsequent to year end, the Company paid Ortho-McNeil an additional $7,000 upon
receipt of the FDA's approval to rename the product "Prefest(R)", which was
previously named "Ortho-Prefest." The acquisition was financed with cash on
hand. The Company's allocation of purchase price was based upon the estimated
fair value of assets acquired and liabilities assumed in accordance with SFAS
No. 142. The purchase price allocation among the intangible assets acquired and
the determination of useful life has been completed and the difference between
the original and final determination was not material. Of the total purchase
price of $111,300 at December 31, 2002, $80,442 was allocated to trademarks and
product rights and $30,858 was allocated to patents. The patent is being
amortized over eleven years and five months, the remaining life on the primary
patent. The trademark and product rights are being amortized over 25 years.

On August 8, 2001, the Company acquired three branded pharmaceutical
products and a fully paid license to a fourth product from Bristol-Myers Squibb
for $285,000 plus approximately $1,500 of expenses. The products acquired
include Bristol-Myers Squibb's rights to the NDAs, trademarks and product rights
in the United States to Corzide(R), Delestrogen(R) and Florinef(R). King also
acquired a fully paid license to and trademark for Corgard(R) in the United
States. The acquisition was financed with a combination of borrowings under the
Company's Senior Secured Credit Facility and cash on hand. The Company's
allocation of purchase price was based upon the estimated fair value of assets
acquired and liabilities assumed in accordance with SFAS No. 142. The purchase
price allocation among the various products acquired and the determination of
useful lives has been completed and the difference between the original and
final determination was not material. The product rights are being amortized
over 20 to 30 years. See Note 24 for a discussion of subsequent events related
to Florinef(R).

On June 22 and July 7, 2000, the Company acquired the sales and marketing
rights, respectively, to Nordette(R), Wycillin(R) and Bicillin(R) from Wyeth for
$200,000 plus assumed liabilities of $3,000. The purchase price was allocated to
intangible assets that are being amortized over their estimated useful lives of
25 years. This acquisition was financed with a draw of $10,000 on a $50,000
bridge loan, $25,000 in the form of a note issued to Wyeth, $37,500 of the
proceeds from the sale of stock to Wyeth, $25,000 received in connection with
the Co-Promotion Agreement with Wyeth, $90,000 from the revolving credit
facility and $12,500 in cash on hand.

F-16

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intangible assets consist of the following:

All of the goodwill of the Company is associated with the branded
pharmaceuticals segment. Amortization expense for the years ended December 31,
2000, 2001, and 2002 was $33,054, $38,217, and $48,738, respectively.

Estimated annual amortization expense at December 31, 2002 for each of the
five succeeding fiscal years is as follows:

The amortization expense above is exclusive of the Company's 2003
acquisitions.

The Company acquired the antibiotic Lorabid(R) in the United States and
Puerto Rico from Eli Lilly and Company ("Eli Lilly") on August 19, 1999 for a
purchase price of $91,700, including acquisition costs. Since the acquisition,
sales declined for a variety of reasons. During the fourth quarter of 2002, the
Company decided to divest its rights to Lorabid(R).

As a result of a continuing decline of Lorabid(R) prescriptions and the
Company's inability, to date, to divest its rights to Lorabid(R), management has
determined that it will not be able to sell all the Lorabid(R) product the
Company is required to purchase under its supply contract with Eli Lilly.
Accordingly, under the requirements of Accounting Research Bulletin No. 43,
because of this decline in Lorabid(R) prescription trends and because the
Company had not finalized its consolidated financial statements for the year
ended December 31, 2002 until July 2003, the Company has recorded a $49,877
liability related to Lorabid(R) purchase commitments in excess of expected
demand as a charge to cost of revenues in 2002.

In addition, the Company has reviewed the Lorabid(R) intangible assets for
impairment under SFAS No. 144. Based on that review, as updated for management's
cash flow expectations for Lorabid(R) as of July 2003, the Company has
determined that the Lorabid(R) intangible assets were impaired and has recorded
an impairment charge of $66,844 to write down the assets to their estimated fair
value as of December 31, 2002.

In addition, as a result of the decision in the fourth quarter of 2002 to
divest the Lorabid(R) intangible assets, the Company donated $15,152 of
Lorabid(R) inventory to a charitable organization. This donation was classified
within cost of sales in the accompanying statements of income. Lorabid(R) is
included in the Company's branded pharmaceutical reporting segment.

The $49,877 liability related to Lorabid(R) purchase commitments in excess
of expected demand, together with the $15,152 of Lorabid(R) inventory donated to
a charitable organization in the fourth quarter

F-17

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of 2002, resulted in a combined charge of $65,029 to cost of revenues in the
fourth quarter of 2002. The Company continues to explore the possible
divestiture of its rights to Lorabid(R), but has not reached an agreement with
any potential purchaser.

