FIRST HORIZON PHARMACEUTICAL CORP - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)

6195 Shiloh Road, Alpharetta, Georgia 30005
(Address of principal executive offices) (Zip code)

Title of each class		Name of each exchange on which registered
None		None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

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

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 the 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. o

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

Common shares of the registrant outstanding as of February 28, 2005 were 36,088,232. The aggregate market value, as of February 28, 2005, of such common shares held by non-affiliates of the registrant was approximately $474,798,511 based upon the last sales price reported that date on the Nasdaq Stock Market of $16.44 per share. (Aggregate market value estimated solely for the purposes of this report. For purposes of this calculation, all executive officers, directors and 10% stockholders are classified as affiliates.)

Part III: Portions of Registrant's Proxy Statement to be filed with the Securities and Exchange Commission on or about April 29, 2005 relating to the 2005 Annual Meeting of Stockholders expected to be held on May 31, 2005 are incorporated into Part III of this Form 10-K.

First Horizon Pharmaceutical Corporation is a specialty pharmaceutical company that markets and sells brand name prescription products. Our key products focus on two therapeutic categories. We promoted the following products in 2004:

Categories:	Cardiology	Women's Health
Prescription Products:	Sular	Prenate Line
	Nitrolingual	Ponstel
		Robinul Line
		Tanafed Line

Our current operating plan focuses on maximizing the sales of our existing products and acquiring companies having products that complement our existing products, accelerating growth by launching line extensions to our current products and acquiring or licensing approved products or late stage development products. We intend to focus our acquisitions on products that fit within our Cardiology and Women's Health categories that will allow us to leverage our existing sales force infrastructure.

We currently market and sell 12 products through our nationwide sales and marketing force of approximately 360 sales professionals, targeting high-prescribing primary care physicians, cardiologists, obstetricians, gynecologists and pediatricians. The six products set forth above were actively promoted through January 2005 and accounted for approximately 89.6% of our total sales in 2004. As of December 31, 2004, we discontinued the sale of Protuss and Mescolor, two of our non-promoted products, which accounted for approximately 0.3% of our total sales in 2004, due to declining sales. In addition, as a result of generic entries into the marketplace, as of the end of January 2005, we stopped actively promoting our Robinul line, which generated 15.1% of our total sales in 2004, and as of the end of February 2005 our Tanafed Line, which generated approximately 10.6% of our total sales in 2004.

We were incorporated in Delaware in July 1992 as the surviving corporation of a merger between Century Pharmaceutical Corporation and Horizon Pharmaceutical Corporation. Our principal office is located at 6195 Shiloh Road, Alpharetta, Georgia 30005 and our telephone number is (770) 442-9707. Our corporate Internet address is www.fhrx.com. We do not intend for the information contained on our website to be a part of this Annual Report.

Beginning in 1999, we started acquiring and licensing products in order to transform ourselves from a small company with a primary focus on cough, cold and allergy products to a broader based specialty pharmaceutical company. These acquisitions provided us with a product portfolio, a base of revenue and cash flow that we believe we can continue to build upon.

In 2003, we determined that our wholesaler customers had purchased what we believe to be excessive amounts of inventory in late 2002 in anticipation of price increases. The effect of this inventory buildup may have been compounded by lower than expected prescriptions of our promoted products. Subsequently, our Board of Directors appointed a task force made up of certain members of internal management and experienced external consultants, to assess our direction and make recommendations to the Board as to our future operational strategy. In May 2003, the Board received and reviewed the task force's recommendations. The Board then appointed certain members of the task force as new executive management and instructed them to implement the approved recommendations.

Our current operating plan focuses on maximizing the sales of products in our existing product portfolio. We are implementing this plan in the following four phases:

Our first step in maximizing the sales of our existing product portfolio was to implement a lower cost operating model and invest in systems and process improvements. Beginning in July 2003, we implemented a lower cost operating model. We cut discretionary spending and streamlined the corporate office. We also began reducing our costs associated with our selling efforts by adjusting our investments in product samples, marketing materials and access funds and terminating agreements with our contract sales organization partners. As part of the first phase, we also invested in systems and process improvements in an effort to lower operating costs. We also entered into inventory management agreements with our three largest wholesale customers. These agreements offer incentives to our wholesalers to maintain an average one month of inventory and have resulted in more consistent inventory levels. Concurrent with these agreements, we developed systems to monitor the levels of inventory held by the wholesalers. We also implemented systems to automate the processing of returns and customer rebates.

Our second step in maximizing the sales of our existing product portfolio is to continue to expand our sales force in order to increase our reach to high prescribing physicians and to increase our call frequency. We began implementing this part of our strategy by combining our two specialty sales forces into one, promoting all of our key products. In the third quarter of 2003, we expanded our sales force in order to provide coverage to approximately 250 sales territories. In the first half of 2004, we expanded our sales force again to provide coverage to a total of approximately 360 sales territories. We believe that with approximately 360 sales territories we should reach the high prescribing physicians needed to increase prescriptions of our key products.

Our third step in maximizing the sales of our existing products is to manage the life cycle of our products. We have dedicated marketing professionals whose goals are to maximize the potential of each brand. Part of each marketing team's directive is to develop ideas for line extensions that will extend the life cycle of our key products. Projects currently in process include line extensions for Prenate and Sular.

We also seek to accelerate our growth through acquiring or licensing approved products or late stage development products and acquiring companies having such products. We are focusing on products that compliment our Cardiology and Women's Health categories and that can be successfully distributed through our existing sales territory infrastructure.

As part of our strategy, in the second quarter of 2004, we entered into an agreement with SkyePharma PLC granting us an exclusive license in the United States for a term of 15 years to market and distribute a fenofibrate based product. The agreement contemplates launching the product in the second quarter of 2005, pending FDA approval.

There is no assurance that we will successfully implement each of the three remaining phases of our current operating plan or that we will be able to acquire or license additional products on favorable terms or at all.

Most of our products treat recurring or chronic conditions or disorders which result in repeated use over an extended period of time. Our key products in 2004 included:

Product	Year of Our Introduction	Product Use
Sular	2002	Hypertension
Nitrolingual	2000	Acute angina
Prenate Elite	2004	Prescription prenatal vitamin
Ponstel	2000	Pain and painful menstruation
Robinul Line	1999	Adjunctive therapy for peptic ulcer
Tanafed Line	2002	Allergy and cold, and allergy and cold with cough

In March 2002, we acquired exclusive U.S. rights to distribute and sell the antihypertensive prescription medication Sular from AstraZeneca and Bayer Healthcare for a period of 10 years. We also entered into a long-term manufacturing, supply and distribution agreement with Sular's manufacturer, Bayer. Sular is a patented, once-a-day treatment for hypertension that competes in the market for antihypertensive prescription medications.

We believe that Sular offers certain advantages over other antihypertensive medications based upon its proven efficacy and safety, and its demonstrated ability to provide twenty-four hour blood pressure control as compared to other branded antihypertensives.

Nisoldipine, the active ingredient in Sular, belongs to a group of medicines called calcium channel blockers. Calcium channel blockers prevent calcium from entering certain types of muscle cells. Because the muscle cells need calcium to contract, calcium channel blockers prevent the cells from contracting and cause them to relax. Nisoldipine selectively relaxes the muscles of small arteries causing them to dilate but has little or no effect on muscles or the veins of the heart.

In February 2000, we began marketing Nitrolingual for which we acquired exclusive distribution rights in the U.S. from Pohl-Boskamp for an initial period of 5 years and an additional renewal period of 5 years. In October 2004, the distribution agreement was renewed for an additional five years with an additional renewal period of two years. Nitrolingual is an oral spray of nitroglycerin used for the acute relief or prevention of chest pain associated with angina pectoris that results from heart disease. Pohl-Boskamp holds a patent that expires in 2010 on the formulation of Nitrolingual that we license. The primary competitor to Nitrolingual is nitroglycerin, which is generally prescribed in tablet form. Unlike nitroglycerin tablets, which begin to lose their potency immediately upon opening the bottle, Nitrolingual maintains its potency for two years from date of manufacture. Further, studies have shown that Nitrolingual provides for more rapid absorption than tablets. Each metered dose of Nitrolingual provides for consistent delivery of nitroglycerin. Also, Nitrolingual has advantages over nitrolingual tablets pertaining to storage and handling required to maintain potency.

During the second quarter of 2003, we launched a 60-dose application bottle of Nitrolingual. The 60-dose bottle is smaller and more convenient to carry for some patients than our 200-dose bottle. We believe that the 60-dose bottle will benefit patients who have mild angina and whose episodes are occasional. We believe the smaller bottle is an advantageous companion product to the 200-dose bottle.

Prescription prenatal vitamins are generally recommended before, during and after pregnancy so that the mother and the fetus receive adequate amounts of essential vitamins and minerals. In April 2004 we launched Prenate Elite, the latest extension of the Prenate Line. The Prenate line has been a market leader of prescription prenatal vitamins based upon total prescriptions written. As of December 31, 2004, Prenate Elite has captured 11.7% of the prenatal market share of new prescriptions, and 11.1% of the prenatal market share of total prescriptions, according to IMS Heathline's National Prescription Audit Plus™ Data.

In April 2000, we acquired exclusive U.S. rights to market, distribute and sell Ponstel from Pfizer. Ponstel is used for the relief of mild to moderate pain for patients 14 years of age and older if therapy will be for less than one week and for primary dysmenorrhea, which is pain associated with menstruation. One class of frequently prescribed pain relievers is nonsteroidal anti-inflammatory drugs, or NSAIDs. Ponstel is a well known NSAID for treating dysmenorrhea and we believe that its advantages are its non-addictive qualities, low stomach-related side effects and efficacy. Primary dysmenorrhea is one of the most frequently encountered gynecological complaints and affects as many as half of postpubescent females.

In January 1999, we acquired exclusive U.S. rights to Robinul and Robinul Forte, which is a higher-strength dosage of Robinul, from Wyeth. Both Robinul and Robinul Forte belong to a class of drugs known as anticholinergics that reduce the motion of the gastrointestinal tract and decrease stomach secretions. The FDA has approved both products for use as a therapy in conjunction with other therapeutics in the treatment of peptic ulcers. Compared to other anticholinergics, we believe the Robinul product line has an overall better side effect profile and is longer acting, thereby requiring fewer doses. In the first quarter of 2005, in an effort to combat generic competition, we engaged a distributor that launched a generic version of our Robinul and Robinul Forte brands into the marketplace and ceased actively promoting the Robinul line.

Our Tanafed line is comprised of liquid cold and allergy products marketed to pediatricians. We believe that pediatricians prescribe our Tanafed products because they are effective and children prefer their taste. We introduced Tanafed DP and Tanafed DMX, two line extensions to our former products Tanafed Suspension and Tanafed DM, in September 2002. Tanafed DP and Tanafed DMX have been formulated using the antihistamine Dexchlorpheniramine Taunate and the decongestant Psudoephedrine Taunate. Tanafed DP is a cold and allergy suspension for children that is dosed twice a day and Tanafed DMX offers the same benefits and contains a cough suppressant. As a result of the entry of generics into the marketplace, we ceased actively promoting the Tanafed line in the first quarter of 2005.

In December 2001, we acquired U.S. rights to Furadantin from Elan. Furadantin is indicated for the treatment of urinary tract infections and is prescribed primarily by pediatricians. Furadantin is a product well-suited for children because it is formulated in liquid suspension form and has a fruit-flavored taste. Furadantin contains nitrofurantoin, which has little bacterial resistance and is not known to cause allergic side effects that are well documented with other antibiotics.

In June 2000, we acquired world-wide rights to market, distribute and sell Cognex from Pfizer, as well as rights to a new unapproved controlled release version of Cognex called Cognex CR. Cognex is indicated for the treatment of mild to moderate dementia associated with Alzheimer's disease. Alzheimer's disease is a progressive, degenerative disease that attacks the brain and results in impaired memory, cognition and behavior.

We sell Zoto-HC ear drops for the treatment of swimmer's ear infections and Zebutal capsules for the treatment of tension headaches.

Our other products for the treatment of cough, cold and allergy are Mescolor tablets and Protuss Liquid. These products were discontinued as of December 31, 2004.

The FDA approved Sular, Furadantin, Cognex, Ponstel, Nitrolingual, Robinul and Robinul Forte based on new drug application submissions. The FDA also approved an abbreviated new drug application for Zebutal. Prenate, a prescription vitamin, does not have an approved new drug application. Our other marketed products do not have approved new drug applications. Based on the FDA's current practice of enforcement discretion with respect to cough and cold products, we believe these products may be marketed at this time without having submitted efficacy or safety data to the FDA.

Our research and development efforts are currently focused primarily on developing line extensions to our current products using proprietary controlled-release drug delivery technologies licensed to us from third parties. Research and development expenses consist primarily of costs incurred to develop formulations, engage contract research organizations to conduct clinical studies, test products under development and engage medical and regulatory consultants. The Company expenses all research and development costs as incurred. Research and development costs were $1.1 million, $2.1 million and $1.5 million for the years ended December 31, 2002, 2003 and 2004, respectively.

Research and development expense decreased $0.6 million to $1.5 million for the year ended December 31, 2004, compared to $2.1 million for the year ended December 31, 2003. The decrease in expense is primarily a result of costs incurred in 2003 associated with manufacturing transfers for our Ponstel, Cognex and Furadantin products and development costs for the Prenate line which were not incurred in 2004. We anticipate that research and development expenses will increase during 2005. From 2002 through 2004, research and development expenses also included the development of brand products. Historically, research and development expenses for brand product activities included, among other things, costs related to personnel, overhead, professional services, filing fees and raw materials, but primarily included the cost of laboratory services, clinical investigators and clinical research organizations that were responsible for conducting the clinical trials required to support a product application with the FDA and preparing New Drug Applications (NDAs). Research and development expenses for generic development activities include, among other things, costs relating to personnel, overhead, laboratories for conducting bio-equivalence studies and raw materials used in developing our products. Planned research and development expenses will be periodically evaluated during 2005 to take into consideration, among other things, our level of profitability and cash flows.

To maximize the effectiveness of our selling efforts, our sales force targets high-prescribing primary care physicians and select specialty physicians. Our sales force seeks to develop close relationships with these physicians and respond to their needs and their patients' needs. During 2004, we expanded our sales and marketing force from approximately 250 to approximately 360 professionals nationwide. The entire sales force promotes all of our key products. We currently have approximately 360 sales territories. We reach approximately 69,000 target physicians.

We sell our products to pharmaceutical wholesalers (who in turn distribute to pharmacies), chain drug stores, other retail merchandisers and, on a limited basis, directly to pharmacies. For the year ended December 31, 2004, sales to our top three pharmaceutical wholesalers accounted for approximately 78% of all of our sales. The following wholesalers each accounted for 10% or more of all of our sales: McKesson Corporation (31%), Cardinal Health, Inc. (25%), and AmerisourceBergen Corporation (22%). In late 2002, our wholesaler customers purchased excessive amounts of inventory of our products in anticipation of future price increases. This adversely impacted our sales in the first half of 2003. In response, in the second and third quarters of 2003, we entered into inventory management agreements with our three largest wholesale customers which offer incentives to the wholesaler to maintain on average one month of inventory, as well as implemented new systems to better track inventory throughout the chain. As a result, inventory levels have become more consistent.

The Company has two main types of arrangements with wholesalers of its products: (a) ordinary course arrangements with health benefit providers, such as managed care contractors and pharmacy benefit managers ("Standard Arrangements"), and (b) agreements with three drug wholesale companies—Inventory Management Agreements ("IMAs"). The Standard Arrangements are ordinary course and are not material in size or nature. Pursuant to those arrangements, the Company provides discounts to various health benefit providers nationwide for purchases of the Company's products, although such providers have no obligation to order any products at any time and the Company is under no obligation to offer or provide the discounts. The Company has utilized such Standard Arrangements for several years and expects to continue to do so in the future. The Company's three IMAs were entered into in 2003 with three national drug wholesale companies—McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen Corporation. Pursuant to our IMAs, we provide purchase price discounts for purchases of our products in order to provide incentives for such companies to stabilize and manage their inventory levels, which in turn allows us to better stabilize and control our inventory pipeline. Each IMA may be terminated by either party upon 60 days prior written notice.

In December 2004, we entered into a Distribution and Inventory Management Services Agreement with Cardinal Health (commencing January 1, 2005) continuing our existing relationship with Cardinal Health. Under the Agreement, Cardinal Health, among other things, provides us with certain distribution and inventory management services, including accounts receivable management, customer service support, consolidated deliveries to providers, and contract and chargeback administration. This agreement calls for Cardinal Health to maintain the inventory levels specified in the agreement. In order to minimize product shortages and maximize product availability, Cardinal Health agreed to institute an automated balancing system on our products and optimize ordering during backorder situations or limited product availability. We have the right to cancel any order exceeding certain levels of products sold. The Agreement also provides that Cardinal Health prepares, and provides to the Company, inventory and sales reports detailing the status and movement of our products in Cardinal Health's inventory, monitors customer order patterns, provides events management services, and provides support for new product launches.

In December 2004, we entered into an amendment to our Inventory Management Agreement with McKesson Corporation. Among other terms and conditions, the Amendment provides that McKesson

maintain specified inventory levels. The Amendment also provides that McKesson prepare, and provide to us, inventory reports detailing the status and movement of our products in McKesson's inventory. The Amendment acknowledges that the agreement by McKesson to provide the reports and to maintain certain inventory levels is in consideration for the Company providing McKesson with economic relief from price increases instituted by the Company. Except as modified by the Amendment, the terms and conditions, including any contractual obligations to provide services, of the agreement underlying and amended by the Amendment remain in full force and effect.

We have a group of sales professionals that focuses exclusively on building relationships with managed-care organizations that can be leveraged across markets. We continue to strengthen this group to gain access to formularies and develop long-term working relationships with managed care organizations.

The percentage of total sales contributed by our largest products is as follows:

	For the Year Ended December 31,
	2002	2003	2004
Sular	26%	31%	38%
Nitrolingual	13%	15%	12%
Prenate Line	16%	12%	10%
Ponstel	5%	6%	6%
Robinul Line	13%	13%	15%
Tanafed Line	14%	15%	11%

Although our business is generally non-seasonal, sales of certain products, such as cough and cold products, increase between October and March due to the cold and flu season. We expect the impact of seasonality to continue to decrease as we acquire or obtain licenses for products that treat chronic conditions. However, we anticipate that the seasonality may continue to affect sales of these products for the foreseeable future. Sales of our cough and cold products accounted for 11% of our total sales in 2004.

In March 2002, we acquired exclusive U.S. rights to distribute and sell Sular from AstraZeneca PLC and Bayer Health. We paid $184.3 million in cash, including $0.6 million in acquisition costs, plus the assumption of liabilities of $1.9 million related to the return of product shipped prior to the acquisition date. In December 2002, we increased our estimates for assumed liabilities by $0.7 million. Under the asset purchase agreement, we acquired the regulatory approval to sell Sular in the U.S., current inventory, licensing rights to certain intellectual property, marketing materials for the promotion, advertising and marketing of Sular in the U.S., study materials relating to clinical studies of Sular, and certain of AstraZeneca's contracts relating to the marketing, sale and distribution of Sular. We must pay AstraZeneca up to an additional $20.0 million upon achievement of certain sales milestones through February 2005. As of December 31, 2004, we calculated that we owed Astrazenca $5.0 million for reaching these milestones which we intend to pay in March 2005.

In March 2002, we also entered into a ten-year agreement with Bayer, which appoints us as the exclusive party to sell and distribute Sular in the U.S., provides us with the rights to sell Sular under certain patents and other technical information owned by Bayer, assigns us the Sular trademark, and provides for the manufacture and supply of Sular to us. We pay Bayer for the manufacture and supply of Sular on a unit basis. The unit price to us for Sular may adjust based upon changes in the net revenue per unit that we recognize in the sale of Sular. We must also pay Bayer an additional

$10.0 million upon the achievement of a certain sales milestone for Sular if a sales threshold is achieved during the ten year term of the agreement. As of December 31, 2004, no milestones had been met under this agreement. Under this agreement, we must purchase minimum quantities of Sular from Bayer through March 2007 and we must obtain the consent of Bayer prior to selling another product containing the active ingredient in Sular.

Subject to obtaining the consent of Bayer prior to conducting clinical trials for new cardiovascular indications for Sular and in the event that we receive a new drug application approval for these new uses, we may deduct a percentage of the costs incurred to obtain such approval, up to a certain amount, from our payments to Bayer under the agreement for five years following such approval. Bayer will have access to any data that we obtain pursuant to such trials and we will grant Bayer a royalty-free license to use such data outside of the U.S.

In July 1999, we acquired exclusive U.S. rights to distribute, market and sell Nitrolingual from Pohl-Boskamp beginning on February 1, 2000. The distribution agreement expires in 2009 but may be renewed for an additional two years. Under the agreement, Pohl-Boskamp supplies us Nitrolingual at prices that decrease as volume purchased in each year increases. We must also pay a royalty on net sales of the product. Also, Pohl-Boskamp can terminate our distribution agreement for Nitrolingual if a company with a product competitive with Nitrolingual acquires direct or indirect influence or control over us, or if a significant change in our stockholders occurs so that Kapoor-Pharma Investments and our employees, management, directors, and any of their respective affiliates, do not in the aggregate directly or indirectly beneficially own at least 20% of our shares. Our agreement with Pohl-Boskamp prohibits us from selling other products which are indicated for the relief of angina pectoris.

In August 2001, we purchased the Prenate line of prescription prenatal vitamins from Sanofi-Synthelabo. We acquired all of Sanofi-Synthelabo's regulatory permits and licenses and contract rights related to Prenate. The purchase price for the acquired assets was $52.5 million in cash plus the assumption of certain liabilities and payment for product inventory, subject to post-closing adjustments.

We also assumed Sanofi-Synthelabo's Prenate-related contracts, including a contract with Patheon, Inc., to manufacture Prenate Advance tablets and the core tablets for Prenate GT, and a contract with Banner Pharmacaps to manufacture Prenate GT using its patented manufacturing process to create gelatin-enrobed tablets. Banner Pharmacaps had agreed not to use this manufacturing process to make any other prenatal vitamins. Under the terms of the supply agreement with Banner Pharmacaps, as amended, we paid Banner Pharmacaps a royalty on net sales. The agreement with Banner was terminated in December 2004 as the Company discontinued Prenate GT and Prenate Advance.

The agreement with Patheon was initially entered into on October 1, 1999 and extended for a term of five years. We are in the process of finalizing a new manufacturing agreement with Patheon for Prenate Elite, which we expect to have finalized during the first quarter of 2005. We began promoting and selling Prenate Elite in April 2004.

In April 2000, we acquired exclusive rights to market, distribute and sell Ponstel in the U.S. from Pfizer. In December 2000, we signed an agreement with West-ward Pharmaceuticals to manufacture Ponstel after West-ward obtained FDA approval to manufacture the product. West-ward began supplying the product to us in the second quarter of 2003, and we received FDA approval in February 2004. This agreement expires in April 2005. We must purchase all of our requirements for

Ponstel from West-ward and are subject to minimum purchase requirements. We must pay West-ward a price for Ponstel based on a multiple of West-ward's direct cost of goods sold in the manufacture and supply of the product. In addition, we must pay West-ward milestone payments, as long as no generics have been introduced, upon certain anniversary dates of FDA approval of the manufacture of Ponstel by West-ward. We are currently negotiating a new supply contract for Ponstel to be effective once our current agreement expires.

In January 1999, we acquired exclusive rights in the U.S. to Robinul and Robinul Forte tablets from Wyeth. We must pay royalties on net sales under our license agreement with Wyeth. We entered into agreements with Mikart, dated April 23, 1999 and January 21, 2001, for Mikart to become qualified under applicable regulations to manufacture and supply our requirements for Robinul. Mikart was approved by the FDA to manufacture Robinul on December 3, 2001 and began supplying the Robinul products to us in December 2001. Under these agreements, Mikart will manufacture the products for five years from the time Mikart became a qualified manufacturer plus renewal terms of one year until either party elects not to renew. The agreement with Mikart requires that we purchase certain designated minimum quantities.

In January 2002, we entered into a license agreement with Wyeth-Ayerst Canada Inc. and Whitehall-Robins Inc. under which we acquired rights to manufacture, have manufactured for us, market and sell Robinul and Robinul Forte in Canada. If we begin to sell Robinul in Canada, we will pay Wyeth-Ayerst Canada a royalty on net sales of Robinul in Canada. However, we have no intention of selling Robinul and Robinul Forte in Canada at this time.

Prior to the fourth quarter of 2002, we had marketed Tanafed Suspension, a liquid cold and allergy product, to pediatricians. In January 2002, we launched Tanafed DM, a line extension to Tanafed Suspension, that contains a cough suppressant. During the second quarter of 2002, we experienced significant erosion of sales of Tanafed Suspension and Tanafed DM due to increased substitution of knock-off products by pharmacies. In response, we launched Tanafed DP and Tanafed DMX, two line extensions to Tanafed Suspension and Tanafed DM, and we ceased selling Tanafed Suspension and Tanafed DM in the fourth quarter of 2002.

In June 2002, we entered into an exclusive distribution agreement with Unisource granting us exclusive rights to sell Tanafed DP and Tanafed DMX in North America and for Unisource to supply Tanafed DP and Tanafed DMX to us through June 2007, subject to an automatic three year renewal. The agreement requires us to purchase all of our Tanafed DP and Tanafed DMX requirements from Unisource and subjects us to minimum purchase requirements. We must pay Unisource for the manufacture and supply of Tanafed DP and Tanafed DMX based upon fixed unit costs.

In June 2002, we entered into an agreement with Jame Fine Chemicals, Inc. for a ten year exclusive license to make, have made, use, distribute, market, promote, advertise and sell pharmaceutical formulations containing the ingredients dextromethorphan tannate and dexchlorpheniramine tannate. Tanafed DP and Tanafed DMX products contain dexchlorpheniramine tannate and Tanafed DMX contains dextromethorphan tannate. The agreement became effective upon the first sale of product containing the ingredients, which occurred in August 2002. We paid a license fee of $0.5 million in cash in connection with the first sale. We paid a maximum royalty of $2.5 million in installments through March 2005. As of December 31, 2004, $0.3 million of this royalty is refundable to us. A nonrefundable royalty commenced in January 2005.

In May 2004, we entered into an agreement with SkyePharma PLC granting us the exclusive license for a term of at least fifteen years to market and distribute a fenofibrate product in the U.S. that has been submitted to the FDA. We intend to commence marketing and distribution shortly after FDA approval. We also obtained the right of first refusal to negotiate a license to develop and commercialize a future cardiovascular product utilizing the SkyePharma delivery technology. The agreement required us to pay $5 million to SkyePharma upon signing the Agreement and up to an additional $15 million is payable thereafter—all of which are contingent upon milestones related to FDA approval. We will utilize our sales force to market the product and will pay SkyePharma 25% of the product's net sales which includes cost of goods sold. Further, SkyePharma will contribute up to $5 million toward our sales and marketing efforts. Over the term of the Agreement, upon our achievement of certain sales levels, SkyePharma can receive up to $30 million in additional milestone payments.

In January 2005, SkyePharma had received an approvable letter from the FDA requesting additional information from SkyePharma with respect to the fenofibrate product. As a result, we renegotiated the arrangement with SkyePharma extending the contract date for FDA approval to January 31, 2005.

In February 2005, we announced that we had amended the agreement with SkyePharma. This amendment provides for SkyePharma to deliver the fenofibrate product so that First Horizon may launch the product in the second quarter of 2005, pending SkyePharma's receipt of FDA approval. To provide additional assistance with First Horizon's launch of the product, SkyePharma has agreed to provide additional marketing support.

In June 2000, we acquired world-wide rights to market, distribute and sell Cognex as well as rights to a new unapproved version of Cognex called Cognex CR from Pfizer. We paid $3.5 million in cash for Cognex. We must pay Pfizer up to $1.5 million in additional purchase price if we obtain FDA approval to market Cognex CR in the U.S. At this time, we are preliminarily exploring opportunities to develop and seek FDA approval to market Cognex CR. In the event that we voluntarily stop selling Cognex for 60 days or more, other than for reasons outside our control, the Federal Trade Commission may order that Cognex revert back to Pfizer and be divested by the FTC to another purchaser. West-ward supplies us with Cognex pursuant to an agreement expiring March 4, 2008, and that may be renewed for a two year term.

In December 2001, we acquired the U.S. rights to Furadantin from Elan. The purchase price for the acquired assets was approximately $15.8 million in cash. Under the agreement, we acquired the assets relating to Furadantin, including the new drug application, trademark and related inventory.

In December 2001, we also entered into a supply agreement with Elan to manufacture and supply Furadantin to us through May 3, 2003. In August 2002, we entered into a manufacturing agreement with OSG Norwich Pharmaceuticals for Furadantin. OSG became qualified to manufacture the product on November 5, 2003. Beginning January 1, 2004, we were required to purchase a minimum amount of inventory annually from OSG Norwich Pharmaceutical. This agreement expires in August 2007.

In May 2003, we entered into a supply agreement with Vinchem, Inc. to supply us the active ingredient in Furadantin. This agreement expires May 2009, and is renewable for successive one year terms. Generally, our other products are manufactured under manufacturing and supply agreements which require that we purchase all of our requirements for these products from the manufacturers which are a party to these agreements, including specified minimum purchase quantities of the product

for each year. Except for our Zoto-HC products these agreements generally state that the product supplier will provide products only to us.

We seek to maximize the value of drugs by developing new patentable formulations, using new delivery methods and seeking regulatory approval for new indications. Through the use of these distinct formulations and patent-protected delivery systems, we plan to create a marketing advantage over competing drugs. Some of these development projects include line extensions which allow us to extend the life cycles of our products. We expect the strength of extensive literature-based clinical data on the active ingredients in our products under development, current acceptance and usage of the active ingredients in these products by healthcare professionals and the safety profile of the active ingredients in approved products will reduce development costs and risks associated with FDA approval. We generally seek to contract third parties to formulate, develop and manufacture materials needed for clinical trials and to perform scale-up work. We select third-party contractors that we believe have the capability to commercially manufacture the products. By selecting qualified third parties capable of both developing formulations and providing full-scale manufacturing services, we believe we will be able to shorten development and scale-up times necessary for production. The key advantage to this approach is that the third-party contractor will have the equipment, operational parameters and validated testing procedures already in place for the commercial manufacture of our products.

We are developing a product for the management of excessive salivation, also known as sialorrhea. This product will be a line extension of our Robinul products. We have entered into an agreement with Mikart to develop a new dosage form and to manufacture the product. On December 29, 2000, we filed an investigational new drug application for this product which has been accepted by the FDA.

In January 2001, we entered into a manufacturing and supply agreement with Mikart granting Mikart exclusive rights to manufacture and package our product under development for the treatment of excessive salivation upon approval of the product by the FDA and upon approval by the FDA of the manufacture of the product by Mikart. The term of this agreement expires five years after FDA approval of the new drug application or supplemental new drug application for the product, subject to automatic one-year renewals.

In late 2002, the FDA issued a notice about various cough and cold combination products, which we believed required us to obtain FDA approval to be able to thereafter continue to market and sell these products as prescription products. In October 2003, the FDA issued a draft guidance document to address their current approach to handling compliance issues with drugs marketed without FDA approval. We performed early phase clinical trials required for FDA approval of our Tanafed products for prescription and over-the-counter sales. In the final quarter of 2004, we determined, based upon the aforementioned draft FDA guidance document and on the initial findings of the above mentioned clinical trials, that an NDA filing is not required at this time.

In February 2005, we entered into a feasibility agreement with SkyePharma for the development of prototypes of a new hypertension formulation.

We use third-party manufacturers for the production of our products for development and commercial purposes. Given the general under-utilization of resources, the availability of excess capacity for manufacturing in the marketplace and the lower cost of outsourcing, we intend to continue to outsource our manufacturing for the near term. Some of our products are currently available only from sole or limited suppliers. These third-party manufactured products, such as Sular, include products that have historically accounted for a significant portion of our revenues.

We are dependent on third parties for the supply of the raw materials necessary to develop and manufacture our products, including the active and inactive pharmaceutical ingredients used in our products. We are required to identify the supplier of all the raw materials for our products in the drug applications that we file with the FDA. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the FDA, which would likely interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist.

In addition, we obtain a significant portion of our raw materials from foreign suppliers. Arrangements with international raw material suppliers are subject to, among other things, FDA regulation, various import duties, foreign currency risk and other government clearances. Acts of governments outside the U.S. may affect the price or availability of raw materials needed for the development or manufacture of our products. In addition, any changes in patent laws in jurisdictions outside the U.S. may make it increasingly difficult to obtain raw materials for research and development prior to the expiration of the applicable U.S. or foreign patents.

We have entered into an agreement with West-ward Pharmaceuticals to supply us with Ponstel. In February 2004, the FDA approved our site transfer application.

We have entered into an agreement with OSG Norwich Pharmaceutical to manufacture Furadantin. This agreement expires August 9, 2007, but may be renewed for an additional two year term. Vinchem supplies us the active ingredient in Furadantin. West-ward Pharmaceuticals supplies Cognex. This agreement expires March 4, 2008, but may be renewed for an additional two year term. We are seeking a new supplier to supply us with the active ingredient in Cognex. Based on our current sales projections, we believe that we have adequate supplies of the active ingredient in Cognex for the foreseeable future. However, if sales exceed our current projections or if we are unable to locate a new supplier of the active ingredient in Cognex, our ability to sell Cognex would be limited and our profitability would be reduced.

Under some of our agreements, the manufacturers or other third parties own rights to the products that we have under our marketing licenses. We have not entered into agreements for alternative manufacturing sources for any of our products. Our supplier of Sular has patents on the manufacturing process and composition of its coat core tablet. The suppliers of Nitrolingual and the raw materials for Tanafed DP and Tanafed DMX hold patents relating to their respective products.

Because of the large number of products on the market which compete with our products, we believe that our product brand names are an important factor in establishing product recognition. We applied for a U.S. trademark registration for the mark First Horizon Pharmaceutical. We also have U.S. trademark applications pending for the marks, DHA250 (and associated design), Optinate and Prenate Elite (and associated design). Our products are sold under a variety of trademarks registered in the U.S., including Zoto-HC (and an associated design), Tanafed DP, Tanafed DMX, Prenate,

Zebutal, and Furadantin (and associated design). We own the U.S. rights to the Cognex trademark and its international counterparts, and the trademarks for Sular (and an associated design), Tanafed and Ponstel. Further, we have been licensed rights to use the trademarks Nitrolingual and Robinul from Pohl-Boskamp and Wyeth, respectively. We own the U.S. trademark registration for First Horizon Pharmaceutical Corporation. Maintenance of our trademarks requires that we enforce our rights by preventing infringement by third parties, and we may not have the resources to stop others from infringing our trademarks.

We consider the protection afforded by patents important to our business. We intend to seek patent protection in the U.S. and selected foreign countries where deemed appropriate for products we develop. There can be no assurances that any patents will result from our patent applications, that any patents that may be issued will protect our intellectual property or that any issued patents will not be challenged by third parties. In addition, if we do not avoid infringement of the intellectual property rights of others, we may have to seek a license to sell our products, defend an infringement action or challenge the validity of the intellectual property in court, all of which could be expensive and time consuming.

In certain cases, a third party owns rights to the products that we have under our marketing licenses. For example, our supplier of Sular has patents on the manufacturing process and composition of its coat core tablet. In addition, the suppliers of Nitrolingual and the raw materials for Tanafed DP and Tanafed DMX hold patents relating to their respective products. These patents may provide us with a competitive advantage because the patents create a barrier to entry to other companies that might otherwise seek to develop similar products.

Pursuant to our distributorship agreement with Bayer, we are afforded patent protection arising from Bayer's patent covering the composition of Sular's coat core tablet. This patent expires in 2008. In 2002, we filed two patents relating to Sular's active ingredient and its uses. Sales of Sular account for 38% of our total revenue in 2004 and the expiration of the patent could result in the introduction of additional competition, which could cause a material decline in the sale and price of Sular.

By virtue of our distribution agreement with Pohl-Boskamp for Nitrolingual, we are afforded patent protection arising from Pohl-Boskamp's 1993 U.S. patent relating to the product. This patent expires in 2010.

We entered into an exclusive licensing agreement with the raw material supplier for Tanafed DP and Tanafed DMX in June 2002. This agreement grants us a license to market and distribute Tanafed DP and Tanafed DMX for which the manufacturer has patents covering the manufacturing process of two of the active ingredients in these products and the composition of an active ingredient in one of the products. The composition patent expires in 2016. In January 2003, we were issued a patent covering compositions for Tanafed DP and Tanafed DMX. This patent expires in 2021. In October 2002, we filed another patent application covering additional compositions for Tanafed DP and Tanafed DMX. On September 14, 2004, we were issued a patent covering additional compositions for Tanafed DP and Tanafed DMX. This patent expires in 2022.

We own certain patent rights relating to the use of an active ingredient in Cognex to treat conditions associated with Alzheimer's disease. The U.S. patents expire from 2006 through 2013.

In 1999, we filed a U.S. patent application directed to the use of glycopyrrolate for the treatment of certain new indications and abandoned this patent in 2002. Glycopyrrolate is the active ingredient in Robinul and Robinul Forte. In 2002, we filed a patent application relating to glycopyrrolate and its uses, and in 2003 we filed a patent application relating to the dosing of glycopyrrolate. These patent applications remain pending.

The market for drugs is highly competitive with many established manufacturers, suppliers and distributors which are actively engaged in all phases of the business. We believe that competition in the sale of our products is based primarily on efficacy, reimbursement coverage, brand awareness, availability, product safety, and price. Our brand name pharmaceutical products may be subject to competition from alternate therapies during the period of patent protection and thereafter from generic or other competitive products. All of our products compete with generic and other competitive products in the marketplace.

Competing in the branded product business requires us to identify and quickly bring to market new products embodying technological innovations. Successful marketing of branded products depends primarily on the ability to communicate the effectiveness, safety and value to healthcare professionals in private practice, group practices and managed care organizations. We anticipate that our branded product offerings will support our existing lines of therapeutic focus. Based upon business conditions and other factors, we regularly reexamine our business strategies and may from time to time reallocate our resources from one therapeutic area to another, withdraw from a therapeutic area or add an additional therapeutic area in order to maximize our overall growth opportunities.

Some of our products, including Sular, compete with one or more products marketed by very large pharmaceutical companies which have much greater financial resources for marketing and selling their products. Our competitors in branded products include the major brand name manufacturers of pharmaceuticals such as Pfizer, Astrazeneca and Reliant. Based on total assets, annual revenues and market capitalization, we are considerably smaller than these and other national competitors in the branded product area. These competitors, as well as others, have been in business for a longer period of time, have a greater number of products on the market and have greater financial and other resources than we do. If we directly compete with them for the same markets and/or products, their financial and market strength could prevent us from capturing a meaningful share of those markets.

We also compete with other pharmaceutical companies for new products and product line acquisitions. These competitors include Forest Laboratories, Inc., Medicis Pharmaceutical Corporation, Watson Pharmaceuticals, Inc., King Pharmaceuticals, Inc., Shire Pharmaceuticals Group plc, Biovail Corporation and other companies that acquire branded products from other pharmaceutical companies. These companies may have greater resources and abilities than we have.