9. OTHER ASSETS

Other assets consist of the following:

On December 19, 2000, September 7, 2001, and June 24, 2002, the Company
acquired convertible senior notes of $20,000, $10,000 and $10,000, respectively,
from Novavax, Inc. The convertible senior notes earn interest at 4% payable
semi-annually in June and December. The convertible senior notes are due
December 19, 2007. The convertible senior notes are convertible to common shares
of Novavax at a specified conversion price. At December 31, 2001 and 2002, the
convertible senior notes were convertible to 10.7% and 17.0%, respectively, of
the outstanding common shares of Novavax. During 2001, the Company recognized an
unrealized gain net of amortization of $8,081 related to the conversion option
on the convertible senior notes in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The gain has been recorded in
other income in the accompanying financial statements. During September 2001,
the Company modified the agreement with Novavax, which resulted in the option no
longer being considered a derivative. During 2002, the convertible senior notes
were deemed to be impaired as defined under SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." The Company recorded a valuation allowance
of $35,443 during 2002. The Company determined the amount of the valuation
allowance by reference to the December 31, 2002 quoted market price of the
Novavax common stock. The amount of the valuation allowance will be adjusted in
future periods until such time as the loan is no longer considered to be
impaired. For the year ended December 31, 2001, Novavax paid the interest
related to the convertible senior notes in cash of $722 and stock of $232, in
accordance with the agreement. During 2002, the Company incurred a write-down of
$186 related to the stock held in Novavax acquired as a result of interest
payments. For the year ended December 31, 2002, Novavax paid interest of $604 in
cash and the Company allowed Novavax to pay the interest of $800 related to the
convertible senior notes in stock, even though this was not in accordance with
the original agreement. Subsequent to year end, Novavax provided 307,692 shares
of common stock to pay the accrued interest receivable at December 31, 2002 of
$800.

On June 22, 2000, the Company entered into an agreement with Aventis Pharma
Deutschland GMBH ("Aventis") to provide Aventis with funds for a facilities
expansion that will provide additional production of an outsourced product of
the Company. During 2000 and 2001, the Company loaned Aventis $15,000 and
$15,000, respectively, under this agreement. This loan bears interest at 8% and
is being repaid by reducing amounts otherwise payable on the purchase of
inventory. During 2001 and 2002, inventory in the amount of $14,086 and $4,310,
respectively, was received as payment against these loans.

Amortization expense related to deferred financing costs was $1,927,
$1,040, and $2,898 for 2000, 2001, and 2002, respectively, and has been included
in interest expense. During 2000 and 2001, the Company repaid certain debt prior
to maturity resulting in extraordinary losses of $12,768 and $14,383, net of
income taxes, respectively.

F-18

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. LEASE OBLIGATIONS

The Company leases certain office and manufacturing equipment and
automobiles under non-cancelable operating leases with terms from one to five
years. Estimated future minimum lease payments as of December 31, 2002 for
leases with initial or remaining terms in excess of one year are as follows:

2003........................................................ $6,175
2004........................................................ 2,375
2005........................................................ 1,710
2006........................................................ 1,155
2007........................................................ 837
Thereafter.................................................. 757

Lease expense for the years ended December 31, 2000, 2001 and 2002 was
approximately $5,690, $7,846, and $10,189, respectively.

11. ACCRUED EXPENSES

Accrued expenses consist of the following:

12. LONG-TERM DEBT

Long-term debt consists of the following:

- ---------------

(a) During the fourth quarter of 2001, the Company issued $345,000 of 2 3/4%
Convertible Debentures due November 15, 2021. The debentures are unsecured
unsubordinated obligations, and the payment of principal and interest is
guaranteed by the Company's domestic subsidiaries on a joint and several
basis. The debentures accrue interest at an initial rate of 2 3/4%, which
will be reset (but not below

F-19

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2 3/4% or above 4 1/4%) on May 15, 2006, May 15, 2011, and May 15, 2016.
Interest is payable on May 15 and November 15 of each year.

On or after November 20, 2006, the Company may redeem for cash all or part
of the debentures that have not previously been converted or repurchased at
a price equal to 100% of the principal amount of the debentures plus accrued
interest up to but not including the date of redemption. Holders may require
the Company to repurchase for cash all or part of their 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. In addition, upon a change of
control, each holder may require the Company to repurchase for cash all or a
portion of the holder's debentures.

Holders may surrender their debentures for conversion into shares of King
common stock at the conversion price (initially $50.16 per share and subject
to certain adjustments) if any of the following conditions is satisfied:

- if the closing sale price of King common stock, for at least 20 trading
days in the 30 trading day period ending on the trading day prior to the
date of surrender, exceeds 110% of the conversion price per share of King
common stock on that preceding trading day;

- if we have called the debentures for redemption; or

- upon the occurrence of specified corporate transactions.

The Company has reserved 6,877,990 shares of common stock in the event such
debentures are converted into shares of the Company's common stock.

(b) On March 3, 1999, the Company issued $150,000 of 10 3/4% Senior Subordinated
Notes due 2009. During 2000 and 2001, the Company redeemed $53,618 and
$96,289, respectively, at a price of $59,144 and $114,299, respectively.

(c) The Senior Credit Facility, as amended, provided for up to $525,000 of
aggregate borrowing capacity, consisting of: a $150,000 tranche A term loan
(the "Tranche A Term Loan"), a $275,000 tranche B term loan (the "Tranche B
Term Loan"), and a revolving credit facility in an aggregate amount of
$100,000 (the "Revolving Credit Facility"). The Revolving Credit Facility
included a $10,000 sublimit available for the issuance of letters of credit
and a $5,000 sublimit available for swingline loans. During the year ended
December 31, 2000, the Company paid the Tranche A Term Loan and Tranche B
Term Loan in full and no amounts were outstanding under its Revolving Credit
Facility at December 31, 2000. During 2001, the Company terminated the
Senior Credit Facility.

(d) On April 23, 2002, the Company established a $400,000 five year Senior
Secured Revolving Credit Facility. The facility has been collateralized in
general by all real estate with a value of $5,000 or more and all personal
property of the Company and its significant subsidiaries. The Company's
obligations under the Senior Secured Revolving Credit Facility are
unconditionally guaranteed on a senior basis by significant subsidiaries.
The Senior Secured Revolving Credit Facility accrues interest at the
Company's option, at either (a) the base rate (which is based on the prime
rate or 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 Senior Secured Revolving Credit
Facility and (b) letters of credit outstanding. At December 31, 2002, the
Company had $400,000 of available borrowings under its Senior Secured
Revolving Credit Facility.

The Company incurred $4,850 of deferred financing costs that are being
amortized over five years, the life of the Senior Secured Revolving Credit
Facility.

F-20

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

This facility requires the Company to maintain a certain minimum net worth
and EBITDA to interest expense ratio and maintain a funded debt to EBITDA
ratio below an established maximum. As of December 31, 2002, the Company has
complied with those covenants.

During 2001, as a result of terminating its Senior Credit Facility and
redemption, through a tender offer of $96,300 of 10 3/4% Senior Subordinated
Notes prior to maturity, the Company recorded an extraordinary charge of $22,903
($14,383 net of income taxes) or $0.06 per share in the fourth quarter of 2001,
resulting from the write-off of deferred financing costs and the payment of an
early redemption premium.

During 2000, the Company repaid the Tranche A and Tranche B Term Loans and
$53,618 of Senior Subordinated Notes prior to maturity resulting in an
extraordinary charge of $20,348 ($12,768 net of income taxes) due to the
write-off of deferred financing costs and the payment of an early redemption
premium for the Senior Subordinated Notes.

During the year ended December 31, 2000, the Company terminated its
interest rate swap agreements and recognized a gain of $1,911, which is included
in other income.

The aggregate maturities of long-term debt (including capital lease
obligations) at December 31, 2002 are as follows:

2003........................................................ $ 1,300
2004........................................................ --
2005........................................................ --
2006........................................................ 345,000
2007........................................................ --
Thereafter.................................................. 93
--------
$346,393
========

13. FINANCIAL INSTRUMENTS

The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable. The
carrying amounts of these items are a reasonable estimate of their fair values.

Marketable Securities. The fair value of marketable securities was based
primarily on quoted market prices (Note 5). If quoted market prices are not
readily available, fair values are based on quoted market prices of comparable
instruments.

Convertible Senior Notes Receivable from Novavax. At December 31, 2001,
the fair value of the convertible senior notes receivable from Novavax was
determined using option pricing models, and was estimated to be approximately
$38,830. Key assumptions used in determining that fair value were as follows:
volatility of 58% and a discount rate of 5%. At December 31, 2002, the carrying
amount of the convertible notes receivable were at their estimated fair value
based on the quoted market prices of the collateral, the Novavax common stock.

Long-Term Debt. The fair value of the Company's long-term debt, including
the current portion, at December 31, 2001 and 2002 is estimated to be
approximately $379,709 and $310,485, respectively, using discounted cash flow
analyses and based on the Company's incremental borrowing rates for similar
types of borrowing arrangements.

F-21

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. INCOME TAXES

The net income tax expense (benefit) is summarized as follows:

A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income before income taxes
and extraordinary item is as follows:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:

Management has determined that it is more likely than not that the deferred
tax assets will be realizable and no valuation allowance is necessary.

15. BENEFIT PLANS

The Company maintains a defined contribution employee benefit plan that
covers all employees over 21 years of age. The plan allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plan. Company contributions during the years ended December
31, 2000, 2001 and 2002 were $2,404, $2,134, and $2,412, respectively. The plan
also provides for discretionary profit-sharing contributions by the Company.
There were no discretionary contributions during the years ended December 31,
2000, 2001 and 2002.

F-22

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. COMMITMENTS AND 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,
which claim damages for personal injury arising from its production of the
anorexigenic drug phentermine under contract for GlaxoSmithKline. The Company
expects to be named in additional lawsuits related to its production of the
anorexigenic drug under contract for GlaxoSmithKline.

While the Company cannot predict the outcome of these suits, management
believes that the claims against the Company are without merit and intend to
vigorously pursue all defenses available to the Company. 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 Company's independent negligence
or intentional acts, and intends to submit a claim for all unreimbursed costs to
its 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 lawsuit and be responsible for
damages, if any, which are awarded against the Company or for amounts in excess
of its product liability coverage.

In addition, Jones, a wholly-owned subsidiary of King, is a defendant in
577 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 its 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.

While management cannot predict the outcome of these suits, management
believes that the claims against the Company are without merit and intend to
vigorously pursue all defenses available to the Company. 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 Jones' insurance
coverage is inadequate to satisfy any resulting liability, Jones will have to
resume defense of these lawsuits and be responsible for the damages, if any,
that are awarded against it. 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. The Company, at this
time, cannot provide an aggregate dollar amount of damages claimed or a
reasonable estimate of the range of possible losses related to the lawsuits.