According to the Federal Food, Drug, and Cosmetic Act ("FDC Act"), new drugs are subject to pre-market approval by the FDA. Applicable FDA law will treat our development of new products and new uses for approved products or the development of any of our line extensions as "new drugs,"

which requires the submission of an NDA or a supplemental NDA ("sNDA") (or an abbreviated NDA ("ANDA") if applicable), and approval by the FDA.

Pre-clinical studies generally include laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological animal studies, to assess quality and safety and provide a basis for design of the human clinical trials. An applicant submits the results of the pre-clinical studies with chemistry, manufacturing and control information and pharmacology and toxicology data in support of the proposed clinical study design to the FDA as a part of an IND and for review by the FDA prior to the commencement of human clinical trials. Unless the FDA says otherwise, the IND will become effective 30 days following its receipt by the FDA; however, the FDA may place an IND on "clinical hold" until the sponsor generates and supplies the FDA with additional data, which prohibits the sponsor of the IND from commencing with clinical studies until the "clinical hold" has been removed by the FDA.

Clinical trials involve the administration of the IND to humans under the clinical study protocols that had been submitted to the FDA as part of the IND. The conduct of the clinical trials is subject to extensive regulation including compliance with good clinical practices, obtaining informed patient consent, sponsor monitoring and auditing of the clinical, laboratory and product manufacturing sites and review and approval of each study by an Institutional Review Board. Clinical trials are typically conducted in three sequential Phases, although Phases may overlap. In Phase I, the investigational new drug usually is administered to 20-50 healthy human subjects and is tested for safety. Phase II usually involves studies in a limited patient population (50-200 patients) to:

When an investigational new drug is found to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials are undertaken to further evaluate clinical effectiveness and to further test for safety within an expanded patient population of usually 200 or more patients. The FDA reviews both the clinical plans and the results of the trials and may require the study to be discontinued at any time if there are significant safety issues or lack of efficacy. In some cases, the FDA can request Phase IV clinical studies to be conducted as a condition of approval of the NDA, although the Phase IV studies will be conducted within a designated time period following NDA approval. These studies can be designed to obtain additional safety and efficacy data, detect new uses for or abuses of a drug, or determine effectiveness for labeled indications under conditions of widespread usage. These studies

can involve significant additional expenses, and failure to perform these Phase IV studies within the FDA-stated timeframe can result in the FDA withdrawing the NDA approval.

Once the FDA has approved an NDA, the holder of the NDA may request changes to the product or manufacturing through a supplement to the original NDA, termed an sNDA. The format, content and procedures applicable to NDA supplements are generally the same as those for NDAs. However, the information required to be provided to the FDA in a supplement is only that which is needed to support the requested change. If the NDA or sNDA is based on new clinical investigations that are essential to the approval of the application, other than bioavailability studies, it may qualify for a three-year period of marketing exclusivity, distinct from any applicable patent protection that may exist. In such a case, the FDA may accept for filing, but will not approve a generic product for three years from the date of that application's approval. The FDA may also require user fees in excess of $0.3 million for prescription drug NDAs or sNDAs. Supplements proposing to include a new indication for use in pediatric populations are not subject to user fees unless the supplement contains clinical data.

Another form of an NDA is the so-called "505(b)(2)" NDA, which applicants submit pursuant to Section 505(b)(2) of the FDC Act. This type of NDA permits the cross-referencing of safety and effectiveness studies that the applicant has not conducted or been granted a right of reference by the sponsor of the animal or human studies, submitted in a prior NDA or in the literature which utilized the same drug. In addition, the FDA recommends a 505(b)(2) NDA for a modification, such as a new dosage form or drug delivery form, of a previously approved drug (but not that held by the 505(b)(2) applicant), which requires more than merely bioequivalence data. This 505(b)(2) NDA is similar to a full NDA, except that, under conditions prescribed by the FDA, it may be supported in whole or in part by one or more animal and human study investigations in the originator NDA or those published in scientific literature in lieu of the applicant's clinical trials. This type of NDA application is submitted to market potential product line extensions or new uses of already-approved products. Payment of user fees may also be required by the FDA.

In addition, if we submit a 505(b)(2) NDA or ANDA, the FDA will require us to certify as to any patent which covers the drug for which we seek approval. If there is a patent in existence, a certain type of certification commonly referred to as a "paragraph 4 certification," is made and proper notice to the patent holder of our intent to market the drugs is given, and if the patent holder makes an infringement claim within a specified time period, then the FDA will not approve our marketing application for 30 months or until the patent litigation is resolved, whichever occurs sooner. In addition, distinct from patent considerations, approval of a generic type of ANDA could be delayed because of the existence of five or three years of marketing non-patent exclusivity afforded by the FDA for the innovator drug or 180 days of non-patent exclusivity afforded to the first applicant to submit an ANDA with a paragraph 4 certification; however, in certain proscribed cases, this non-patent exclusivity may not prevent the submission and approval of competitor applications. A patent holder can, however, sue for infringement under traditional patent law.

The least burdensome application for new drug approval is the ANDA, which may apply to a new drug that is shown to be bioequivalent to a drug previously approved by the FDA for safety and effectiveness and listed as the drug to which bioequivalence must be shown. An applicant may submit an ANDA for products that are the same as an approved originator drug regarding active ingredient(s), route of administration, dosage form, strength and conditions of use recommended on the labeling. The ANDA requires only bioequivalence data and other technical and manufacturing information, but typically no safety and effectiveness studies.

Even after obtaining regulatory approval, such approval may require post-marketing (Phase IV) testing and surveillance to monitor the safety of the product. In addition, the product approval may be withdrawn if compliance with regulatory standards is not maintained or if issues arise following

initial marketing. At present, companies cannot export pharmaceutical products that cannot be lawfully sold in the U.S. unless certain statutorily prescribed conditions are met.

FDA regulations require that we report adverse events suffered by patients, submit new marketing and promotional materials, submit changes we plan to make to the product manufacturing or labeling and comply with recordkeeping requirements and requirements relating to the distribution of drug samples to physicians. Failure to comply with the FDA requirements may result in the manufacture, sales and distribution of our products being suspended, and we may be prevented from obtaining FDA approval of new products.

Our third-party manufacturers must adhere to FDA regulations relating to current good manufacturing practice ("cGMP") regulations, which include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned and salvaged products. Ongoing compliance with cGMP procedures, labeling and other regulatory requirements are monitored through periodic inspections and market surveillance by state and federal agencies, including the FDA. It is also our obligation to periodically monitor the FDA compliance of our third-party manufacturers. Failure by our third-party manufacturers to comply with these rules could result in sanctions being imposed, including fines, injunctions, civil penalties, suspension or withdrawal of FDA approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. In addition, we rely upon our third-party manufacturers to provide many of the documents that we use to comply with our FDA reporting requirements for all products we sale.

In addition, we are subject to fees under the Prescription Drug User Fee Act for new drug applications for new drug products and sNDAs for new uses, except that we may qualify for a waiver of the fee for our first new drug application. We will be responsible for paying these fees for NDAs, sNDAs and subsequent submissions, unless we receive approval from the FDA for a waiver, reduction or refund. We are also subject to regulation under other federal and state laws, including the Occupational Safety and Health Act and other environmental laws and regulations, national restrictions on technology transfer and import, export and customs regulations. In addition, some of our products that contain controlled substances, such as Protuss and Protuss-D, are subject to Drug Enforcement Administration requirements relating to storage, distribution, importation and sampling procedures. We have registered with the Drug Enforcement Administration under the Controlled Substances Act which establishes, among other things, registration, security and recordkeeping requirements. We must also comply with federal and state anti-kickback and other healthcare fraud and abuse laws.

In addition, whether or not we obtain FDA approval, we must obtain approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries prior to the commencement of clinical trials and subsequent marketing of such product in these countries. The approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval.

We may request orphan drug status for some of our products under development. Orphan drug designation may be granted to those products developed to treat diseases or conditions that affect fewer than 200,000 persons in the U.S. or that affect more than 200,000 persons in the U.S. and for which there is no reasonable expectation that the cost of developing and making a drug in the U.S. for such disease or condition will be recovered from sales in the U.S. of such drug. Under the law, the developer of an orphan drug may be entitled to seven years of market exclusivity following the approval of the product by the FDA, exemption from user fee payments to the FDA and a tax credit for the amount of money spent on human clinical trials. However, we must be the first to receive FDA

marketing approval to receive market exclusivity under the orphan drug statute should there be a competitor with a similar molecular entity pursuing the same intended clinical use. Although we may receive market exclusivity under the Orphan Drug Act, the FDA will allow the sale of a molecularly equivalent drug which is clinically superior to or a molecular entity different from another approved orphan drug, although for the same indication, during the seven-year exclusive marketing period. It is also possible that a competitor may attempt to undermine any exclusivity provided by promoting a product for an off-label use that is the otherwise protected product. We cannot be certain that any of our products under development would ultimately receive orphan drug designation, or that the benefits currently provided by this designation, if we were to receive it, will not subsequently be amended or eliminated. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Our ability to market our products successfully will depend in part on the extent to which reimbursement for the costs of the products will be available from government health administration authorities, private health insurers and managed care organizations in the U.S. and in any foreign markets where we may sell our products. Third-party payors can affect the pricing or relative attractiveness of our products by regulating the reimbursement they provide on our products and competing products. Insurance carriers may not reimburse healthcare providers for use of our products used for new indications. Domestic and foreign government and third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new pharmaceutical products.

Third-party payors regularly challenge the pricing of medical products and services by substituting cheaper products on their approved lists. We face an increased risk of third-party payors substituting or competing with the drugs in our product portfolio. If third-party payors remove any of these products from their lists or choose not to pay for our product prescriptions, patients and pharmacies may not continue to choose our products.

We maintain a product liability insurance policy. We do not maintain separate business interruption insurance; however, our property and casualty insurance policy provides for payment for lost inventory and lost sales in the event of loss from damage to our property.

We had 477 full-time employees as of December 31, 2004, including 357 sales employees in the field and 120 in management, marketing, finance and administration. We also maintain active independent contractor relationships with various individuals with whom we have consulting agreements. We believe our employee relations are good. None of our employees are subject to a collective bargaining agreement.

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Annual Report. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect us.

If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline.

Our operating results are substantially dependent upon the contribution of Sular, which has been below our acquisition expectations since we acquired the product and which has adversely affected our operating results.

Sales of Sular, which we acquired in March 2002, accounted for approximately 38% of our total net sales for 2004. We have not realized the sales growth for Sular that we anticipated when we acquired it. As a result, our growth has suffered and our net sales for 2004 were lower than was anticipated at the acquisition of Sular. According to IMS Health's National Prescription Audit Plus™ data, total Sular prescriptions increased 11.7% for the year ended December 31, 2004 compared to the year ended December 31, 2003.

Although we have revised our operational plan to focus on maximizing sales of our existing products, particularly Sular, there is no assurance that we will be able to increase Sular prescriptions.

The potential growth rate for Sular may be limited by the contraction of the market for the class of drugs to which Sular belongs.

The calcium channel blocker products market is contracting. This contraction may be due to the following:

Sales of our Tanafed products have been adversely affected by the introduction of competitive and knock off products.

In May 2004, our Tanafed DP product was knocked off by a competitor, and our Tanafed DMX product was knocked off in the first quarter of 2005. These competing products are expected to have an adverse effect on future revenues of our Tanafed products.

Sales of our Robinul products have been adversely affected by the introduction of generic products.

In December 2004, generics to our Robinul and Robinul Forte products were introduced into the marketplace. These products are expected to have an adverse effect on future revenues of our Robinul products.

The FDA recently issued a notice which may cause us to incur increased expenses and adversely affect our ability to continue to market and sell our Tanafed products.

Going forward. we may not be able to increase our sales to compensate for the decrease in sales of our non-promoted products.

Sales of our non-promoted products going forward into 2005, which include our Robinul and Tanafed lines, accounted for 36% of our total sales for the year ended December 31, 2004. We plan to compensate for this decline in revenues by increasing sales of our existing actively promoted products and acquiring new products. However, there is no assurance that we will be able to increase sales of actively promoted products or locate attractive acquisition candidates and successfully complete an acquisition.

Introductions by us of line extensions of our existing products may require that we make unexpected changes in our estimates for future product returns and reserves for obsolete inventory which would adversely affect our operating results.

Part of our revised operating plan includes the introduction of line extensions of our existing products to create marketing advantages and extend the life cycles of our products. From time-to-time we may seek to introduce line extensions on an unexpected and expedited basis before we are able to reduce the levels of inventories of product which may be rendered obsolete or otherwise adversely affected by the line extension. This may require us to increase our estimate for returns of product on hand at wholesalers, which is recorded as a reduction of our net revenues, and increase our reserve for inventory in our warehouse which is recorded as a cost of revenues. Accordingly, the introduction of line extensions may adversely affect our operating results.

When we acquire the rights to manufacture and sell a product, we record the aggregate purchase price, along with the value of the product related liabilities we assume, as intangible assets. We use the assistance of valuation experts to help us allocate the purchase price to the fair value of the various intangible assets we have acquired. Then, we must estimate the economic useful life of each of these intangible assets in order to amortize their cost as an expense in our statement of operations over the estimated economic useful life of the related asset. The factors that drive the actual economic useful life of a pharmaceutical product are inherently uncertain, and include patent protection, physician loyalty and prescribing patterns, competition by products prescribed for similar indications, future introductions of competing products not yet FDA approved, the impact of promotional efforts and many other issues. We use all of these factors in initially estimating the economic useful lives of our products, and we also continuously monitor these factors for indications of appropriate revisions.

In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated undiscounted future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets we must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than its carrying value, an impairment

loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, we may be required to record impairment changes for these assets. We review intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If we determine that an intangible asset is impaired, a non-cash impairment charge would be recognized.

As circumstances after an acquisition can change, the value of intangible assets may not be realized by us. If we determine that an impairment has occurred, we would be required to write-off the impaired portion of the unamortized intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs. In addition, in the event of a sale of any of our assets, we cannot be certain that our recorded value of such intangible assets would be recovered.

Our ability to grow will suffer if we do not acquire or license rights to new products and integrate them successfully.

We depend on acquisitions of rights to products from others as our primary source for new products. Risks in acquiring new products include the following:

We often face significant competition from other pharmaceutical companies in acquiring rights to products, which makes it more difficult to find attractive products on acceptable terms. Integration of new products into our existing structure may require unanticipated investments of time and resource or an expansion of our sales force.

We may encounter problems in the manufacture or supply of our products that could limit our ability to sell our products.

Third parties manufacture and supply all of our products, and we do not currently have manufacturing facilities, personnel or access to raw materials to independently manufacture our products. Except for any contractual rights and remedies which we may have with our manufacturers and suppliers, we have no control over the availability of our products or their quality or cost to us. We do not maintain alternative manufacturing sources for any of our products, and we may not be able to locate alternative manufacturers on commercially acceptable terms in the event of a manufacturing interruption or termination of an existing manufacturing agreement. We do not currently have business interruption insurance with respect to adverse events that could occur at third-party manufacturers' facilities. Furthermore, due to the patent held on Nitrolingual by our supplier, Pohl-Boskamp, no alternative source for Nitrolingual exists. Bayer holds the patents for the manufacturing process and composition of the coat core tablet for Sular. A third party holds the patents for the manufacturing process for raw materials in Tanafed DP and Tanafed DMX. A third party holds the rights to Metafolin, an active ingredient in Prenate Elite. In the event that these suppliers of Nitrolingual, Tanafed DP and Tanafed DMX, Prenate Elite or Sular ceased to supply product to us, there is no

assurance that we would be able to locate another manufacturer or supplier who would be able to manufacture or supply the products without violating such patents or who could manufacture the products on commercially reasonable terms.

We are seeking a new supplier to supply us with the active ingredient in Cognex. Based on our current sales projections, we believe that we have adequate supplies of the active ingredient in Cognex for the foreseeable future. However, if sales exceed our current projections or if we are unable to locate a new supplier of the active ingredient in Cognex, our ability to sell Cognex would be limited and our profitability would be reduced.

Our third-party manufacturing agreements for our Sular, Nitrolingual, Robinul, Robinul Forte, Tanafed DP, Tanafed DMX, Zebutal, Ponstel and Prenate Elite products require that we purchase our product requirements from the manufacturers that are a party to those agreements. This prevents our entering into more advantageous manufacturing agreements with other manufacturers for these products.

As part of our growth strategy, we may acquire businesses, which subjects us to additional risks.

As an element of our growth strategy, we may acquire businesses with products that complement our current products, and we have evaluated and discussed such opportunities with interested parties in the past. In addition to the risks that we face in locating and integrating new product acquisitions, we may face the following risks:

In addition, if we conduct acquisitions using convertible debt or equity securities, the increased number of shares will be dilutive to our shareholders resulting in lower earnings per share.

Risks Relating to our acquisition of certain rights from Andrx Pharmaceuticals, Inc.

On March 2, 2005, we entered into definitive agreements with Andrx Pharmaceuticals, Inc. ("Andrx") to acquire certain rights related to the drug products Fortamet and Altoprev, and to engage Andrx to manufacture and supply us with Fortamet and Altoprev. The risks described below are the risks that we believe to be the most significant at this time to the Company related to the pending acquisition, which is expected to close on March 31, 2005.

We cannot be certain that the pending transaction will be completed by the anticipated date or that the transaction will be completed at all. There are a number of factors that could delay or prevent the completion of the pending transaction, including, without limitation, the failure to receive all governmental approvals required, the failure to obtain all third party consents required, the introduction of a generic product into the marketplace that completes with either Fortamet or Altoprev and the discovery of any deficiencies in the products or Andrx's rights to the same. If the transaction is significantly delayed or cannot be completed, then our ability to execute our growth strategy may be adversely effected. Furthermore, such a delay or failure to complete the pending transaction could

require us to expend additional time and resources to acquire alternative products to grow our business. There is no assurance that such alternative products will be available to us at competitive prices. Our ability to complete the transaction as anticipated is not a certainty, and the failure to do so could have a material adverse effect on our financial results from operations.

After closing the transaction, we will have to integrate Fortamet and Altoprev into our existing operations. The integration will require that we make adjustments to our sales and administrative functions. For example, we will need to hire additional sales representatives and adjust our marketing strategy to include the acquired products. Furthermore, we will need adjust our administrative processes to facilitate the sales of Fortamet and Altoprev. If our integration of the products into our existing operations is unsuccessful or delayed, then we may not achieve the expected level of return from our sales of Fortamet or Altoprev. This could result in a material adverse effect on our results from operations. Further, we may not be able to timely hire additional sales representatives to sell these products, resulting in our inability to achieve expected sales.

While we expect to extend our existing product lines and to increase our sales of existing products by offering a more complete line of treatment alternatives through our acquisition of certain rights to the Fortamet and Altoprev products, there can be no assurance that these expected synergies can be achieved. In addition, if we experience difficulty in integrating the products into our existing operations or marketing them through our existing sales channels or as part of our existing product lines, we may incur significant unplanned costs to complete the integration of the products. If we do not realize the expected synergies from acquiring the products or we incur unexpected costs to integrate them into our existing operations, then we may experience a material adverse effect to our results from operations.

While we believe that our current arrangement with Andrx to manufacture and supply Fortamet and Altoprev will be adequate to meet our needs, there can be no assurance that Andrx will supply us with a sufficient quantity to meet our demand for finished goods, products and samples or that the products provided will meet our specifications. If we are unable to obtain a sufficient quantity or the products provided do not meet our specifications, then our ability to fulfill orders for the products could be adversely effected. Our ability to engage a third party to manufacture and supply us with Fortamet and Altoprev is restricted to a very limited set of circumstances under our current agreement with Andrx. If we are unable to provide customers with the quantity of products ordered or to provide customers with high quality products on a consistent basis, then our relationships with our customers could be adversely affected. This could result in a material adverse effect on our results from operations.

In March 2004, the Company issued a total of $150 million of its 1.75% senior subordinated contingent convertible notes due in 2024 in transactions that were exempt from registration in reliance upon Rule 144A and other available exemptions under the Securities Act. The notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest on the notes, after March 8, 2007, the Company will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or

more. During any period when contingent interest is payable, it will be payable at a rate equal to 0.5% per annum.

In February 2003, we entered into a credit facility for a $20 million revolving loan. We may borrow under the revolving loan and incur other debt to finance acquisitions to implement our growth strategy and/or for general corporate purposes. Significant debt could:

We expect to require additional funding, and if we cannot obtain it, our sales, profits, acquisitions and development projects could suffer.

We expect to need additional funds to acquire or obtain licenses for new products, develop and test new products and potentially to acquire other businesses. We may seek funding through public and private financing and may seek to incur debt, issue shares of our stock, or both, either to finance a transaction or as consideration for a transaction. Adequate funds for these purposes, whether through the financial markets or from other sources, may not be available when we need them or on terms acceptable to us. Insufficient funds could cause us to delay, scale back or abandon some or all of our product acquisitions, licensing opportunities, marketing programs, product development programs, potential business acquisitions and manufacturing opportunities.

We face generic and other competition that could lower prices and unit sales.

Sular competes with products that are generic to other calcium channel blockers. Nitrolingual competes with generic tablet products. Prenate Elite competes with other prenatal vitamins. Companies also introduced generic products to our Tanafed and Robinul products. Our Zebutal capsules and Zoto-HC ear drops are not protected by patents and face competition from less expensive products. In addition, competitors could develop generic or other products to compete with our Furadantin and Ponstel products, which are not protected by patents, or could develop generic versions of products with which our products compete, such as Norvasc. Third-party payors can require substitution and pharmacists can substitute generic or other competitive products for our products even if physicians prescribe them. Government agencies, third-party payors and pharmacies often put pressure on patients to purchase generic or other products instead of brand-name products as a way to reduce healthcare costs. Any further increase in the amount of generic and other competition against any one or more of our products could further lower prices and unit sales.

Strong competition exists for our products, and competitors have recently introduced new products and therapies that could make some of our products obsolete.

Our products compete against products sold over-the-counter or by prescription that in some cases are marketed by much larger pharmaceutical companies with greater financial resources for marketing and manufacturing. For example, Pfizer sells a hypertension product called Norvasc which in 2004 had a 43.4% share of the calcium channel blocker market (based on prescriptions according to IMS Health's National Prescription Audit Plus™ data), and introduced a combination of Norvasc with its popular cholesterol-reducing product Lipitor, which could prove to be an attractive alternative to our product Sular. Also, a competitor is developing a lingual nitroglycerin spray similar to our Nitrolingual

product, which could divert prescriptions and reduce sales of Nitrolingual. Also, based on the regulatory status of our Prenate Elite, Tanafed, Zebutal, and Zoto-HC products, barriers to entry for competing products are low, which makes it easier for companies to enter the market. Competitors are developing new products and have developed new surgical procedures to treat angina. Competitors are also developing new products to treat short term pain and have recently developed new pain therapies. These new products and procedures may reduce demand for our products. The high level of competition in our industry could force us to reduce the price at which we sell our products or require us to spend more to market our products, or both.

A patent addressing the composition of the active ingredient in Sular expired in 1998 and a patent covering the manufacturing process expired in 2004. Therefore, a competitor could introduce a product competitive with Sular containing its same active ingredient, although Sular remains protected under a patent addressing its coat core tablet. Any such competing product may reduce our potential sales of Sular.

The regulatory status of some of our products makes these products subject to increased competition and other risks.

The regulatory status of our Tanafed DP and Tanafed DMX products allows third parties to more easily introduce competitive products, and may make it more difficult for us to sell these products in the future. Currently, an FDA program allows us, in our opinion, to manufacture and market these products and permits others to manufacture and market the same and similar products without submitting safety or efficacy data. These markets are already highly competitive and, except for a license to certain of the raw materials in Tanafed DP and Tanafed DMX and for a patent covering compositions in Tanafed DP and Tanafed DMX, we do not hold rights in patents protecting us against such competitive pressures. This results in increased competition because other companies can enter the market without having to submit safety and efficacy data to sell competing products. On several occasions, the FDA has considered changing the classification of certain single entity and combination product types of drugs from prescription to over-the-counter use, and a new rule permits sponsors to utilize foreign over-the-counter experience data to establish a product as safe and effective for over-the-counter use in the U.S. If the FDA does change the classification, we might have to reformulate these products, submit safety and efficacy data on our products which could be costly, or we might have to discontinue selling these products if the FDA does not approve our marketing application. We could lose third-party reimbursement for these products and face increased competition. In addition, the FDA considers these products and our Prenate line of products to be new drugs, but has indicated its intent to exercise enforcement discretion and not pursue regulatory action unless certain conditions occur. If these conditions were to materialize, or the FDA disagreed with our conclusions about the regulatory status of these products, we might be required to submit a new drug application and/or cease marketing until the FDA grants approval to do so. The FDA could also, at any time, promulgate new regulations or policies to require the submission of a new drug application for each of these products.

A small number of customers account for a large portion of our sales and the loss of one of them, or changes in their purchasing patterns, could result in reduced sales or adversely impact our financial performance.

We sell most of our products to a small number of wholesale drug distributors. For the year ended December 31, 2004, sales to McKesson Corporation, Cardinal Health Inc., and AmerisourceBergen Corporation represented 31%, 25%, and 22%, respectively, of our total sales. The small number of wholesale drug distributors, consolidation in this industry or financial difficulties of these distributors could result in the combination or elimination of warehouses, which could temporarily increase returns of our products or, as a result of distributors reducing inventory levels, delay the purchase of our products.

In late 2002, our wholesaler customers purchased excessive amounts of inventory of our products in anticipation of future price increases. This adversely impacted our sales in the first half of 2003. In response, in the second and third quarters of 2003, we entered into inventory management agreements with our three largest wholesale customers which offer incentives to the wholesaler to maintain on average one month of inventory. These wholesalers may choose to forego the incentives and to maintain more than one month of inventory.

While we have instituted inventory management controls with our wholesaler customers, the controls rely upon data supplied by our wholesaler customers. There is no assurance that the data supplied by our wholesaler customers will be accurate of that the controls will be effective. If the wholesaler information is unreliable and our controls are not effective, it could have a material adverse effect on our inventory management and financial performance.

If our products under development fail in clinical studies, if we fail or encounter difficulties in obtaining regulatory approval for new products or new uses of existing products, or if our development agreements are terminated, we will have expended significant resources for no return.

We have completed Phase I clinical trials of our excessive salivation product under development and filed INDs with the FDA. If we cannot obtain FDA approval for this or other products which we may seek to develop in the future, our rate of sales growth may suffer. We do not have the experience or the capability to undertake clinical and other studies to obtain FDA approval for new products or new uses of already-approved products. As a result, we rely on third parties to formulate, develop and manufacture the materials needed for clinical trials for our products under development to treat excessive salivation. We also rely on third parties to conduct clinical trials for us. If our products are not successful in clinical trials or we do not obtain FDA marketing approval, we will have expended significant resources with no return. Our ongoing clinical studies might be delayed or halted for various reasons, including:

Our business is heavily regulated by governmental authorities, and failure to comply with such regulation or changes in such regulations could negatively affect our results.

Many government authorities regulate our business, including, among others, the following:

We may incur significant expenses to comply with regulations imposed by these authorities Also, our future results could be reduced by changes in governmental regulation over the pharmaceutical industry, including regulation of Medicare, Medicaid and similar programs, by reducing our revenue and profits and/or increasing our costs and expenses in order to comply with such regulation. In addition, all of our third-party manufacturers, third-party sample distributors and product packaging companies are subject to inspection by the FDA and, in appropriate cases, the Drug Enforcement Administration and foreign regulators. From time to time, some of our third-party manufacturers have received warning letters from the FDA concerning noncompliance with manufacturing requirements. If our third-party manufacturers, third-party sample distributors and product packaging companies do not comply with FDA regulations in the future, they may not deliver products to us or deliver samples to our representatives, or we may have to recall products. Even if deficiencies observed by the FDA do not relate to our products, our third-party manufacturers, third-party sample distributors and product packaging companies may be delayed in manufacturing and supplying our products to us in a timely manner until they address their compliance issues with the FDA.

Our warehouse facility is also subject to inspection by the FDA and the Drug Enforcement Administration. If we do not comply with FDA and the Drug Enforcement Administration regulations, we may not be able to sell product to our customers.

If third-party payors do not adequately reimburse patients for our products, doctors may not prescribe them.

Because our products are sold by prescription, we depend on third-party payors, such as the government, private healthcare insurers and managed care organizations, to include these products on their lists of products for which third-party payors will reimburse patients. Third-party payors regularly challenge the pricing of medical products and services by substituting cheaper products on their approved lists. Because our Zebutal, Tanafed line, Zoto, Robinul line, Ponstel and Furadantin products are susceptible to generic competition and because of products that compete with Sular, Prenate, Nitrolingual Pumpspray, and Ponstel, we face an increased risk of third-party payors substituting these products. If third-party payors remove any of these products from their lists or choose not to pay for our product prescriptions, patients and pharmacies may not continue to choose our products.

We depend on highly trained management, and we may not be able to keep current management or hire qualified management personnel in the future.

We currently have a limited number of key regulatory, technical and management personnel. We may need to identify and attract new executive, operational and marketing personnel, and we may have difficulty hiring personnel at an acceptable cost. While we periodically address succession planning, our failure to successfully identify and attract such personnel, as and when needed, could limit our ability to continue our business at its current level and/or grow our business.

Product liability claims and product recalls could limit sales and increase costs.

Side effects could occur from the use of our products. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. The defense of these claims would be expensive, and could result in withdrawal of approval to market the product or recall of the product. These problems often occur with little or no notice in connection with the sale of pharmaceutical products.

An adverse judgment in the securities class action litigation in which we and certain directors and executive officers are defendants could have a material adverse effect on our results of operations and liquidity.

We, along with certain former and current officers and directors, were named defendants in a consolidated securities lawsuit initiated on August 22, 2002 in the United States District Court for the Northern District of Georgia. Plaintiffs in the class action litigation alleged in general terms that we violated Sections 11 and 12(a)(2) of the Securities Act of 1933 and that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffs claimed that we issued a series of materially false and misleading statements to the market in connection with our public offering on April 24, 2002 and thereafter relating to alleged "channel stuffing" activities. The amended complaint also alleged controlling person liability on behalf of certain of our officers under Section 15 of the Securities Act of 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffs sought an unspecified amount of compensatory damages in an amount to be proven at trial.

On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit. Although the class action lawsuit was dismissed, the court granted the plaintiffs the right to refile their class action lawsuit provided that the plaintiffs pay all of the defendants' fees and costs associated with filing the motions to dismiss the class action lawsuit. Plaintiffs failed to refile by the deadline, but have asked the Court to reconsider its dismissal. Should the court reverse the dismissal, we will vigorously defend against any claims made.

If we do not secure or enforce patents and other intellectual property rights, we could encounter increased competition that would adversely affect our operating results.

We do not hold patent rights covering all of the products we are distributing and do not in some cases have the right to enforce patents our licensors hold. Patent rights do not protect our Robinul, Ponstel and Furadantin products from competition. We obtained exclusive distribution rights in the U.S. to distribute our Nitrolingual, Tanafed DP and Tanafed DMX products but have no or only limited rights to enforce the patents relating to Nitrolingual. We obtained exclusive U.S. distribution rights to Sular from Bayer. Bayer holds the patents for the manufacturing process and composition of the coat core tablet for Sular. Any exclusivity afforded by any of these patents or rights could cease because we have no rights or only limited rights to enforce patents or to require enforcement actions by the owners of the patents. Proceedings involving our rights in patents or patent applications could result in adverse decisions. In addition, the confidentiality agreements required of our employees and third parties may not provide adequate protection for our trade secrets, know-how and other proprietary information which we rely on to develop and sell our products. If any of our employees or third parties disclose any of our trade secrets or know-how, we could encounter increased competition.

Our products could infringe the intellectual property rights of third parties, which could require us to pay license fees or defend litigation that would be expensive or prevent us from selling products.

The manufacture, use or sale of our products may infringe on the patent, trademark and other intellectual property rights of others. Patent and trademark infringement problems occur frequently in connection with the sale and marketing of pharmaceutical products. If we do not avoid alleged infringement of the intellectual property rights of others, we may need to seek a license to sell our products, defend an infringement action or challenge the validity of the intellectual property in court, all of which could be expensive and time consuming. In addition, if we are found liable for infringing a patent, we may have to stop selling one or more of our products and pay damages.

Even though most of our product agreements under which we license intellectual property rights from others contain provisions that allow us to recover costs and damages if we have to defend or are

found liable for infringing a patent of a third party, the agreement under which we obtained rights to Nitrolingual does not contain these indemnification provisions. It could be very costly if we have to defend the patents or trademarks covering our products, including Nitrolingual, or if we were found liable for infringement.

Nitrolingual Pumpspray is one of our key products. Pohl-Boskamp can terminate our distribution agreement for Nitrolingual Pumpspray if a company with a product competitive with Nitrolingual Pumpspray acquires direct or indirect influence or control over us, or if a significant change in our stockholders occurs so that Kapoor-Pharma Investments and our employees, management and directors, and any of their respective affiliates, do not in the aggregate directly or indirectly beneficially own at least 20% of our shares. While the beneficial ownership of those parties may fall below 20% as a result of a number of factors, including factors outside of our control, we may determine to enter into future equity financing arrangements that could result in a reduction in beneficial ownership below 20% which could result in Pohl-Boskamp terminating our distribution agreement which would have a material adverse impact on our financial results.

The market price for our securities has been highly volatile. Various factors, including factors that are not related to our operating performance, may cause significant volume and price fluctuations in the market. The following factors, among others, may cause fluctuations in our stock price:

Existing officers, directors and our principal stockholder owns a substantial block of stock that may allow them to elect directors and direct the outcome of matters requiring stockholder approval.

As of February 28, 2005, our officers, directors and our principal stockholder beneficially owned approximately 20.0% of our outstanding common stock. As of February 28, 2005, Kapoor-Pharma Investments, L.P. owned approximately 19.5% of our outstanding common stock. Accordingly, Kapoor-Pharma Investments holds significant control or influence over our policies and acts. John N. Kapoor, Ph.D., the Chairman of the Board of Directors, is President and sole stockholder of EJ Financial Enterprises, Inc. EJ Financial Enterprises is the managing general partner of Kapoor-Pharma Investments. In addition, a trust of which Dr. Kapoor is trustee is a partner of Kapoor-Pharma Investments.

Anti-takeover provisions could discourage a third party from making a takeover offer that could be beneficial to stockholders.

Some of the provisions in our restated certificate of incorporation and bylaws, our shareholder rights plan, and the anti-takeover provisions under Delaware law could delay or prevent a third party from acquiring us or replacing members of our board of directors, even if the acquisition or the replacements would be beneficial to our stockholders. These provisions could also reduce the price that certain investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. Our charter and other documents contain anti-takeover devices including:

Our financial statements as of and for the years ended December 31, 2000 and 2001 included in this Form 10-K Annual Report were audited by Arthur Andersen LLP, which has been found guilty of obstruction of justice and may be the subject of additional litigation.

Arthur Andersen LLP has been found guilty of obstruction of justice with respect to its activities in connection with Enron Corp. and may be the subject of additional litigation. In the event that Arthur Andersen LLP dissolves, liquidates or does not otherwise continue in business, it may have insufficient assets to satisfy any claims that may be made by investors with respect to financial statements which it has audited. We believe that Arthur Andersen LLP no longer operates as an auditing firm, and do not know if it has any assets. Arthur Andersen LLP has ceased practicing before the SEC. As a result of such cessation, we will not be able to obtain the consent of Arthur Andersen LLP to the inclusion of its audit report in this Form 10-K Annual Report. The SEC allows companies that file reports with the SEC to dispense with the requirement to file a consent of Arthur Andersen LLP. Because Arthur Andersen LLP has not consented to the inclusion of their report in this Form 10-K Annual Report, you may not be able to recover against Arthur Andersen LLP for any information included in financial statements that it has audited.

In December 2001, we entered into a lease for a 101,120 square foot office and warehouse facility in Alpharetta, Georgia. Our facility includes space for offices and a warehouse. This lease expires in May 2009. In September 2004, we entered into a lease for a 300 square foot office in Dublin, Ireland. This lease expires in September 2007.

We, along with certain former and current officers and directors, are defendants in a consolidated securities lawsuit initiated on August 22, 2002 in the United States District Court for the Northern District of Georgia. Plaintiffs in the class action alleged in general terms that we violated Sections 11 and 12(a)(a) of the Securities Act of 1933 and that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffs claim that we issued a series of materially false and misleading statements to the market in connection with our public offering on April 24, 2002 and thereafter relating to alleged "channel stuffing" activities. The amended compliant also alleged controlling person liability on behalf of certain of our officers under Section 15 of the Securities Act of 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffs seek an unspecified amount of compensatory damages to be proven at trial.

On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit. Although the class action lawsuit was dismissed, the court granted the plaintiffs the right to refile their class action lawsuit provided that the plaintiffs pay all of the defendant's fees and costs associated with filing the motions to dismiss the class action lawsuit. Plaintiffs failed to refile by the deadline, but have asked the Court to reconsider its dismissal. Should the Court reverse the dismissal, we will vigorously defend against any claims made.

On April 15, 2004, we filed a patent infringement action against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the Northern District of Illinois, on the grounds that their product, Duotan PD, infringes the patents for our products, Tanafed DP and Tanafed DMX. In response, on April 21, 2004, Breckenridge filed for declaratory judgment in the U.S. District Court for the Southern District of Florida seeking to invalidate the Tanafed patents. On July 20, 2004, our action was transferred to the U.S. District Court for the Southern District of Florida.

We intend to vigorously litigate our infringement action and defend Breckenridge's motion for declaratory judgment unless resolved otherwise. While we believe that Breckenridge's product, Duotan, infringes the patent for Tanafed, we cannot assure you that we will prevail. If we lose our infringement action and Breckenridge is successful in invalidating the Tanafed patent we could lose market share for Tanafed or we may have to decrease the price of Tanafed to keep its sales competitive, resulting in a loss of earnings and profits from Tanafed sales.

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2004.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the Nasdaq National Market on May 31, 2000. Our trading symbol is "FHRX." The following table lists, for the periods indicated, the high and low sale prices per share for our common stock as reported on the Nasdaq National Market.

		High		Low
2003
	First Quarter	$	8.65	$	1.93
	Second Quarter		4.18		2.27
	Third Quarter		8.05		2.92
	Fourth Quarter		12.05		6.29

		High		Low
2004
	First Quarter	$	19.47	$	10.48
	Second Quarter		19.98		13.71
	Third Quarter		20.20		14.80
	Fourth Quarter		26.41		18.55

On February 28, 2005, the last reported sale price for our common stock on the Nasdaq National Market was $16.44 per share. As of February 28, 2005, there were approximately 204 holders of record of our common stock.

The following table provides information as of December 31, 2004 with respect to shares of our common stock that may be issued under existing equity compensation plans.

We have not declared or paid any cash dividends since our inception. We currently intend to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our current credit facility prohibits the payment of any dividends or other distributions on any shares of our stock. For further discussion of our current credit facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operation."

In July 2002, the Company announced a share repurchase program. This program authorized the repurchase of up to $8 million in common stock until July 2003. Through July 2003, we repurchased 823,400 shares of our common stock at an aggregate cost of approximately $2.1 million. In August 2003, our Board of Directors authorized the repurchase of up to an additional $7.9 million of common stock and extended the repurchase program to August 2004. In September 2003, we repurchased 162,225 shares of common stock at an aggregate cost of approximately $1.0 million. Through December 2003, we had repurchased a total of 985,625 shares of common stock at an aggregate cost of approximately $3.1 million. During the six months ended June 2004, we repurchased a total of 260,000 shares of common stock at an aggregate cost of approximately $4.6 million. All of these shares were retired.