F-23

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

State of Wisconsin Investment Board

On November 30, 1999, the Company entered into an agreement of merger with
Medco Research, Inc. ("Medco") pursuant to which the Company acquired Medco in
an all stock, tax-free pooling of interests transaction, which was subject to
approval by the Medco shareholders. On January 5, 2000, Medco issued to its
stockholders a proxy statement with respect to the proposed transaction and
noticed a meeting to approve the transaction for February 10, 2000.

On January 11, 2000, the State of Wisconsin Investment Board, ("SWIB"), a
Medco shareholder that held approximately 11.6% of the outstanding stock of
Medco, filed suit on behalf of a proposed class of Medco shareholders in the
Court of Chancery for the State of Delaware, New Castle County, (State of
Wisconsin Investment Board v. Bartlett, et al., C.A. No. 17727), against Medco
and members of Medco's board of directors to enjoin the shareholder vote on the
merger and the consummation of the merger.

On April 10, 2002, the court granted the motion to dismiss with prejudice
and awarded SWIB $234 in fees and $94 in costs, for a total award of $328.

SWIB appealed the court's decision to the Delaware Supreme Court. On
October 25, 2002, the Delaware Supreme Court promptly affirmed the decision of
the Court of Chancery in all respects. In light of the fact that the Company has
already satisfied the April 10, 2002 judgment of the Court of Chancery, the
Company believes that any further exposure in this matter will be remote.

Thimerosal/Vaccine Related Litigation

King and its wholly owned subsidiary, Parkedale Pharmaceuticals, Inc.
("Parkedale"), 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 is moving to be dismissed from the litigation
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.

Other Legal Proceedings

The Parkedale 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 Parkedale facility
is currently manufacturing pharmaceutical products subject to the Consent Decree
that prohibits the manufacture and delivery of specified drug products unless,
among other things, the products conform to current good manufacturing practices
and are produced in accordance with an approved ANDA or NDA. The Company
intends, when appropriate, to petition for relief from the Consent Decree.

Cobalt Pharmaceuticals, Inc. has filed an ANDA with the FDA pertaining to
ramipril, the generic name for Altace(R), which the Company co-promotes together
with Wyeth. The allegations in Cobalt's notice relate to a composition of matter
patent for ramipril which does not expire until October 2008. A separate patent,
expiring in January 2005, also covers ramipril, but Cobalt is not seeking FDA
approval

F-24

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

until after the expiration of this second patent in January 2005. Together with
Aventis, which owns the pertinent patent, the Company intends to vigorously
enforce this patent, as well as a method of use patent relating to Altace(R)
that is also listed in the FDA's Orange Book.

Eon Labs, Inc. ("Eon Labs") and CorePharma, LLC ("CorePharma") have each
filed an ANDA with the FDA pertaining to metaxalone, the active ingredient in
Skelaxin(R), to which the Company acquired certain rights from Elan on June 12,
2003. The allegations in Eon Labs' and CorePharma's notice relate to a patent
covering a method of using metaxalone, which does not expire until December
2021. The Company intends to vigorously enforce its rights under this patent.

Mylan Pharmaceuticals, Inc. ("Mylan") filed an ANDA with the FDA pertaining
to levothyroxine sodium, the active ingredient in Levoxyl(R). The allegations in
Mylan's notice relate to a patent covering pharmaceutical compositions of
levothyroxine sodium, which does not expire until February 2022. The Company
intends to vigorously enforce its rights under this patent.

The Company is involved in various routine legal proceedings incident to
the ordinary course of its business.

Other Commitments and Contingencies

The following summarizes the Company's unconditional purchase obligations
at December 31, 2002:

2003........................................................ $112,997
2004........................................................ 112,854
2005........................................................ 113,358
2006........................................................ 93,177
2007........................................................ 68,007
Thereafter.................................................. 61,845
--------
Total............................................. $562,238
========

The unconditional purchase obligations of the Company are primarily related
to minimum purchase requirements under contracts with suppliers to purchase raw
materials and finished goods related to the Company's branded pharmaceutical
products. See Note 8 for a discussion of the $49,877 loss accrual related to the
excess purchase commitments under the Lorabid(R) supply agreement.

Government Agency Pricing

The Company and other pharmaceutical manufacturers are required to provide
statutorily defined rebates to various government agencies in order to
participate in Medicaid, the veterans health care program and other
government-funded programs. Several government agencies have placed restrictions
on physician prescription levels and patient reimbursements, emphasized greater
use of generic drugs and enacted across-the-board price cuts as methods to
control costs. The Company is unable to predict the final form and timing of any
future governmental or other health care initiatives, and therefore, their
effect on operations and cash flows cannot be reasonably estimated. Similarly,
the effect on operations and cash flows of decisions of government entities,
managed care groups and other groups concerning formularies and pharmaceutical
reimbursement policies cannot be reasonably estimated. See Note 2 for
information regarding Medicaid and other governmental pricing programs.