In July 2004, our Board of Directors authorized a $20.0 million share repurchase program. The new program, which authorizes the repurchase of up to $5 million of common stock per quarter, became effective in August 2004, terminating and replacing the $10.0 million share repurchase program authorized by our Board of Directors in fiscal 2002. The share repurchase program will expire in August 2005.

In the third quarter of 2004, as part of the new share repurchase program, our Board of Directors increased the per quarter repurchase cap and authorized us to repurchase a total of 731,580 shares of our common stock, inclusive of the 500,000 shares of our common stock repurchased from one of Dr. Kapoor's family partnerships, at an aggregate cost of approximately $13.4 million. These shares have been retired. In the fourth quarter of 2004, as part of the plan that became effective in August 2004, we repurchased 65,427 shares of common stock. These shares have been retired.

The following table presents the total number of our shares repurchased during 2004 and the average price paid per share:

In December 2004, our Board of Directors authorized the company purchased 1,000,000 shares of common stock at an average price of $23.19 per share. The shares were converted to treasury stock. We acquired those shares in part, to establish a pool of authorized shares that will be available for contribution to the Employee Stock Ownership Plan over time as we in our discretion deems appropriate.

The following selected financial data is qualified by reference to and should be read in conjunction with our financial statements and the related notes and other financial information included elsewhere in this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data has been derived from our financial statements which have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 and by Arthur Andersen LLP, independent auditors, for the years ended December 31, 2000 and 2001. These results may not be indicative of future results. Our results of operations include contributions from products we acquired only from their respective acquisition date. We acquired Sular in March 2002, Furadantin in December 2001, the Prenate line of products in August 2001, Ponstel in April 2000, Cognex in April 2000, Nitrolingual Pumpspray in July 1999, and the Robinul line of products in January 1999. In 2003, we recorded a $4.2 million impairment on our Cognex intangible assets.

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

The following discussion and related financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report.

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.

Forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "hopes," "may," "will," "plan," "intends," "estimates," "could," "should," "would," "continue," "seeks," "pro forma," "reasonably likely" or "anticipates," or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions "Description of Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as all other sections in this Annual Report.

We are a specialty pharmaceutical company that markets and sells brand name prescription products. Our current operating plan focuses on maximizing the sales of our existing product portfolio, accelerating growth by launching line extensions to our current products and acquiring or licensing approved products or late stage development products. We plan to focus on products that fit within the Cardiology and Women's Health categories that will allow us to leverage our existing sales force infrastructure.

We sell our products to pharmaceutical wholesalers (who in turn distribute to pharmacies), chain drug stores, other retail merchandisers and, on a limited basis, directly to pharmacies. We recognize revenue when our products are shipped and the customer takes ownership and assumes the risk of loss. Our sales force targets high-prescribing primary care physicians and select specialty physicians. Our sales force seeks to develop close relationships with these physicians and respond to their needs and the needs of their patients. These physicians, in turn, write prescriptions for our products in order to treat their patients. We evaluate the effectiveness of our sales and marketing efforts by monitoring prescription trends of our promoted products.

Net Revenues. Net revenues increased $56.7 million to $152.0 million for 2004, compared to $95.3 million for 2003. This increase was primarily the result of management's redefined corporate strategy, which included an increase in sales force from approximately 250 sales professionals to approximately 360 sales professionals and an increased emphasis on hospital and managed care contracts. These changes resulted in an 11.7% increase in Sular total dispensed prescriptions according to IMS Health's National Prescription Audit Plus™ data and the successful launch of Prenate Elite, the newest member to the Prenate family, in April 2004. Prenate Elite has captured 11.7% of the market share for new prescriptions and 11.1% of the market share of total prescriptions for the month of December 2004, according to IMS Health's National Prescription Audit Plus™ data.

In 2003, revenues were also adversely affected as a result of the company's limitation on sales in order to reduce the level of wholesaler inventory for the first half of the year. In late 2002, our wholesaler customers purchased what we believe to be excessive levels of inventory of our products in anticipation of future price increases. This adversely impacted our sales in the first half of 2003. As a result of limiting shipments to wholesalers in the first half of 2003 and thereby attempting to reduce the amount of inventory held by the wholesalers, unit sales decreased 29% from the first half of 2002 compared to the first half of 2003.

Prior to developing systems in 2003, we first learned of the wholesalers increasing the trade levels of inventory in mid-December 2002 upon receiving the IMS Health Pipeline Report, which was a report provided by IMS Health Incorporated that provides information on inventory levels held by certain major wholesalers. This report indicated that wholesaler inventory levels were higher than we expected. This additional inventory was purchased by the wholesalers prior to our January 2003 product price

increases, allowing these wholesaler customers to increase the prices they charge their retail customers in the first quarter of 2003, thereby improving their margins for these products. In response, in the second and third quarters of 2003, we entered into inventory management agreements with our three largest wholesale customers to encourage the wholesaler's to maintain on average one month of inventory.

Net revenues for the year ended December 31, 2003, also included a decrease of $3.4 million for an accrual for estimated future returns of the Tanafed Suspension and Tanafed DM products which we discontinued in April 2003.

	Change in total dispensed prescriptions for the year ended December 31, 2004 compared to the year ended December 31, 2003(a)		Change in new dispensed prescriptions for the year ended December 31, 2004 compared to the year ended December 31, 2003(a)
Sular	+11.7	%	+23.1	%
Nitrolingual(b)	(2.5	)%	(2.3	)%
Prenate Elite(c)	N/A		N/A
Tanafed line	(23.7	)%	(25.5	)%
Robinul line	+2.1	%	(0.4	)%
Ponstel	(10.1	)%	(8.8	)%

Product sales of Sular were approximately $57.1 million for 2004 compared to $24.1 million for 2003. The increase was primarily a result of total prescription growth, significant hospital growth, the impact of recent managed care plan additions and price increases.

Product sales of the promoted Women's Health products (namely Prenate Elite, Ponstel, the Robinul line and the Tanafed line), were approximately $60.9 million for 2004 compared to approximately $44.7 million for 2003. The increase was primarily a result of total prescription growth from the launch of Prenate Elite, significant hospital growth, the impact of recent managed care plan additions and price increases.

In March 2004, we announced that we were launching Prenate Elite, the next generation of the Prenate line of prenatal vitamins. We began promoting and selling Prenate Elite in April 2004. Net revenues of Prenate Elite were $12.9 million for the year ended December 31, 2004. Prenate Elite has captured a market share of 11.7% of new prescriptions and 11.1% of total prescriptions as of December 31, 2004 (Source: IMS Health's National Prescription Audit Plus™ data), Metafolin®, is an active form of folate that does not need to be metabolized to the same extent as folic acid. Net revenues of Prenate GT and Prenate Advance were $2.1 million for the period from January 2004 through April 2004 when the products were discontinued and $11.8 million for the year ended December 31, 2003.

Cost of Revenues. Cost of revenues increased $11.4 million to $29.1 million for the year ended December 31, 2004 compared to $17.7 million for the year ended December 31, 2003. The increase in costs was due primarily to the increase in net revenues. As a result of a change in our sales forecast, cost of revenues for the year ended December 31, 2003 included an increased allowance for obsolete and excess inventory of $3.5 million. These charges were primarily for our non-promoted products,

excess Sular and Tanafed inventory and short dated Prenate GT inventory. Cost of revenues for the year ended December 31, 2004 do not include a comparable allowance for obsolete and excess inventory.

Gross Margin. Gross margins for 2004 and 2003 were 81%. Net sales for 2004 included a higher proportion of hospital and managed care prescriptions which have a lower per unit revenue. This was offset by 2003 cost of revenues including the increased allowance for obsolete and excess inventory of $3.5 million. Cost of revenues for the year ended December 31, 2004 do not include a comparable allowance for obsolete and excess inventory.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $8.9 million, or 15.4%, to $66.7 million for the year ended December 31, 2004, compared to $57.8 million for the year ended December 31, 2003. This increase is primarily related to the increase in sales force, increased accounting fees related to the Sarbanes-Oxley requirements, as well as increased royalties related to the increased sales. This increase was partially offset by lower selling expenses resulting from the Company's revised strategy and operating plan.

Depreciation and Amortization. Depreciation and amortization expense increased $0.4 million, to $16.9 million for 2004 compared to $16.5 million for 2003. This increase resulted from higher depreciation expense related to our implementation of a disaster recovery system and a new sales tracking system in 2004.

Impairment Charge. In the second quarter of 2003, the Company formulated a new sales and marketing strategy upon the Company hiring Mr. Patrick Fourteau as its then President and Chief Operating Officer. This new strategy resulted in the discontinuation of the pursuit of a line extension for Cognex as well as the subsequent plans to promote the product. As part of this new strategy, using market research, the Company updated its forecasts of Cognex sales projections to reflect a life cycle through June 2013, the period of time that the Company expects it will continue to sell the product in the future. As a result, the estimated useful life of Cognex was decreased from a remaining life of 17 years to 10 years, and using the estimated future undiscounted cash flows over the useful life of the product, the intangible asset related to Cognex was not projected to be recoverable.

To determine a fair value of the intangible asset related to Cognex, the Company performed an internal analysis utilizing a number of factors, including information from an independent valuation. The Company's analysis resulted in an impairment charge of $4.2 million being recorded as of June 30, 2003. The methodologies used to determine a fair value for Cognex included a combination of a market approach, which used a marketable multiple methodology and a comparable transaction methodology, as well as an income approach, using a discounted cash flow methodology.

The Company believes there are no other intangible asset impairments and there were no other asset write-downs as of December 31, 2004.

Research and Development Expense. Research and development expense decreased $0.6 million to $1.5 million for the year ended December 31, 2004, compared to $2.1 million for the year ended December 31, 2003. The decrease in expense is primarily a result of costs incurred in 2003 associated with manufacturing transfers for our Ponstel, Cognex and Furadantin products and development costs for the Prenate line. Research and development expenses for the year ended December 31, 2004 do not include comparable expenses.

estimated cost to obtain FDA approval. We are performing early phase clinical trials that are required for FDA approval regardless of the eventual prescription versus over-the-counter status. Based on the findings of the planned Phase 1 trial, we will finalize our development strategy and seek a pre-IND meeting with the FDA. We may incur significant developmental expenses to obtain FDA approval or may begin marketing Tanafed products as non-prescription products, which could have a material adverse effect on net revenues and profit margins for the Tanafed product line.

Interest Expense. Interest expense was $2.5 million year for the year ended December 31, 2004, compared to $0.2 million for the year ended December 31, 2003. The increase is due to the issuance of a total of $150.0 million, 1.75% senior subordinated contingent convertible notes in March 2004. For the year ended December 31, 2003, the Company had no debt outstanding.

In March 2004, we issued a total of $150.0 million, 1.75% contingent convertible senior subordinated notes. The notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest on the notes, after March 8, 2007, we will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable, it will be payable at a rate equal to 0.5% per annum. The net proceeds from this issuance after deducting offering expenses were approximately $145.4 million.

The holders of the convertible notes may convert the notes into shares of our common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which is equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business on March 8, 2024. Holders may convert their convertible notes only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for redemption; (3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of that period was less than 95% of the product of the closing price of our common stock and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or (4) the occurrence of specified corporate transactions.

We have the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

The holders of the notes have the option to require us to repurchase the notes on March 8 of 2009, 2014 and 2019, and upon a change in control, at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

Interest Income. Interest income was $3.8 million for the year ended December 31, 2004, compared to $0.4 million for the year ended December 31, 2003. The increase in interest income for year ended December 31, 2004 is primarily due to a higher average cash and marketable securities balances as a result of the proceeds from the issuance of the contingent convertible senior subordinated notes in March 2004, as well as positive cash flows generated from operations during 2004.

Benefit (Provision) for Income Taxes. Income taxes were provided for at a rate of 31.9% for the year ended December 31, 2004 compared to 37.5% for the year ended December 31, 2003. This decrease in the effective rate for the year ended December 31, 2004 is due to the change in the mix of tax jurisdictions, both domestic and international as a result of our implementation of international operations where our income was earned, as well as a change in the ratio of non-deductible expenses to pre-tax income.

Net Revenues. Net revenues decreased $19.9 million to $95.3 for 2003, compared to $115.2 for 2002. This decrease was primarily the result of:

	Change in total dispensed prescriptions for the year ended December 31, 2003 compared to the year ended December 30, 2002(a)
Sular	+1.4	%
Nitrolingual(b)	(1.8	)%
Prenate line	3.5	%
Tanafed line	+13.3	%
Robinul line	+8.1	%
Ponstel	(2.0	)%

Product sales of Sular, excluding the reversal of Medicaid rebate liability of $5.4 million, were approximately $24.1 million for 2003 compared to $30.2 million for 2002. We acquired Sular in March 2002. This decline in product sales was primarily the result of the reduction in trade levels of Sular held by our wholesaler customers during 2003.

Product sales of the promoted Women's Health products (namely the Prenate line, the Tanafed line, the Robinul line and Ponstel), were approximately $44.7 million for 2003 compared to approximately $54.9 million for 2002. This decrease was primarily the result of the reduction in trade levels of inventory during 2003 and lower sales of the Prenate line due to increased substitution of knock-off products by pharmacies.

Commencing during the second quarter of 2002, we experienced significant erosion of Prenate GT sales due to increased substitution of knock-off products by pharmacies filling prescriptions for Prenate GT. According to IMS Health's National Prescription Audit Plus™ data, substitution rates as measured by total dispensed prescriptions captured by Prenate GT and knock-off products were 45.2% for the quarter ended December 31, 2003 compared to 32.0% for the quarter ended December 31, 2002. As

part of our operational plan of maximizing sales of our existing products, we explored new line extensions for the Prenate line in an effort to reduce this substitution rate.

Product sales of Nitrolingual decreased 2.1% for the year ended December 31, 2003, compared to the year ended December 31, 2002. This decrease was primarily the result of the reduction in trade levels of inventory during the year partially offset by price increases taken during 2003. During the second quarter of 2003, we launched a 60-dose application bottle of Nitrolingual. The 60-dose bottle is smaller and more convenient to carry for some patients than the currently marketed 200-dose bottle. We believe that the 60-dose bottle will benefit patients who have mild angina and whose episodes are occasional. We believe the smaller bottle is an excellent companion product to the 200-dose bottle.

Cost of Revenues. Cost of revenues decreased $6.3 million to $17.7 million for 2003 compared to $24.0 million in 2002. Cost of revenues includes an increase to our allowance for excess and obsolete inventory of $2.5 million in 2003 compared to $1.9 in 2002. These charges in 2003 were primarily for our non-promoted products, excess Sular and Tanafed inventory and short dated Prenate GT inventory. In 2002, the charges were the result of Tanafed Suspension inventory becoming obsolete due to the launch of line extensions and lower than expected sales of Prenate GT.

Gross margin for 2003 was 81% compared to 79% for 2002. This increase in gross margin was primarily the result of a change in product sales mix.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.0 million to $57.8 million for 2003, compared to $61.8 million for 2002. Selling related expenses decreased due to lower co-promotion expenses incurred for promotion of our Sular product due to the termination of a co-promotion agreement in the second quarter of 2003, as well as lower selling expense as a result of our revised operating plan. The decrease was partially offset, by increased expenses for an allowance for obsolete sample inventory, shipping cost related to the withdrawal of Tanafed Suspension and Tanafed DM and severance for departing employees.

Depreciation and Amortization. Depreciation and amortization expense increased $2.0 million, to $16.5 million for 2003 compared to $14.5 million for 2002. This increase resulted from higher amortization expense related to the acquisition of Sular in March 2002 and higher depreciation expense related to our implementation of new financial systems in 2003.

Research and Development Expense. Research and development expense increased $1.0 million to $2.1 million for 2003 compared to $1.1 million for 2002. The increase in expense is primarily a result of

costs associated with manufacturing transfers for our Ponstel, Cognex and Furadantin products and development costs for the Prenate line.

In late 2002, the FDA issued a notice about various cough and cold combination products, which we believe requires us to obtain FDA approval of our Tanafed products before January 1, 2005 in order to be able to thereafter continue to market and sell these products as prescription products. In October 2003, the FDA issued a draft guidance document to address their current approach to handling compliance issues for drugs marketed without FDA approval. At December 31, 2004, we had not yet determined the estimated cost to obtain FDA approval. We were performing early phase clinical trials that were required for FDA approval regardless of the eventual prescription versus over-the-counter status. Based on the findings of the planned Phase 1 trial, we would finalize our development strategy and seek a pre-IND meeting with the FDA.

Interest Expense. Interest expense was $0.2 million for 2003 compared to $4.2 million for 2002. We had no debt outstanding in 2003. Interest expense in 2003 was the result of amortization of capitalized loan costs and unused facility fees relating to our $20 million line of credit. Interest expense in 2002 was primarily the result of a credit facility obtained in March 2002 to finance the acquisition of Sular. We repaid all indebtedness outstanding under the credit facility in the second quarter of 2002 and terminated this credit facility in July 2002.

As a result of SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" results for 2002 have been reclassified to state what was previously reported as an extraordinary loss on debt extinguishment of $0.9 million net of taxes. To make this reclassification, interest expense for 2002 has been increased by $1.4 million and the income tax provision was decreased by $0.5 million.

Interest Income. Interest income was $0.4 million for 2003, compared to $0.5 million for 2002. The decrease in interest income is primarily due to a lower average cash balance in 2003.

Benefit (Provision) for Income Taxes. Income taxes were provided for at a rate of 37.5% for 2003, compared to 39.0% 2002. The decrease in the effective rate is due primarily to the change in the ratio of non-deductible expenses to pre-tax income.

Our liquidity requirements arise from working capital requirements, product development activities, funding of acquisitions and debt service. We expect to need additional funds to acquire or obtain licenses for new products, develop and test new products and potentially to acquire other businesses, which may increase our cost of capital. We may seek funding through public and private financing and may seek to incur debt, issue shares of our stock, or both, either to finance a transaction or as consideration for a transaction. Adequate funds for these purposes, whether through the financial markets or from other sources, may not be available when we need them or on terms acceptable to us. Insufficient funds could cause us to delay, scale back or abandon some or all of our product acquisitions, licensing opportunities, marketing programs, product development programs, potential business acquisitions and manufacturing opportunities. We have historically met these cash requirements through cash from operations, borrowings and the issuance of common stock.

Our cash and cash equivalents were $36.6 million at December 31, 2004, as compared to $33.7 million at December 31, 2003. Net cash provided by operating activities for the year ended December 31, 2004 was $49.5 million. This providing of cash resulted from the net income for the year of $26.6 million, non cash depreciation and amortization of $16.9 million, non-cash tax transactions of $12.5 million, increase in accounts payable of $8.9 million; increase in accrued expenses and other liabilities of $2.4 million and non-cash interest expense of $0.3 million. These providers of cash were

partially offset by the increases in accounts receivable of $8.1 million, other current assets and other assets of $4.7 million, inventories of $4.6 million and income taxes receivable of $0.6 million.

Our cash and cash equivalents were $33.7 million at December 31, 2003, as compared to $47.4 million at December 31, 2002. Net cash used in operating activities for the year ended December 31, 2003 was $1.6 million. This use of cash resulted from the net loss for the year of $1.7 million, decreases in accrued expenses and other liabilities of $22.8 million and in accounts payable of $3.9 million and an increase in income taxes receivable of $4.8 million. These uses of cash were partially offset by the Cognex impairment charge of $4.2 million; non cash depreciation and amortization of $16.5 million, non-cash tax transactions of $3.8 million; non-cash deferred compensation of $0.2 million; and decreases in accounts receivable of $0.1 million, inventories of $6.3 million, and other current assets and other assets of $0.6 million.

We maintain supply agreements with third party suppliers for all of our products. Some of these supply agreements contain minimum purchase requirements. For most of these supply agreements, we believe that our inventory requirements and related purchases of inventory will exceed the minimum purchase requirement in 2005. In those cases in which we do not believe our purchases will exceed the minimum purchase requirements, we are seeking to negotiate waivers or modifications of the minimum purchase requirements.

Net cash used in investing activities for the year ended December 31, 2004 was $161.3 million compared to net cash used in investing activities for the year ended December 31, 2003 which was $11.8 million. The primary use of cash for investing activities was the purchase of marketable securities of $152.4 million. In addition, another use of investing cash during the second quarter of 2004, we announced an agreement with SkyePharma PLC, granting us the exclusive license to market and distribute a cardiovascular product in the United States. The agreement required us to pay $5.0 million to SkyePharma PLC upon signing the agreement and up to an additional $15.0 million is payable thereafter-all of which are contingent upon milestones related to FDA approval. The product has been submitted to the FDA for approval, and the agreement calls for approval to be completed by June 2004. We intend to begin marketing and distribution shortly after receipt of the FDA approval. We have incurred an additional $0.4 million in acquisition costs related to the SkyePharma PLC agreement. We also used $3.5 million for the purchase of property and equipment, primarily for a new sales force automation system. Our business strategy includes the acquisition or licensing of pharmaceutical products that we believe represent attractive growth opportunities for us in the future. We regularly evaluate acquisition opportunities. Subject to our liquidity and capital resources at any particular time, we may incur commitments in the future to acquire or license pharmaceutical products.

Net cash used in investing activities for the year ended December 31, 2003 was $11.8 million. Net cash used in investing activities in 2003 resulted primarily from the purchase of marketable securities of $10.0 million. In addition, we purchased $1.8 million of property and equipment in 2003.

Net cash provided by financing activities for the year ended December 31, 2004 was $114.0 million, compared to cash used by financing activities of $0.6 million for the year ended December 31, 2003. The primary provider of cash from financing activities was the proceeds from the issuance of long-term debt of $150.0 million and from the issuance of common stock, primarily from the exercise of stock options, of $11.5 million. These providers of cash were offset by $5.0 million in incurred financing costs related to the debt issuance, $19.2 million for the repurchase of common stock which was subsequently retired and $23.2 million for the acquisition of treasury stock which was acquired in part, to establish a pool of authorized shares that will be available for contribution to the Employee Stock Ownership Plan over time as the Company in its discretion deems appropriate.

Net cash used in financing activities for the year ended December 31, 2003 was $0.6 million, compared to cash provided by financing activities of $151.8 million for the year ended December 31, 2002. We repurchased $3.0 million worth of our common stock under our share repurchase program. We also incurred $0.2 million of capitalized financing costs in association with our $20.0 million revolving credit facility. These uses of cash were offset by net proceeds from the issuance of common stock of $2.7 million. These shares were issued primarily as a result of option exercises.

We believe that our cash on hand, cash we expect to generate from our operations and availability under our revolving credit facility will be sufficient to fund these working capital requirements, at least for the next twelve months. However, in the event that we make significant acquisitions, we may need to raise additional funds through additional borrowings or the issuance of debt or equity securities, or both. Our purchase of inventory impacts our liquidity. During 2005, we expect to invest cash in the purchase of inventory. Some of our supply agreements contain minimum purchase requirements. We do not expect that meeting those requirements will result in the acquisition of excessive inventory. We expect we will also experience growth in our accounts receivable as our sales increase.

In March 2004, we issued a total of $150.0 million of our 1.75% contingent convertible senior subordinated notes. The notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest in the notes, after March 8, 2007, we will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable, it will be payable at a rate equal to 0.5% per annum. The net proceeds from this issuance after deducting offering expenses were approximately $145.4 million.

The holders of the convertible notes may convert the notes into shares of our common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which is equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business on March 8, 2024. Holders may convert their convertible notes only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for redemption; (3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of that period was less than 95% of the product of the closing price of our common stock and the number of shares of our common stock issuable upon conversion of $1,000 principal amount of the notes; or (4) the occurrence of specified corporate transactions.

We have the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

On February 11, 2003, we entered into a Credit Agreement for a $20.0 million senior secured revolving credit facility with various lenders and LaSalle Bank National Association, as Administrative Agent. Subject to the satisfaction of certain borrowing base requirements, we may from time-to-time borrow monies under the revolving facility for working capital requirements and general corporate purposes. Borrowings are secured by substantially all of our assets. Borrowings bear interest at our option at the base rate in effect from time to time plus an applicable margin or the Eurodollar rate, plus an applicable margin. The applicable margin will vary dependent upon our leverage ratio in effect from time-to-time. As of February 28, 2005, we had no borrowings outstanding under this facility. The revolving facility matures on February 11, 2006. Fees payable under the revolving facility include a one-time commitment fee of 0.685% of the stated amount of the facility, an unused commitment fee based on funds committed but not borrowed under the revolving facility at rates which vary dependent upon our leverage ratio in effect from time-to-time and letter of credit fees equal to 0.25% per annum of the face amount of letters of credit issued and outstanding under the revolving facility. The revolving facility may be prepaid from time-to-time or terminated at our discretion without penalty.

The revolving loan contains various restrictive covenants, including covenants relative to maintaining financial ratios and earnings levels, limitations on acquisitions, dispositions, mergers and capital expenditures, limitations on incurring additional indebtedness and a prohibition on payment of dividends and certain issuances of our capital stock. As of December 31, 2004, we were in compliance with these financial covenants. As of March 31, 2003 and June 30, 2003, we were not in compliance with certain financial covenants of the Credit Agreement. Effective August 11, 2003, we entered into an amendment to the Credit Agreement and obtained a waiver for the covenant violations and extended the maturity date of the facility to August 11, 2006.

In July 2002, we announced a share repurchase program. This program authorized us to repurchase up to $8.0 million in common stock until July 2003. Through July 2003, the Company repurchased 823,400 shares of its common stock at an aggregate cost of approximately $2.1 million. In August 2003, the Company's Board of Directors authorized the repurchase of up to an additional $7.9 million of common stock and extended the repurchase program to August 2004. In September 2003, the Company repurchased 162,225 shares of common stock at an aggregate cost of approximately $1.0 million. Through December 2003, the Company had repurchased a total of 985,625 shares of common stock at an aggregate cost of approximately $3.1 million. During the six months ended June 2004, the Company repurchased a total of 260,000 shares of common stock at an aggregate cost of approximately $4.6 million. All of these shares were retired.

In July 2004, our Board of Directors authorized a $20.0 million share repurchase program. The new program, which authorizes the repurchase of up to $5 million of common stock per quarter, became effective in August 2004, terminating and replacing the $10.0 million share repurchase program authorized by the Company's Board of Directors in fiscal 2002. The share repurchase program will expire in August 2005.

In the third quarter of 2004, as part of the new share repurchase program, the our Board of Directors increased the per quarter repurchase cap and authorized the Company to repurchase a total of 731,580 shares of common stock, inclusive of the 500,000 shares of common stock repurchased from one of Dr. Kapoor's family partnerships, at an aggregate cost of approximately $13.4 million. These shares have been retired. In the fourth quarter of 2004, as part of the plan that became effective in August 2004, the Company repurchased 65,427 shares of common stock. These shares have been retired.

On December 10, 2004, the Company, with Board of Directors approval, purchased 1 million shares of common stock at fair market value equal to the December 10, 2004 closing price of the Company's common stock as reported by Nasdaq from certain executives and board members and a significant shareholder of the Company. The Company acquired those shares in part, to establish a pool of authorized shares that will be available for contribution to the Company's Employee Stock Ownership Plan over time as the Company in its discretion deems appropriate.

We expect that our existing sources of working capital or liquidity will be sufficient to enable us to execute our main operational goals of maximizing the sales of our existing products and acquiring companies having such products, accelerating growth by launching line extensions to our current products and acquiring or licensing approved products or late stage development products.

Operating lease obligations include $0.9 million and $1.2 million in 2005 and 2006, respectively for our corporate fleet vehicles. Also included is the annual lease payment of $0.7 million per annum through May 2009 for the home office space and $0.025 million per annum through September 2007 for the Irish office space.

Inventory purchase obligations are based on the unit contractual obligations at the unit cost as of December 31, 2004. Unit prices are subject to increase upon notification by the supplier in the event of increased costs incurred by the supplier.

Long-term debt obligations do not include interest payments of $2.6 million per year.

Contractual obligations do not include certain contingent payments related to milestones on licensing and purchasing agreements, as the conditions for payment have not been met.

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

We have experienced only moderate price increases under our agreements with third-party manufacturers as a result of raw material and labor price increases. We have generally passed these price increases along to our customers.

Although our business is generally non-seasonal, sales of certain products, such as cough and cold products, increase between October and March due to the cold and flu season. We expect the impact of seasonality to decrease as we acquire or obtain licenses for products that treat chronic conditions. However, we anticipate that the seasonality may continue to affect sales for the foreseeable future. Sales of our cough and cold products accounted for 11% of our total sales in 2004.

We view our critical accounting policies to be those policies which are very important to the portrayal of our financial condition and results of operations, and require management's most difficult, complex or subjective judgments. The circumstances that make these judgments difficult or complex relate to the need for management to make estimates about the effect of matters that are inherently uncertain. We believe our critical accounting policies are as follows:

In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." The standard is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and eliminates the exception under ABP Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS no. 153 is not expected to have a material impact on the Company's financial position or results of operations.

In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payment." The standard eliminates the disclosure-only election under FAS 123 and requires the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant. The standard is effective for periods beginning after June 15, 2005. See Note 1 for the disclosures of the pro forma dilutive impact on net income and earnings per share of expensing stock options based on the Black-Scholes model.

In November 2004, the FASB issued Statement 151, "Inventory Costs." The standard clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS no. 151 is not expected to have a material impact on the Company's financial position or results of operations.

In October 2004, the Emerging Issues Task Force (the "EITF") of the FASB reached a consensus on EITF 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share" ("EITF 04-8"), which requires all shares that are contingently issuable under the Company's outstanding convertible notes to be considered outstanding for its diluted earnings per share computations, if dilutive, using the "if converted" method of accounting from the date of issuance. These shares were only included in the diluted earnings per share computation if the Company's common stock price has reached certain conversion trigger prices. EITF 04-8 also requires the Company to retroactively restate its prior periods diluted earnings per share. EITF 04-8 is effective for periods ending after December 15, 2004. Upon adoption, EITF 04-8 had no impact on the Company's diluted earnings per share for the years ended December 31, 2002 and December 31, 2003, but it did reduce the Company's diluted earnings per share by $0.06 for the year ended December 31, 2004.

In March 2004, the EITF reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost method or the equity method. The application of this guidance should be used to determine when an investment is considered impaired, whether an impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance for evaluating whether an investment is other-than-temporarily impaired is effective for

evaluations made in reporting periods beginning after June 15, 2004. In September 2004, the FASB issued FSP 03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1, 'The Meaning of Other than Temporary Impairment'," which delayed certain provisions of EITF 03-1 until the FASB issues further implementation guidance. The application of this consensus did not have a material impact on the Company's results of operations or financial position.

During December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB No. 104"), which supersedes SAB No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). While the wording of SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by SAB No. 104. The issuance of SAB No. 104 did not impact the Company's accounting policy for revenue recognition.

During December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106" ("SFAS No. 132"). SFAS No. 132 revises disclosure requirements about pension plans and other postretirement benefit plans. SFAS No. 132 does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. In addition, the various elements of pension and other postretirement benefit costs must be disclosed on a quarterly basis. The annual disclosure provisions of SFAS No. 132 generally are effective for fiscal years ending after December 15, 2003, while the interim disclosure provisions are effective for interim periods beginning after December 15, 2003. The adoption of SFAS No. 132 did not have a material impact on the Company's financial condition or results of operations.

The Company is exposed to certain market risks that arise in the ordinary course of business. A discussion of the Company's primary market risk exposure is presented below.

Our purchases of Nitrolingual under our agreement with Pohl-Boskamp and our purchases of Sular product inventory from Bayer are made in Euros. Although we did not enter into any forward contracts in 2004, we may eliminate risks from foreign currency fluctuations after the time of shipment of product by entering into forward contracts for these purchases of inventory at the time of product shipments. While the effect of foreign currency translations has not been material to our results of operations to date, currency translations on export sales or import purchases could be adversely affected in the future by the relationship of the U.S. dollar with foreign currencies.

The fair value of our investment portfolio would be negatively affected by an increase in interest rates. Since the majority of the Company's investments are fixed rate interest-bearing securities and therefore subject to the market risk of loss in market value from an increase in rates or a change in the underlying risk of the issuers of the notes, the Company's future earnings and cash flows could be affected adversely if the Company were to sell the securities prior to their maturity date. There were

no realized gains or losses from sale of investments in the year ended December 31, 2004. At December 31, 2004, the Company had total net unrealized losses from marketable securities of $1.8 million.

In connection with borrowings incurred under the senior secured revolving credit facility arranged by LaSalle Bank, N.A., we could experience market risk with respect to changes in the general level of the interest rates and its effect upon our interest expense. Borrowings under this facility bear interest at variable rates. Because such rates are variable, an increase in interest rates will result in additional interest expense and a reduction in interest rates will result in reduced interest expense. Accordingly, our present exposure to interest rate fluctuations is primarily dependent on rate changes that may occur while borrowings under the senior secured credit facility are outstanding. As of February 28, 2005 there was no debt outstanding under this facility.

The Company's long-term fixed interest rate senior subordinated contingent convertible notes are also subject to market risk. Fixed rate debt outstanding at December 31, 2004 was $150 million with an interest rate of 1.75%. All other things being equal, the fair market value of the Company's fixed rate debt will increase as rates decline and will decrease as rates rise. The fixed rate notes outstanding totaling $150.0 million at December 31, 2004 had a fair value of $180.6 million based on quoted market rates.

The information required by this item is set forth at the pages indicated in Item 15(a) below.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We carried out an evaluation under the supervision and with the participation of management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of First Horizon's disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act as of the end of the period covered by this report. Our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures provide reasonable assurance as of the end of the period for which the report is being filed that (i) information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the Company.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Statement of management's assessment of the effectiveness of the Company's internal control over financial reporting as of the end of the Company's most recent fiscal year.

Our internal control over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data. Based on our evaluation of our internal control over financial reporting for the period for which this report is filed, our management, including our President and Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2004. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within First Horizon have been or will be detected. Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management, including our President and Chief Executive Officer and Chief Financial Officer, does not expect that our controls and procedures will prevent all errors.

Statement identifying the framework used by management to evaluate the effectiveness of the Company's internal control over financial reporting.

In order to ensure that our internal control over financial reporting is effective, management is responsible for regularly assessing such controls and did so most recently for its financial reporting as of December 31, 2004. We are committed to a continuing process of identifying, evaluating and implementing improvements to the effectiveness of our disclosure and internal controls and procedures. Our management based its assessment of the effectiveness of our internal control over financial reporting on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control—Integrate Framework. The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our businesses.

Statement that the registered public accounting firm that audited the Company's financial statements included in the annual report has issued an attestation report on management's assessment of the Company's internal control over financial reporting.

Our Board of Directors, acting through its Audit Committee, is responsible for the oversight of our accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.

Our management has issued a report of its assessment of internal control over financial reporting which is included herein. Deloitte and Touche LLP, our independent registered public accounting firm, audited management's assessment of the effectiveness of internal control over financial reporting and, based on that audit, issued their report which is included below.

Our management has not identified any changes in our internal controls over financial reporting during our fourth fiscal quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

To the Board of Directors and Stockholders of
First Horizon Pharmaceutical Corporation
Atlanta, Georgia

We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting included at Item 9A, that First Horizon Pharmaceutical Corporation and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and the financial statement schedule as of and for the year ended December 31, 2004 of the Company and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

This information is incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the headings "Proposal 1—Election of Class B Directors," and "Proposal 1—Directors and Executive Officers" in our Proxy Statement for our 2005 Annual Meeting of Stockholders or in a subsequent amendment to this Report. Information regarding compliance by our directors and executive officers and owners of more than 10% of First Horizon's common stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, will be set forth in and incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" or in a subsequent amendment to this Report.

This information is incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the heading "Executive Compensation" or in a subsequent amendment to this Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

This information is incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the heading "Security Ownership of Certain Beneficial Owners and Management" or in a subsequent amendment to this Report. See also Part II, Item 5 "Market for Registrant's Common Equity and Related Stockholder Matter-Equity Compensation Plan Information" of this Report.

This information is incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the heading "Certain Relationships and Related Transactions" or in a subsequent amendment to this Report.

This information is incorporated by reference from our Proxy Statement for the 2005 Annual Meeting of Stockholders under the heading "Independent Accountant Matters" or in a subsequent amendment to this Report.

Exhibit Number		Description
3.1(1)	—	Restated Certificate of Incorporation of the Registrant, as amended
3.2(2)	—	Amended and Restated Bylaws of the Registrant
3.3(16)	—	Amendment to the Amended and Restated Bylaws of the Registrant
4.1(3)	—	Form of Stock Certificate
4.2(6)	—	Shareholder Protection Rights Agreement
4.3(17)	—	Indenture with Deutsche Bank Trust Company Americas dated as of March 8, 2004
10.1(5)	—	1997 Non-Qualified Stock Option Plan
10.2(3)	—	2000 Stock Plan
10.3(7)	—	Amended and Restated 2002 Stock Plan
10.4(3)	—	Form of Nonqualified Stock Option Agreement
10.5(1)	—	Form of Employment Agreement between the Registrant and its Executive Officers
10.6(8)	—	Lease Agreement dated December 31, 2001 between the Registrant and Castle Investment Company, Inc.
10.7(4)	—	Manufacturing and Supply Agreement dated April 23, 1999 between the Registrant and Mikart, Inc.
10.8(4)	—	License Agreement dated January 29, 1999 between the Registrant and American Home Products Corporation
10.9(4)	—	Distribution Agreement dated July 22, 1999 between the Registrant and G. Pohl-Boskamp GmbH & Co.
10.10*	—	Amendment to Distribution Agreement dated October 29, 2004 between the Registrant and G. Pohl-Boskamp GmbH & Co.
10.11(3)	—	Form of Indemnity Agreement between the Registrant and its Directors and Executive Officers
10.12(4)	—	Supply Agreement dated April 14, 2000 between the Registrant and Warner-Lambert Company
10.13(9)	—	Supply Agreement dated May 3, 2001 between Sanofi-Synthelabo, Inc. and Banner Pharmacaps Inc.
10.14(9)	—	Manufacturing and Supply Agreement dated October 1, 1999 between Sanofi-Synthelabo, Inc. and Patheon, Inc.
10.15(10)	—	Manufacturing and Supply Agreement dated January 21, 2001 between the Registrant and Mikart, Inc.
10.16(11)	—	Supply Agreement dated December 21, 2002 between the Registrant and Dura Pharmaceuticals, Inc.
10.17(12)	—	Asset Purchase Agreement dated February 12, 2002 between the Registrant and AstraZeneca UK Limited
10.18(12)	—	Distributorship Agreement dated December 12, 2001 between the Registrant and Bayer AG
10.19(8)	—	Trademark Purchase and Assignment Agreement dated December 13, 2001 by and between the Registrant and Bayer Aktiengellschaft
10.20(8)	—	First Amendment to Asset Purchase Agreement dated January 17, 2002 between the Registrant and Sanofi-Synthelabo Inc.
10.21(13)	—	Exclusive License Agreement dated June 27, 2002 between the Registrant and Jame Fine Chemicals Inc.
10.22(1)	—	Nonexclusive Sublicense Agreement dated June 27, 2002 between the Registrant and Jame Fine Chemicals Inc.
10.23(13)	—	Exclusive Distribution Agreement dated June 27, 2002 between the Registrant and Unisource, Inc.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated:

Signature	Title	Date

/s/ PATRICK P. FOURTEAU Patrick P. Fourteau	Director, Chief Executive Officer and President (principal executive officer)	March 11, 2005
/s/ DARRELL BORNE Darrell Borne	Chief Financial Officer, Treasurer and Secretary (principal financial and accounting officer)	March 11, 2005
/s/ JOHN N. KAPOOR, PH.D. John N. Kapoor, Ph.D.	Chairman of the Board	March 11, 2005
/s/ JON S. SAXE Jon S. Saxe	Director	March 11, 2005
/s/ PIERRE LAPALME Pierre Lapalme	Director	March 11, 2005
/s/ JERRY N. ELLIS Jerry N. Ellis	Director	March 11, 2005
/s/ PATRICK J. ZENNER Patrick J. Zenner	Director	March 11, 2005

To the Board of Directors and Stockholders of
First Horizon Pharmaceutical Corporation
Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of First Horizon Pharmaceutical Corporation (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2003 and 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARES DATA)

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

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

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

FIRST HORIZON PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

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

FIRST HORIZON PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Description of Business. First Horizon Pharmaceutical Corporation (the "Company"), a Delaware corporation, is a specialty pharmaceutical company that markets and sells brand name prescription products to primary care and select specialty physicians in the U.S. through their nationwide sales and marketing force. In addition, limited sales to European customers are made through local distributors in the region. The Company focuses on the treatment of cardiovascular, obstetrical and gynecological, pediatric and gastroenterological conditions and disorders. The Company's strategy is to acquire or license pharmaceutical products that other companies do not actively market, or that the Company believes have high sales growth potential, are promotion-sensitive and complement the Company's existing products. In addition, the Company seeks to maximize the value of their drugs by developing new patentable formulations, using new delivery methods and seeking regulatory approval for new indications of existing drugs.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Revenue Recognition. Revenue is recognized when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable, and are shown net of sales adjustments for discounts, rebates to customers, returns and other adjustments, which are provided in the same period that the related sales are recorded.