17. SEGMENT INFORMATION

The Company's business is classified into four reportable segments: branded
pharmaceuticals, contract manufacturing, royalties and all other. Branded
pharmaceuticals includes a variety of branded prescription products over four
therapeutic areas, including cardiovascular, anti-infective, critical care and
endocrinology/women's health. These branded prescription products have been
aggregated because of the similarity in regulatory environment, manufacturing
process, method of distribution, and type of customer. Contract

F-25

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

manufacturing represents contract manufacturing services provided for
pharmaceutical and biotechnology companies. Royalties represents products for
which the Company has transferred the manufacturing and marketing rights to
corporate partners in exchange for licensing fees and royalty payments on
product sales. The classification "all other" primarily includes generic
pharmaceutical products.

The Company primarily evaluates its segments based on gross profit.
Reportable segments were separately identified based on revenues, gross profit
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 of contract manufacturing
to the branded pharmaceuticals segment.

The following represents selected information for the Company's operating
segments for the periods indicated:

F-26

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents revenues by therapeutic area:

Capital expenditures of $25,149, $40,167, and $73,587 for the years ended
December 31, 2000, 2001 and 2002, respectively, are substantially utilized for
contract manufacturing and branded pharmaceutical products purposes.

18. RELATED PARTY TRANSACTIONS

The Benevolent Fund is a nonprofit corporation organized under the laws of
the Commonwealth of Virginia and is exempt from taxation under Section 501(c)(3)
of the Internal Revenue Code. The Benevolent Fund obtains pharmaceutical
products either as gifts-in-kind from manufacturers or by purchase from
third-party distributors or wholesalers. The Benevolent Fund donates the
pharmaceutical products purchased or received as gifts-in-kind to medical
missions in the United States and in foreign countries to advance its
humanitarian aid efforts. The Benevolent Fund was founded in 1994 by John M.
Gregory, who also founded King and was its Chairman of the Board until June 28,
2002 and its Chief Executive Officer until January 1, 2002. John M. Gregory
owned more than 5% of the Company's common stock until May 6, 2002. John M.
Gregory, who serves as President of the Board of Directors of the Benevolent
Fund, is the brother of Jefferson J. Gregory, who became the Company's Chief
Executive Officer on January 1, 2002 and the Company's Chairman of the Board on
June 28, 2002, and James E. Gregory, one of the Company's current directors. In
addition, Mary Ann Blessing, a sister of Jefferson J. Gregory and James E.
Gregory, served as the Chief Operating Officer of the Benevolent Fund until
approximately January 2001 and presently serves as a director and Treasurer of
the Board of the Directors of the Benevolent Fund. Carol Shrader, mother of
Brian Shrader, Chief Financial Officer of the Company until September 2000, is
presently a director of the Benevolent Fund.

Jefferson J. Gregory and James E. Gregory were members of the Board of
Directors of the Benevolent Fund in 1999, 2000, 2001 and 2002, but no longer
hold those positions. In addition, Joseph R. Gregory, who was Vice Chairman of
the Company's Board of Directors and President of the Company's wholly-owned
subsidiary Monarch Pharmaceuticals, Inc. until February 2003, served as a
director of the Benevolent Fund in 1999, 2000, 2001 and 2002, but no longer
holds that position. Joseph R. Gregory is the brother of Jefferson J. Gregory,
James E. Gregory, John M. Gregory and Mary Ann Blessing. Herschel Blessing,
Executive Vice-President of King until July 1, 2002, is the husband of Mary Ann
Blessing and a director of the Benevolent Fund.

The Company occasionally donates its products to the Benevolent Fund. The
Company donated inventory with a carrying value of $1.8 million in 1999, $3.3
million in 2000, $4.1 million in 2001 and $22.6 million in 2002. In addition to
receiving donations of products directly from pharmaceutical manufacturers, the
Benevolent Fund also purchases pharmaceutical products, including those
manufactured by King, from third-party distributors or wholesalers. The Company
is aware of three occasions on which the Benevolent Fund purchased its products
from third-party distributors or wholesalers.

On November 22, 1999, the Company sold $2,775,000 of Fluogen(R) vials to a
third-party distributor, which in turn resold those vials to the Benevolent
Fund. The Benevolent Fund donated the vials to Global

F-27

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Resource Services for use in North Korea. On December 27, 1999, the Company sold
$825,075 (net of a 5% prompt pay discount) of Fluogen(R) syringes to the same
third-party distributor, which in turn resold those syringes to the Benevolent
Fund in January 2000. The Benevolent Fund donated the syringes to the Feed the
Children(R) organization on January 28, 2000 for use in Venezuela. On December
26, 2002, the Company sold $4,587,571 (net of a 2% prompt pay discount) of
Cortisporin(R), Silvadene(R) and Tigan(R) to a third-party wholesaler, which in
turn resold those products to the Benevolent Fund in January 2003. For a
description of the Company's accounting for this transaction, please see Note 2.

In February 2000, the Company paid $2,823 to Richard C. Williams, a former
director of the Company, for services performed in connection with the
successful completion of the Medco merger. Prior to the merger, Mr. Williams was
Chairman of the Board of Medco. In addition, Mr. Williams received fees for
consulting services of $180 in 2000.

During 2001, the Company donated $103 to King College. Gregory D. Jordan, a
director of the Company, is the president of King College.

During 2002, the Company paid $73 to James E. Gregory, a director of the
Company, for consulting services. Of that amount, $23 was for personal use of
the corporate aircraft.

During the years ended December 2000, 2001 and 2002, the Company paid $49,
$5 and $171, to the Wake Forest University School of Medicine, respectively, for
research and development activities. R. Charles Moyer, a director of the
Company, is the Dean of the Babcock Graduate School of Management at Wake Forest
University.

19. STOCKHOLDERS' EQUITY

Preferred Shares

The Company is authorized to issue 15 million shares of "blank-check"
preferred stock, the terms and conditions of which will be determined by the
Board of Directors. As of December 31, 2001 and 2002, there were no shares
issued or outstanding.

2001 Offerings

On November 7, 2001 and November 20, 2001, the Company completed the sale
of 16,000,000 and 1,992,000, respectively, of newly issued shares of common
stock for $38.00 per share ($36.67 per share net of commissions and expenses)
resulting in net proceeds of $659.8 million.

Stock Splits

On June 20, 2001, the Company's Board of Directors declared a four for
three stock split for shareholders of record as of July 3, 2001, to be
distributed July 19, 2001. The stock split has been reflected in all share data
contained in these consolidated financial statements.

On June 2, 2000, the Company's Board of Directors declared a three for two
stock split for shareholders of record as of June 12, 2000, to be distributed
June 21, 2000. The stock split has been reflected in all share data contained in
these consolidated financial statements.

Stock Repurchase Program

On May 13, 2002, the Company's Board of Directors authorized a plan to
repurchase up to 7.5 million shares of the Company's common stock. Under the
plan, the Company may repurchase shares of its common stock in the open-market
from time to time, depending on market conditions, share price and other
factors. During the year ended December 31, 2002, the Company repurchased 7.5
million shares for $166,274.

F-28

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Option Plans

The Company has various incentive stock plans for executives and employees.
In connection with the plans, options to purchase common stock are granted at
option prices not less than the fair market values of the common stock at the
time the options are granted and either vest immediately or ratably over a
period of up to ten years from the grant date. At December 31, 2002, options for
8,365,624 shares of common stock are available for future grant. A total of
4,908,317 options to purchase common stock are outstanding under these plans at
December 31, 2002, of which 4,211,652 are currently exercisable.

Certain of the incentive stock plans allow for employee payment of option
exercise prices in the form of either cash or previously held common stock of
the Company. Shares tendered in payment of the option exercise price must be
owned by the employee making the tender, for either six months or one year
depending on how the shares were acquired, prior to the date of tender.

A summary of the status of the Company's plans as of December 31, 2002 and
changes during the years ended December 31, 2000, 2001 and 2002 are presented in
the table below:

Options outstanding at December 31, 2002 have exercise prices between $3.16
and $44.26, with a weighted average exercise price of $21.27 and a remaining
contractual life of approximately 6.58 years.

F-29

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2000, 2001 and 2002, the Company granted 79,998, 53,332 and 50,000
options, respectively, of common stock to its directors under the 1998 Stock
Option Plan at an exercise price equal to market value at the date of grant. The
options vested immediately upon grant. Options totaling 234,965 issued under the
1998 Stock Option Plan were vested and outstanding at December 31, 2002. Options
under the 1998 Stock Option Plan expire 10 years from the date of grant. These
options are included in amounts reflected in the above tables.

20. INCOME PER COMMON SHARE

The basic and diluted income before extraordinary item(s) per common share
was determined based on the following share data:

The weighted average stock options that were anti-dilutive at December 31,
2000, 2001 and 2002 were 221,316, 220,431 and 1,669,922 shares, respectively.
The convertible debentures could also be converted into 6,877,990 shares of
common stock in the future, subject to certain contingencies outlined in the
indenture (Note 12). Because such contingencies were not fulfilled, the
convertible debentures were not considered in the calculation of diluted income
per common share.

21. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In the first quarter of 2002, the Company adopted SFAS No. 141, "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires all business combinations to be accounted for under the purchase
method of accounting. SFAS No. 141 was effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized, but evaluated annually for impairment.

SFAS No. 142 also required an additional impairment test for existing
goodwill ($12,742) and for indefinite-lived intangible assets ($19,192) to
determine whether any write-down was required as of the beginning of 2002. Upon
completion of such testing, management determined that no write-down to the
carrying value of these assets was required.

F-30

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table reflects consolidated results adjusted as though the
adoption of SFAS No. 142 occurred as of January 1, 2000:

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted these standards
effective January 1, 2002. The implementation of these standards did not have
any effect on the Company's financial statements.

In January 2003, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods
of transition to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements of SFAS No.
123. The disclosure provisions of SFAS No. 148 were adopted by the Company for
the fiscal year ending December 31, 2002 and did not have any impact on the
Company's financial statement.

22. MERGERS AND RESTRUCTURING

Merger with Medco

On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco") by exchanging 7,221,000 (14,440,972 post-splits) shares of its
common stock for all of the common stock of Medco. Each share of Medco was
exchanged for 0.6757 (1.3514 post-splits) of one share of King common stock. In
addition, outstanding Medco stock options were converted at the same exchange
rate into options to purchase approximately 695,000 (1,389,299 post-splits)
shares of King common stock. Subsequent to the merger, Medco was renamed King
Pharmaceuticals Research and Development, Inc.