Revenue Deductions. Rebate costs, which are recorded as a reduction of sales, include estimated amounts for volume rebate programs, contractual price reductions with wholesalers and insurance providers, and certain other sales related deductions. Provision for these estimated costs are recorded at the time of sale and are periodically adjusted to reflect actual experiences.

Product Returns. The Company's customers generally may return product from six months prior to the expiration date of the product until twelve months after expiration. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists," a provision for these estimated returns is recorded at the time of sale based on historical returns of the product, product specific information provided by customers and information obtained from independent sources regarding the levels of inventory being held by customers, as well as overall purchasing patterns by customers. The provision is periodically adjusted to reflect actual experience. These costs are recorded as a reduction of sales.

In connection with the acquisition of product rights, the Company also assumes certain liabilities for returns of product shipped by the seller prior to the acquisition date. At the acquisition date, the Company estimates the amount of assumed liabilities based on actual sales return data from the seller. This amount is included in the purchase price allocation. The Company periodically reviews this estimated liability.

In connection with line extensions of current products, the Company accrues for returns at the historical rate of returns of the previous product line as the line extensions provide the same effective relief and treat the same conditions and patient populations as the original version.

Cost of Revenues. Cost of revenues is comprised of purchased product costs and freight out. Costs related to freight-out totaled $0.3 million, $0.3 million and $0.5 million for the years ended December 31, 2002, 2003 and 2004, respectively. The Company does not bill customers for freight costs.

Royalties. The Company pays royalties on the sale of certain products. These costs are included in selling, general and administrative expenses in the accompanying statements of operations. Total royalties were $3.8 million, $3.6 million, and $5.4 million for the years ending December 31, 2002, 2003 and 2004, respectively.

Research and Development. Research and development expenses consist primarily of costs incurred to develop formulations, engage contract research organizations to conduct clinical studies, test products under development and engage medical and regulatory consultants. The Company expenses all research and development costs as incurred. Research and development costs were $1.1 million, $2.1 million and $1.5 million for the years ended December 31, 2002, 2003 and 2004, respectively.

Cash and Cash Equivalents. The Company considers only those investments that are highly liquid, and readily convertible to cash with an original maturity of three months or less to be cash equivalents.

Financial Instruments. 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 stockholders equity as a component of accumulated other comprehensive income (loss). 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 securities for speculative or trading purposes.

The Company's $150.0 million senior subordinated contingent convertible debt had a fair value of $180.6 million at December 31, 2004 based on quoted market rates.

The Company's carrying value of other financial instruments approximates fair value due to the short maturity of those instruments.

Concentration of Credit Risk. The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the U.S. The Company is required to estimate the level of accounts receivable which ultimately will not be paid. The Company calculates this estimate based on prior experience supplemented by a periodic customer specific review when needed. Historically, the Company has not experienced significant credit losses on its accounts. The Company's three largest customers accounted for approximately 65% and 69% of accounts receivable at December 31, 2003 and 2004, respectively.

The mix of sales of the Company's products changes as products are added. On a combined basis, products with sales greater than 10% of the Company's sales comprised approximately 85%, 86%, and 75% of total sales for the years ended December 31, 2002, 2003 and 2004, respectively.

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

Customer	2002		2003		2004
McKesson Corporation	23	%	29	%	31	%
Cardinal Health, Inc.	23		22		25
AmerisourceBergen Corporation	31		18		22

The Company's international sales represent less than 1% of sales for the periods presented.

Segment Reporting. The Company is engaged solely in the business of marketing and selling prescription pharmaceutical products. Accordingly, the Company's business is classified in a single reportable segment, the sale and marketing of prescription products. Prescription products include a variety of branded pharmaceuticals for the treatment of cardiovascular, obstetrical and gynecological, pediatric and gastroenterological conditions and disorders.

The following presents revenues for prescription products by area of treatment for the years ended December 31, 2002, 2003, and 2004, respectively (in thousands):

	2002		2003		2004
Cardiovascular	$	44,636	$	43,627	$	75,252
Women's Health		54,916		44,736		60,947
Non Promoted		15,626		6,942		15,768

Net Revenues	$	115,178	$	95,305	$	151,967

Inventories. Inventories consist of purchased pharmaceutical products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method, and market is considered to be net realizable value. Inventories consist of finished product and bulk product awaiting processing and packaging into finished product. Inventories, net of reserves of $2.4 million and $0.9 million at December 31, 2003 and 2004, respectively, at December 31, 2003 and 2004 consisted of (in thousands):

Samples. Samples primarily consist of product samples used in the sales and marketing efforts of the Company's products and are included in other current assets in the Company's consolidated balance sheet. Samples are expensed upon distribution as a selling expense. Sample inventories, net of revenues of $0.2 million and $0.5 million at December 31, 2003 and 2004, respectively, at December 31, 2003 and 2004 were $0.8 million and $1.9 million, respectively.

Property and Equipment. Property and equipment are recorded at cost, less accumulated depreciation. Major improvements, which extend the lives of existing property and equipment, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Upon

retirement or disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations.

Depreciation is provided for on the straight-line basis over the estimated useful lives of the assets as follows:

Office equipment, furniture and fixtures		5 to 10 years
Computer hardware and software		3 to 5 years
Leasehold improvements		useful life of asset or term of lease

The components of property and equipment at December 31, 2003 and 2004 are as follows (in thousands):

	2003			2004
Office equipment, furniture and fixtures	$	530		$	607
Computer hardware and software		2,783			5,551
Leasehold improvements		679			715

		3,992			6,873
Less accumulated depreciation		(1,162	)		(1,763	)

Property and equipment, net	$	2,830		$	5,110

Depreciation expense related to property and equipment for the years ended December 31, 2002, 2003 and 2004 was $0.3 million, $0.6 million and $1.2 million, respectively.

In the event that facts and circumstances indicate that the carrying amounts of property and equipment may be impaired, an 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, pursuant to the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and its related interpretations. Any impairment loss is measured as the difference between the carrying amount and the fair value of the impaired asset. The Company believes there are no impaired assets as of December 31, 2004.

Intangible Assets. Intangible assets, which include license rights, tradenames, managed care contracts and distribution, manufacturing and supply agreements, are stated at cost, net of accumulated amortization. These costs are capitalized and amortized on a straight-line basis over the estimated periods benefited by the asset (1 to 20 years). Amortization of such assets, excluding distribution, manufacturing and supply agreements, is included in depreciation and amortization expense in the accompanying statements of operations. Amortization expense for the years ended December 31, 2002, 2003 and 2004 totaled $14.1 million, $15.9 million and $15.7 million, respectively. These distribution, manufacturing and supply agreements are discussed in more detail in Notes 9 and 11.

In accordance with SFAS No. 144, the Company continually reevaluates the propriety of the carrying amount of the definite lived intangibles as well as the related amortization period to determine whether current events and circumstances warrant adjustments to the carrying values and/or estimates of useful lives. This evaluation is performed using the estimated projected 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 projections indicate that the undiscounted cash flows are not expected to

be adequate to recover the carrying amounts, the assets are written down to fair value as determined by discounting future cash flows.

In the second quarter of 2003, the Company formulated a new sales and marketing strategy upon the Company hiring Mr. Patrick Fourteau as its then President and Chief Operating Officer. This new strategy resulted in the discontinuation of the pursuit of a line extension for Cognex as well as the subsequent plans to promote the product. As part of this new strategy, using market research, the Company updated its forecasts of Cognex sales projections to reflect a life cycle through June 2013, the period of time that the Company expects it will continue to sell the product in the future. As a result, the estimated useful life of Cognex was decreased from a remaining life of 17 years to 10 years, and using the estimated future undiscounted cash flows over the useful life of the product, the intangible asset related to Cognex was not projected to be recoverable.

The Company believes there are no other intangible asset impairments and there were no other asset write-downs as of December 31, 2004.

Income Taxes. Income taxes are provided for under the liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the consolidated financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or if future deductibility is uncertain.

Developing the provision for income taxes requires significant judgment and expertise in federal, state, and international income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our income tax liabilities in our consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on our consolidated financial condition and results of operations.

Advertising Costs. The Company charges the costs of advertising to expense as incurred. Advertising expenses were $5.2 million, $7.3 million and $5.1 million for the years ended December 31, 2002, 2003 and 2004, respectively.

Foreign Currency Exposure. Certain of the Company's product purchases and sales are denominated in foreign currencies. Gains or losses on foreign currency transactions are included in income as incurred. The Company at its discretion enters into short term forward foreign exchange contracts in relation to certain purchases of two of its products. Historically, these forward contracts are not designated as hedging instruments and as such, any change in fair value while open is recognized currently in income. This gain or loss offsets the transaction gain or loss on the underlying foreign

denominated payables. Foreign denominated payables, receivables and open exchange contracts as of December 31, 2003 and 2004 were insignificant.

Stock Options. At December 31, 2004, the Company had four stock-based employee compensation plans, which are described more fully in Note 7. The Company applies Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for all stock options issued to employees. Accordingly, the Company records compensation expense for any stock option grants with exercise prices lower than fair value, recognized ratably over the vesting period. The Company has recognized compensation expense related to stock option grants of $0.4 million, $0.2 million and $0 for the years ended December 31, 2002, 2003 and 2004, respectively.

Had compensation costs for the Company's options been determined using the Black Scholes option-pricing models prescribed by SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro forma net income (loss) per common share would have been reported as follows (in thousands, except per share amounts):

		2002			2003			2004
Net income (loss):
As reported		$	6,166		$	(1,738	)	$	26,554
Add: Stock based compensation expense recorded			350			207			—
Deduct: Total stock-based employee compensation expense determined under fair value based for all awards, net of related tax effects			(2,932	)		(1,784	)		(2,054	)
Pro forma		$	3,584		$	(3,315	)	$	24,500
Net income (loss) per common share — basic:
	As reported	$	0.19		$	(0.05	)	$	0.74
	Pro forma	$	0.11		$	(0.09	)	$	0.69
Net income (loss) per common share — diluted:
	As reported	$	0.18		$	(0.05	)	$	0.66
	Pro forma	$	0.11		$	(0.09	)	$	0.61

The weighted average fair value of options granted during 2002, 2003 and 2004 is estimated at $16.82, $5.37 and $15.70 per share, respectively. The value of options is estimated on the date of the grant using the following weighted average assumptions:

	2002		2003		2004
Risk-free interest rate	4.36	%	2.96	%	3.40	%
Expected dividend yield	—		—		—
Expected lives	4 years		5 years		5 years
Expected volatility	105.9	%	134.2	%	125.06	%

Earnings Per Share. As required by SFAS No. 128, "Earnings Per Share," the Company has presented basic and diluted earnings per common share amounts in the accompanying financial statements. Basic earnings per common share are calculated based on the weighted average common shares outstanding during the year. Diluted earnings per common share are calculated similarly to basic

earnings per common share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and contingent convertible notes that are dilutive were exercised or converted and that the proceeds from such exercises, if any, were used to acquire shares of common stock at the average market price during the period.

Below is the calculation of basic and diluted net income per common share (in thousands, except per share data):

The number of outstanding options (in thousands), which are excluded from the above calculation as their impact would be anti-dilutive, are 1.7 million; 3.8 million and 0.7 million for the years ended December 31, 2002, 2003 and 2004, respectively.

Foreign Currency Translation. Assets and liabilities for non-U.S. subsidiaries are translated from local currencies to U.S. dollars using exchange rates at the end of the period. Results of operations for non-U.S. subsidiaries are translated using average exchange rates for the period. Adjustments resulting from the translation process are reported in a separate component of stockholders' equity and are not included in the determination of the results of operations.

Supplemental Cash Flow Disclosures. Supplemental cash flow information for the years ended December 31, 2002, 2003 and 2004 was as follows (in thousands):

		2002			2003			2004
Cash paid for taxes		$	1,482		$	4,856		$	5,682
Cash paid for interest		$	1,098		$	114		$	1,362

have commercial substance. The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS no. 153 is not expected to have a material impact on the Company's financial position or results of operations.

During December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106" ("SFAS No. 132"). SFAS No. 132 revises disclosure requirements about pension plans and other postretirement benefit plans. SFAS No. 132 does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,"Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. In addition, the various elements of pension and other postretirement benefit costs must be disclosed on a quarterly basis. The annual disclosure provisions of SFAS No. 132 generally are effective for fiscal years ending after December 15, 2003, while the interim disclosure provisions are effective for interim periods beginning after December 15, 2003. The adoption of SFAS No. 132 did not have a material impact on the Company's financial condition or results of operations.

At December 31, 2001, the Company had an existing revolving loan agreement. There were no borrowings under this revolving loan agreement at December 31, 2001. The availability under the agreement was $2.5 million and was subject to a 0.25% fee on the unused portion. In March 2002, this revolving loan agreement was terminated as a condition of and in connection with the Company entering into a new credit facility arranged by Deutsche Bank Alex. Brown.

In March 2002, the Company entered into a six-month $152 million senior secured credit facility with a syndicate of banks arranged through Deutsche Bank Alex. Brown. The facility consisted of a $127 million term loan and a $25 million revolving loan. For the Sular acquisition, as discussed in Note 9, the Company borrowed $127 million of the term loan and $10 million of the revolving loan. Borrowings under the term loan accrued interest at the Company's option of the base rate in effect from time to time plus an applicable margin or the Eurodollar rate, plus an applicable margin and matured six months from the closing date of the Sular transaction. As a condition of this facility, the Company's existing revolving loan agreement was terminated. In April 2002, both the term loan and the revolving loan were repaid in full with the proceeds from the Company's follow-on offering, as discussed in Note 6. In July, 2002, the Company terminated the credit facility. For the year ended December 31, 2002, total interest paid under this credit facility was $1.1 million.

On February 11, 2003, the Company entered into a Credit Agreement for a $20.0 million senior secured revolving credit facility with various lenders and LaSalle Bank National Association, as

Administrative Agent. The Credit Agreement was amended effective August 11, 2003. Borrowings may be used for working capital requirements and general corporate purposes. Borrowings are secured by substantially all of the Company's assets. Borrowings bear interest at the Company's option at the base rate in effect from time to time plus an applicable margin or the Eurodollar rate, plus an applicable margin. The applicable margin will vary dependent upon the Company's leverage ratio in effect from time to time. The revolving facility matures on August 11, 2006. The revolving loan contains various covenants, including covenants relative to maintaining financial ratios and earnings levels, limitations on acquisitions, dispositions, mergers and capital expenditures, limitations on incurring additional indebtedness and a prohibition on payment of dividends and certain issuances of our capital stock. As of December 31, 2003, the Company was in compliance with all financial covenants of the Credit Agreement, as amended. As of December 31, 2003, there was no outstanding balance on the Credit Agreement. For the year ended December 31, 2004, there were no borrowings or repayments under the Credit Agreement.

The Company classifies its existing marketable securities as available-for-sale. All available-for-sale securities are classified as current as the Company has the ability to use them for current operating and investing purposes. There were no realized gains or losses in the year ended December 31, 2004. At December 31, 2004, the Company had total net unrealized losses from marketable securities of $1.8 million.

The carrying amount of available-for-sale securities and their approximate fair values at December 31, 2004 were as follows (in thousands):

The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2004 (in thousands):

The Company has determined that its unrealized losses are temporary based on the minor amount of the losses compared to amortized cost (1.1%) and the short duration of the losses (less than 9 months), as well as the credit worthiness of the investee. The Company expects that all losses will be

recovered, and intends to hold securities to recovery. If market, industry and/or investee conditions deteriorate. We may incur future impairments.

The amortized cost and estimated fair value of marketable securities at December 31, 2004 by contractual maturity are shown below (in thousands):

	Cost		Estimated Fair Value
Due in one year or less	$	38,479	$	38,271
Due after one year through three years		110,194		108,808
Due after three years through five years		13,244		13,069
Due after five years		490		488

	$	162,407	$	160,636

The carrying amount of available-for-sale securities and their approximate fair values at December 31, 2003 were as follows (in thousands):

In March 2004, the Company issued a total of $150.0 million of its 1.75% senior subordinated contingent convertible notes due in 2024 in transactions that were exempt from registration in reliance upon Rule 144A and other available exemptions under the Securities Act. The notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004. In addition to the interest on the notes, after March 8, 2007, the Company will also pay contingent interest during specified six-month periods if the average trading price of the notes per $1,000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable, it will be payable at a rate equal to 0.5% per annum. As this contingent interest feature is based on the underlying trading price of the notes, the contingent interest meets the criteria of and qualifies as an embedded derivative as provided by FAS 133, Accounting for Derivative Instruments and Hedging Activities. As of December 31, 2004, management determined that the fair value of this contingent interest embedded derivative is not material. The net proceeds from this issuance, after deducting offering expenses, were approximately $145.4 million. Financing costs of $4.6 million were incurred with the issuance which are being amortized on a straight line basis over the life of the notes and are included in other assets in the consolidated balance sheet.

Holders of the notes may initially convert the notes into shares of the Company's common stock at a conversion rate of 45.1467 shares per $1,000 principal amount of the notes, which is equivalent to a conversion price of $22.15 per share, subject to anti-dilution adjustments, before the close of business

on March 8, 2024. Holders may convert the notes only under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004, if the closing sales price of the Company's common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) if the notes have been called for redemption; (3) during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the notes per $1,000 principal amount for each day of that period was less than 95% of the product of the closing price of the Company's common stock and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or (4) the occurrence of specified corporate transactions.

The Company has the option to redeem the notes beginning March 13, 2007 at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

The holders of the notes have the option to require the Company to repurchase the notes on March 8 of 2009, 2014 and 2019, and upon a change in control, at a price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest, including contingent interest, if any.

In connection with the issuance of the notes, on March 30, 2004 the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to register for resale of 6.8 million shares of the Company's common stock issuable, subject to anti-dilution adjustments, upon conversion of the notes. The registration statement became effective during the second quarter of 2004.