F-31

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Medco merger was accounted for as a pooling of interests. In connection
with this transaction, the Company charged to expense $20,789 of merger related
costs in the first quarter of 2000. The types of costs incurred and the actual
cash payments made are summarized below:

Merger with Jones

On August 31, 2000, the Company completed a merger with Jones by exchanging
73,770,000 (98,357,541 post-split) shares of its common stock for all of the
common stock of Jones. Each share of Jones was exchanged for 1.125 (1.50
post-split) shares of King common stock. In addition, outstanding Jones stock
options were converted at the same exchange rate into options to purchase
approximately 4,024,000 (5,365,199 post-split) shares of King common stock.

The Jones merger was accounted for as a pooling of interests. In connection
with the merger with Jones, the Company incurred total merger and restructuring
related costs of $35,317. The types of costs incurred and the actual cash
payments made are summarized below:

All activity was paid in cash except for $4.7 million in 2000 and $3.9
million in 2001 for non-cash compensation and a $3.2 million asset write-down
for a negotiated contract termination in 2000.

Discontinuance of Fluogen(R) Product

On September 27, 2000, the Company received written notification from the
FDA that it must cease manufacturing and distributing Fluogen(R), an influenza
vaccine, until the Company demonstrated compliance with related FDA regulations.
In addition, the notification recommended that the Company properly dispose of
Fluogen(R) inventory on hand. As a result of this notification, the Company
decided to permanently discontinue Fluogen(R) production and distribution. This
restructuring plan resulted in the elimination of approximately 160 employees,
of which approximately 110 were hourly and 50 were salaried. As a result of the
Company's decision to discontinue Fluogen(R), the Company recorded extraordinary
losses on disposed and impaired assets of $15.0 million, before tax benefit of
$5.6 million, and a nonrecurring

F-32

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

charge of $37.3 million for the year ended December 31, 2000. A summary of the
types of costs accrued and incurred are summarized below:

- ---------------

(1) Includes non-cash asset write-downs.

Discontinuance of Pallacor(TM) Research and Development Efforts

In September 2000, management decided to discontinue the research and
development efforts relating to Pallacor(TM) due to the Company's inability to
out-license rights to the product and management's assessment of the
significance of projected research and development costs relative to the
likelihood of the project's success, resulting in a nonrecurring research and
development charge of $6.1 million. At December 31, 2001 and 2002, the Company
estimated that there were no remaining contractual commitments associated with
Pallacor(TM).

Restructuring and Executive Retirements

During 2002, the Company consolidated the international division into the
Company's operations in Bristol, Tennessee decided to sell the veterinary
business, and decided to terminate production at one of its facilities. Two
executives retired and were paid $4,325. These activities will eliminate
approximately 35 employees, of which approximately 16 were hourly and 19 were
salaried. As a result of the activities described above, the Company incurred a
charge of $5,911 for the year ended December 31, 2002. At December 31, 2002, the
Company has $2,216 accrued relating to these activities. At December 31, 2002,
24 employees had not been severed and are expected to be severed by the second
quarter of 2003.

F-33

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth summary financial information for the years
ended December 31, 2001 and 2002:

- ---------------

(1) Quarterly amounts do not total to annual amounts due to the effect of
rounding on a quarterly basis.

The information shown above for the fourth quarter of 2002 reflects
significant charges consisting of (1) a $46.5 million adjustment to the
Company's accrual for estimated amounts due under Medicaid and other
governmental pricing programs, (2) a $66.8 million charge to write down the
Lorabid(R) intangible assets to their fair value, and (3) a $49.9 million charge
related to the liability associated with the amount of the Lorabid(R) inventory
purchase commitments in excess of expected demand. Included in the $46.5 million
adjustment in (1) above are amounts representing corrections of immaterial
errors. The impact of these immaterial errors in each of the seven quarters
prior to the fourth quarter of 2002 (beginning with the first quarter of 2001)
on revenues is $967, $2,493, $1,756, $2,083, $5,495, $2,831, and $2,070,
respectively, and on diluted income per common share is zero, $0.01, $0.01,
$0.01, $0.02, $0.01, and $0.01, respectively.

24. SUBSEQUENT EVENTS

(a) Meridian Acquisition

On January 8, 2003, the Company completed its previously announced
acquisition of Meridian Medical Technologies, Inc. ("Meridian"). The Company
paid a cash price of $44.50 per common share to Meridian shareholders, totaling
approximately $246,800. A portion of the purchase price, estimated at $18,000
will be charged to expense as in-process research and development upon closing.
Meridian is the leading manufacturer of auto-injectors for the
self-administration of injectable drugs and had revenues of

F-34

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$82,407 for the fiscal year ended July 31, 2002. The Company financed the
acquisition using available cash on hand.

(b) Elan Transaction

On June 12, 2003, the Company acquired the primary care business of Elan
Corporation, plc and of some of its subsidiaries in the United States and Puerto
Rico, which includes the rights to two branded prescription pharmaceutical
products, including rights to potential new formulations, of Sonata(R) and
Skelaxin(R), together with Elan's United States primary care field sales force.
The Company believes the acquisition of these branded pharmaceutical products
will provide additional growth opportunities in the branded pharmaceutical
segment through promotional activities and pipeline opportunities. Product
rights subject to the agreement include those related to Sonata(R), a
nonbenzodiazepine treatment for insomnia, and Skelaxin(R), a muscle relaxant, in
the United States, its territories and possessions, and Puerto Rico. Under the
terms of the agreement, Elan's sale of Skelaxin(R) included related NDAs,
copyrights, trademarks, patents and U.S. rights to potential new formulations of
Skelaxin(R). Elan's sale of Sonata(R) included its rights to the product, as
well as certain related copyrights. The Company also acquired certain
intellectual property, regulatory, and other assets relating to Sonata(R)
directly from Wyeth. Under the terms of the agreement, the Company secured an
exclusive license to the intellectual property rights, in this territory, of
both Wyeth and Elan to the extent they relate to new formulations of Sonata(R),
other than for use in animals. The total estimated purchase price of $777,000,
includes the cost of acquisition and certain contingent and assumed liabilities.
Of the total purchase price, $602,000 was assigned to identifiable assets, and
$175,000 to in process research and development expense. The identifiable assets
have been assigned useful lives with a weighted-average range of 16.6 years. The
purchase price allocation among the assets acquired and the assignment of lives
to the intangible assets are preliminary and subject to further evaluation, as
the Company has not yet finalized its valuation of tangible assets acquired. The
Company also will pay royalties on the current formulation of Skelaxin(R) from
the date of closing and up to $71,000 if Elan achieves certain milestones in
connection with the development of a reformulated version of Sonata(R). The
Company also has a potential milestone payment of $15,000 if annual net sales of
a reformulation version of Sonata(R) exceed $100,000. The Company also
potentially will pay an additional $25,000 milestone payment to Elan relating to
the ongoing exclusivity of Skelaxin(R) on January 2, 2004. Prior to the closing
of this transaction, the Company had received a letter on March 13, 2003 from
the Federal Trade Commission ("FTC") stating that the FTC was conducting an
investigation to determine whether any person has engaged in unfair methods of
competition with respect to Elan's product Skelaxin(R). The focus of this
investigation was Elan's listing in the FDA's Orange Book of at least one patent
claiming a method of using metaxalone, and other actions with regard to FDA
regulatory processes. As a result of this new information, the Company commenced
an investigation and asked Elan to provide additional information. On March 17,
2003, Elan filed a lawsuit in the Supreme Court of the State of New York seeking
to compel us to close the transaction. On May 8, 2003, the FTC advised Elan that
it was discontinuing a portion of its investigation with respect to this method
of use patent. On May 20, 2003, we reached an agreement with Elan that
restructured the terms of the transaction as described above and, as a result,
the litigation has since been dismissed.

(c) Florinef(R) generic

During January 2003, the Company was notified of the approval by the FDA of
a second generic for the Florinef(R) product. The Company had intangible assets
related to Florinef(R) with carrying values of $135,043 at December 31, 2002.
The Company completed its impairment review, and will record an impairment
charge of $110,970 in the first quarter of 2003 reflecting the reduction in the
fair value of the Florinef(R) intangible assets as a result of the entrance of a
second generic into the market.

F-35

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) Levoxyl(R) generic

Mylan Pharmaceuticals, Inc., a generic drug manufacturer, filed an ANDA
with the FDA seeking permission to market a generic version of Levoxyl(R) prior
to the expiration of U.S. Patent No. 6555581, a utility patent with composition
of matter claims, which was issued to the Company on April 29, 2003 and extends
through February 15, 2022. The Company received notice of the Paragraph IV
certification no earlier than April 30, 2003. The Company intends to vigorously
enforce the patent being challenged and has filed suit.

Additionally, on June 24, 2003, the Company received a notice of Paragraph
IV certification related to the '581 patent from KV Pharmaceutical Company. We
intend to enforce our rights under the '581 patent to the full extent of the
law.

(e) Skelaxin(R) generic

Eon Labs, Inc. and CorePharma, LLC have each filed an ANDA with the FDA
pertaining to metaxalone, the active ingredient in Skelaxin(R), to which the
Company acquired certain rights from Elan on June 12, 2003. The allegations in
Eon's and CorePharma's notice relate to a patent covering a method of using
metaxalone, which does not expire until December 2021. The Company intends to
vigorously enforce its rights under this patent.

25. GUARANTOR FINANCIAL STATEMENTS

Each of the Company's subsidiaries (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.

F-36

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS

F-37

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

F-38

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS

F-39

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

KING PHARMACEUTICALS, INC.

By: /s/ JEFFERSON J. GREGORY
------------------------------------
Jefferson J. Gregory
Chairman and Chief Executive Officer

July 28, 2003

In accordance with the requirements of the Securities Exchange Act, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

II-1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Jefferson J. Gregory, certify that:

1. I have reviewed this annual report on Form 10-K of King Pharmaceuticals, Inc.
("King");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
King as of, and for, the periods presented in this annual report.

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: July 28, 2003 /s/ JEFFERSON J. GREGORY
--------------------------------------------
Jefferson J. Gregory
Chairman of the Board and Chief Executive
Officer

II-2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, James R. Lattanzi, certify that:

1. I have reviewed this annual report on Form 10-K of King Pharmaceuticals, Inc.
("King");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
King as of, and for, the periods presented in this annual report.

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: July 28, 2003 /s/ JAMES R. LATTANZI
--------------------------------------------
James R. Lattanzi
Chief Financial Officer

II-3

KING PHARMACEUTICALS, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

- ---------------

(1) Amounts represent write-offs of accounts.

S-1