The Company had no debt outstanding at December 31, 2003 and no debt other than the aforementioned notes outstanding at December 31, 2004.

	2003		2004
Employee compensation and benefits	$	1,830	$	1,951
Product returns		3,813		1,563
Product rebates		3,173		2,031
Sales deductions		1,114		2,549
Accrued royalties		546		1,202
Product license fee		—		5,000
Other		2,734		6,212

	$	13,210	$	20,508

In April 2002, the Company completed a follow-on offering of 7,475,000 shares of common stock at a price of $21.75 per share. The Company received net proceeds of $152.6 million after the exercise of the over allotment option and after deducting offering expenses. Proceeds from the offering were used to repay debt incurred under the Company's credit facility and the balance of the proceeds were used for other general corporate purposes.

In May 2002, the Company and shareholders amended the Certificate of Incorporation to increase the number of authorized shares of common stock to 100,000,000.

In July 2002, the Company announced the adoption of a shareholder rights plan. The terms of the plan provide for a dividend of one right to purchase a fraction of a share of a newly created class of preferred stock for each share of common stock outstanding as of the close of business on July 26, 2002, payable on August 9, 2002. The rights expire on July 26, 2012 and may only be exercised if certain conditions are met. Under the Company's Restated Certificate of Incorporation the Board of Directors has the authority, without further action by the stockholders, to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company, which could have a depressive effect on the market price of the common stock. The Company has no present plan to issue any shares of preferred stock. As of December 31, 2003 and December 31, 2004 there were no shares of preferred stock outstanding.

The Company issued 19,542, 35,031 and 10,921 shares of common stock under its employee stock purchase plan during 2002, 2003 and 2004, respectively.

In July 2002, the Company announced a share repurchase program. This program authorized the repurchase of up to $8 million in common stock until July 2003. Through July 2003, the Company repurchased 823,400 shares of its common stock at an aggregate cost of approximately $2.1 million. In August 2003, the Company's Board of Directors authorized the repurchase of up to an additional $7.9 million of common stock and extended the repurchase program to August 2004. In September 2003, the Company repurchased 162,225 shares of common stock at an aggregate cost of approximately $1.0 million. Through December 2003, the Company had repurchased a total of 985,625 shares of common stock at an aggregate cost of approximately $3.1 million. During the six months ended June 2004, the Company repurchased a total of 260,000 shares of common stock at an aggregate cost of approximately $4.6 million. All of these shares were retired.

In July 2004, the Company's Board of Directors authorized a $20.0 million share repurchase program. The new program, which authorizes the repurchase of up to $5 million of common stock per quarter, became effective in August 2004, terminating and replacing the $10.0 million share repurchase program authorized by the Company's Board of Directors in fiscal 2002. The share repurchase program will expire in August 2005.

In the third quarter of 2004, as part of the new share repurchase program, the Company's Board of Directors increased the per quarter repurchase cap and authorized the Company to repurchase a total of 731,580 shares of common stock, inclusive of the 500,000 shares of common stock repurchased from one of Dr. Kapoor's family partnerships, at an aggregate cost of approximately $13.4 million. These shares have been retired. In the fourth quarter of 2004, as part of the plan that became effective in August 2004, the Company repurchased 65,427 shares of common stock at an aggregate cost of approximately $1.3 million. These shares have been retired.

In December 2004, the Company, with Board of Directors approval, purchased 1 million shares of common stock at an aggregate cost of approximately $23.2 million which was at a fair market value equal to the December 10, 2004 closing price of the Company's common stock as reported by Nasdaq

from certain executives and board members and a significant shareholder of the Company. The Company acquired those shares in part, to establish a pool of authorized shares that will be available for contribution to the Company's Employee Stock Ownership Plan over time as the Company in its discretion deems appropriate.

Pursuant to the Company's 1997 Non-Qualified Stock Option Plan (the "1997 Plan"), the Board of Directors approved the issuance of options to purchase shares of common stock of the Company to various employees. Under the plan, 6,000,000 shares of common stock were reserved for issuance. Vesting periods range from immediate to four years, and options granted generally expire seven years from the date of grant. All options also include accelerated vesting provisions in the event of a change in control, as defined in the plan. In 2000, the Company terminated the 1997 Plan and no additional grants of stock options will be made under the 1997 Plan. At December 31, 2004, 25,500 options remained issued and outstanding under the 1997 Plan.

On February 14, 2000, the Board of Directors and stockholders approved the 2000 Stock Plan (the "2000 Plan"). This plan provides for the granting of incentive stock options, nonqualified stock options, stock awards or stock bonuses, and sales of stock. The 2000 Plan provides for the grants of these options and other awards to officers, directors, full- and part-time employees, advisors and consultants. Only employees may receive incentive stock options. The Company has reserved 3,000,000 shares of common stock for issuance under the 2000 Plan. The Company's compensation committee administers the 2000. Plan and has the sole authority to determine the meaning and application of the terms of the plan and all grant agreements, the persons to whom option or stock grants are made, the nature and amount of option or stock grants, the price to be paid upon exercise of each option, the period within which options may be exercised, the restrictions on stock awards, and the other terms and conditions of awards. All options granted under the 2000 Plan include accelerated vesting provisions in the event of a change in control, as defined in the plan. The 2000 Plan will terminate in February 2010. In May 2002, the 2000 plan was terminated and no additional options will be granted or awarded under this plan. At December 31, 2004, 354,423 options remained issued and outstanding under the 2000 plan.

On May 24, 2002, the Board of Directors and stockholders approved the 2002 Stock Plan (the "2002 Plan"). This plan provides for the granting of incentive stock options, nonqualified stock options, stock awards or stock bonuses, and sales of stock. The 2002 Plan provides for the grants of these options and other awards to officers, directors, full and part-time employees, advisors and consultants. Only full-time employees may receive incentive stock options. The aggregate number of shares available under the 2002 plan shall be seven percent of the outstanding shares of common stock on the last day of the preceding fiscal year less any options already granted under the 2002 plan up to a maximum of 3,000,000 shares. The Company's compensation committee administers the 2002 Plan and has the sole authority to determine the meaning and application of the terms of the plan and all grant agreements, the persons to whom option or stock grants are made, the nature and amount of option or stock grants, the price to be paid upon exercise of each option, the period within which options may be exercised, the restrictions on stock awards, and the other terms and conditions of awards. All options granted under the 2002 Plan include accelerated vesting provisions in the event of a change in control, as defined in the plan. On May 7, 2004, the Board of Directors and stockholders approved the amendment and restatement of the 2002 Plan to reserve an additional 1.5 million shares of common stock for issuance under the Plan. The 2002 Plan will terminate in May 2012. At December 31, 2004,

1,568,242 options were issued and outstanding under the 2002 plan. For fiscal year 2005, there are 1,196,495 options available for issue under the 2002 plan.

On June 12, 2003, the Board of Directors approved the 2003 Nonqualified Stock Option Plan (the "2003 Plan"). This plan provides for the granting of nonqualified stock options and stock awards or stock bonuses. The 2003 Plan provides for the grants of these options and other awards to full and part-time non-executive employees. The aggregate number of shares available under the 2003 plan shall be 1,200,000 shares. The Company's compensation committee administers the 2003 Plan and has the sole authority to determine the meaning and application of the terms of the plan and all grant agreements, the persons to whom option or stock grants are made, the nature and amount of option or stock grants, the price to be paid upon exercise of each option, the period within which options may be exercised, the restrictions on stock awards, and the other terms and conditions of awards. All options granted under the 2003 Plan include accelerated vesting provisions in the event of a change in control, as defined in the plan. The 2003 Plan will terminate in June 2013. At December 31, 2004, 870,541 options were issued and outstanding under the 2003 plan. For fiscal year 2005, there are 166,968 options available for issue under the 2003 plan.

The Company has granted stock options to officers, directors, and employees as follows:

The following table sets forth the range of exercise prices, number of shares, weighted average exercise price, and remaining contractual lives by similar price and grant date at December 31, 2004.

Upon the exercise of outstanding options, the Company became entitled to a tax effected benefit of $0.9 million, $1.7 million and $7.4 million in fiscal 2002, 2003 and 2004, respectively, which represents the tax benefit to the Company for tax deductions for options exercised in each year. The impact of the benefit has been credited to additional paid-in capital.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for all stock options issued to employees. Accordingly, the Company records compensation expense for any stock option grants with exercise prices lower than fair value, recognized ratably over the vesting period. The Company has recognized compensation expense related to stock option grants of $0.4 million, $0.2 million and $0 in the years ended December 31, 2002, 2003 and 2004, respectively.

All options granted in the years ended December 31, 2002, 2003 and 2004 have been granted at exercise prices equal to fair market value at the date of grant.

The Company adopted an employee stock purchase plan on February 14, 2000 that is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. The Company has reserved 750,000 shares of common stock for the stock purchase plan. In order to participate in the stock purchase plan, employees must meet eligibility requirements, including length of employment. Participating employees will be able to direct the Company to make payroll deductions of up to 7.0% of their compensation during an offering period for the purchase of shares of the Company's common stock. Each offering period is six months. The stock purchase plan provides participating employees with the right, subject to specific limitations, to purchase the Company's common stock at a price equal to 85.0% of the lesser of the fair market value of the Company's common stock on the first or last day of the offering period. The Board of Directors has the authority to amend, suspend or discontinue the stock purchase plan as long as the change will not adversely affect participants without their consent and as long as the Company receives the stockholder approval required by law. The stock purchase plan will terminate on December 31, 2010.

The income tax (provision) benefit for the years ended December 31, 2002, 2003 and 2004, respectively, consisted of the following (in thousands):

	2002			2003			2004
Current	$	(6,814	)	$	3,127		$	(7,397	)
Deferred		2,873			(2,084	)		(5,018	)

	$	(3,941	)	$	1,043		$	(12,415	)

A reconciliation of the statutory rate to the effective rate as recognized in the statements of operations is as follows:

	2002		2003		2004
Federal statutory rate	34.0	%	34.5	%	35.0	%
State income tax, net of federal benefit	2.3		3.3		2.7
International income tax	—		—		(5.7	)
Non-deductible expenses and other	2.6		(0.3	)	(0.1	)

	38.9	%	37.5	%	31.9	%

Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2003 and 2004 are as follows (in thousands):

	2003		2004
Deferred tax assets:
Accrued returns	$	1,350	$	610
Accrued liabilities and reserves		1,492		1,299
Net operating loss carryforward		—		887
Charitable contributions carryforward		2,464		3,191
Other assets		673		1,163

	$	5,979	$	7,150

Deferred tax liabilities:
Intangibles	$	1,577	$	2,600
Interest accrual		—		3,511
Other liabilities		150		970

	$	1,727	$	7,081

Valuation allowance		914		1,054

Net deferred tax assets (liabilities)	$	3,338	$	(985	)

At December 31, 2004, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $0.9 million, tax effected, expiring at various dates through 2024. At December 31, 2004, the company had charitable contribution carryforwards of $3.2 million, tax effected, expiring at various dates through 2009.

For any deferred tax assets where the Company determines that it is more likely than not that a deferred tax asset would not be recovered, the Company records a valuation allowance. The valuation allowance for deferred tax assets increased by $0.1 million in 2004 primarily due to the creation of net operating losses. Before the provision for income taxes, domestic income was $32.5 million and foreign income was $6.5 million for the year ended December 31, 2004.

At December 31, 2004, the Company had an aggregate of $6.5 million of unremitted earnings of foreign subsidiaries that have been or are intended to be permanently reinvested for continued use in foreign operations and that, if distributed, would result in taxes at approximately that U.S. statutory rate.

On January 29, 1999, the Company acquired exclusive rights in the U.S. to Robinul and Robinul Forte tablets from American Home Products Corporation ("AHP") for $4.0 million in cash with an additional $1.8 million financed by the seller. Pursuant to the acquisition, the Company also assumed liabilities of $0.2 million for returns of products shipped by the seller prior to the acquisition date. The Company has recorded the total purchase price for this acquisition including the liabilities assumed to the licensing rights within intangible assets in its financial statements. The licensing rights are being amortized over an estimated economic life of 20 years. The Company agreed to pay royalties on net sales as long as the Company sells the product.

In December 2002, the Company reviewed the estimated assumed liability for sales returns for the Robinul and Robinul Forte products. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Robinul and Robinul Forte were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.1 million in December 2002.

On April 14, 2000, the Company acquired exclusive rights from Warner-Lambert Company, a subsidiary of Pfizer, to distribute, market, and sell the drug Ponstel in the U.S. for $9.5 million in cash and a $3.5 million promissory note to the seller. The Company also assumed liabilities of $1.1 million for certain returns of products shipped by the seller prior to the acquisition date, and returned after October 20, 2000. The Company financed $9.5 million of the transaction under a bridge loan agreement. Both the bridge loan and promissory note were paid in full in June 2000 upon the receipt of proceeds from the Company's initial public offering. The acquisition agreement includes the purchase of the license rights and certain trademarks. The value allocated to tradename and license rights is being amortized over their estimated useful lives of 20 years. In addition, the Company agreed to purchase the entire outstanding inventory of Ponstel for approximately $0.1 million.

On June 22, 2000, the Company acquired exclusive rights from Warner-Lambert Company, a subsidiary of Pfizer, to market, distribute and sell the drug Cognex and a new unapproved version of Cognex called Cognex CR, in the U.S. and other countries for $3.5 million in cash. The Company must also pay up to $1.5 million in additional purchase price if the Company obtains FDA approval to market Cognex CR. The Company also assumed liabilities of $0.8 million for returns of products shipped by Warner-Lambert prior to the acquisition date, and returned after June 22, 2001. The purchase price was allocated among the fair values of intangible assets (primarily tradename and licensing rights) and liabilities assumed and is being amortized over 20 years. In March 2001, the

Company reviewed the estimated assumed liability for sales returns for Cognex. From this review, the Company determined that the established reserves for Cognex were less than what was needed to cover future anticipated returns of Cognex. As a result of this revised estimate, assumed liabilities for Cognex increased by $2.7 million.

In September 2002, the Company reviewed the estimated assumed liability for sales returns for the Ponstel and Cognex products. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Ponstel and Cognex were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $2.6 million in September 2002.

In June 2003, the Company reviewed the estimated assumed liability for sales returns for the Cognex products. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Cognex were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.6 million in June 2003.

In December 2003, the Company reviewed the estimated assumed liability for sales returns for Ponstel. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Ponstel were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.1 million in December 2003.

On August 20, 2001, the Company acquired from Sanofi-Synthelabo Inc. ("Sanofi") the Prenate line of prescription prenatal vitamins (the "Prenate Acquisition"). The purchase price was $51.9 million in cash and the assumption of liabilities of $0.9 million for returns of product shipped by Sanofi prior to the acquisition date, and returned after February 20, 2002 and for estimated contractual price reductions with wholesalers and insurance providers. The agreement includes the purchase of the Prenate license rights, certain tradenames and managed care contracts and a supply agreement. The purchase price was allocated among the fair values of the intangible assets acquired and the liabilities assumed and is being amortized over a period of 3 to 20 years. The managed care contracts are being amortized over a period of 5 years and the supply agreement is being amortized over a period of 3 years. All other intangibles are being amortized over 20 years. The weighted average amortization period is 17 years. In addition, the Company purchased the outstanding inventory of Prenate for approximately $0.1 million.

In June 2003, the Company reviewed the estimated assumed liability for sales returns for the Prenate products. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for the Prenate products were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.4 million in June 2003.

On December 21, 2001, the Company acquired from Dura Pharmaceuticals Inc., an affiliate of Elan Pharmaceuticals PLC ("Elan"), the U.S. rights to Furadantin, a prescription drug used for the treatment of urinary tract infections in children, for $15.8 million in cash plus acquisition costs of approximately $0.2 million and the assumption of liabilities of $0.3 million for the return of product shipped by Elan prior to the acquisition date returned after December 31, 2002. The purchase price was allocated among the fair value of the intangible assets acquired and liabilities assumed and is being

amortized over a weighted average amortization period of 17 years. The purchase agreement includes all assets related to Furadantin, including the new drug application ("NDA") and the trademark. The license rights and tradename are being amortized over 20 years. Additionally, the Company purchased the outstanding inventory of Furadantin for $0.3 million. The Company has also entered into a transitional supply agreement with Elan Pharmaceuticals whereby they will supply the Company with Furadantin until May 2003. The supply agreement is being amortized over its useful life of 17 months.

In December 2003, the Company reviewed the estimated assumed liability for sales returns for Furadantin. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Furadantin were in excess of the currently expected returns. As a result of the revised estimate, the Company reduced the liability and increased net revenues by $0.1 million in December 2003.

On March 6, 2002, the Company acquired from AstraZeneca UK Limited certain U.S. rights relating to the antihypertensive prescription medication Sular. The Company also entered into a long-term manufacturing, supply, and distribution agreement with Sular's current manufacturer, Bayer AG. The aggregate purchase price paid was $184.3 million in cash, including $0.6 million in acquisition costs, plus the assumption of liabilities of $1.9 million related to the return of product shipped prior to the acquisition date. In addition, the Company must pay up to $30.0 million in additional purchase price after closing, based on the achievement of certain performance milestones during a specified period of time. The agreements include the purchase of the Sular license rights, certain tradenames and managed care contracts and a distribution agreement. The purchase price also included $5.7 million of product inventory. The purchase price was allocated among the fair values of the intangible and tangible assets acquired and the liabilities assumed and is being amortized over a period of 5 to 20 years. The weighted average amortization period is 19 years. The results of Sular are included in the consolidated statements of operations from March 6, 2002.

License rights	$	160,721
Distribution agreement		10,350
Managed Care contracts		6,870
Tradename		2,560

Total intangibles		180,501
Inventory		5,724

Total assets		186,225
Liabilities assumed		(1,895	)

Total acquisition	$	184,330

For the year ended December 31, 2002, aggregate amortization expense related to the Sular acquisition was $8.6 million related to the period from the purchase date to year-end.

The unaudited pro forma summary below presents certain financial information as if the Sular acquisition had occurred as of January 1, 2002. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the

acquisition been made on January 1, 2002. Additionally, these pro forma results are not indicative of future results (in thousands, except per share data):

In December 2002, the Company reviewed the estimated assumed liability for sales returns for the Sular product. This review is performed by the Company on a periodic basis and is done for all acquisitions. From this review, the Company determined that the established reserves for Sular were less than what was needed to cover future anticipated returns of Sular. As a result of this revised estimate, assumed liabilities for Sular increased by $0.7 million.

In December 2004, the Company recorded an additional $5.0 million in purchase price for licensing rights of sular as a result of the company reaching a performance milestone in the original agreement. This milestone is being amortized over the remaining useful life of the asset.

The following table reflects the components of all intangible assets as of December 31, 2004 (in thousands):

The following table reflects the components of all intangible assets as of December 31, 2003 (in thousands):

Amortization is calculated on a straight-line basis over the estimated useful life of the intangible asset. Estimated annual amortization expense for each of the 5 succeeding fiscal years is as follows (in thousands):

Year ending December 31,
2005	$	15,966
2006		15,766
2007		15,662
2008		14,357
2009		14,106

As a result of SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," results for the year ended December 31 2002 have been reclassified to state what was previously reported as an extraordinary loss on debt extinguishment of $0.9 million net of taxes. To make this reclassification, interest expense for the year ended December 31, 2002 has been increased by $1.4 million and the provision for income taxes was decreased by $0.5 million.

On January 1, 1996, the Company obtained exclusive distribution rights from Unisource, Inc. for Tanafed in North America through December 31, 2003 with an option for an additional 7 years. The agreement requires the Company to purchase all of their requirements for Tanafed from Unisource, including at least certain minimum quantities of Tanafed in each year of the agreement. In December 1998, the Company obtained exclusive distribution and supply rights from Unisource, Inc. for Tanafed DM in North America through December 2005, subject to an automatic 7 year renewal. The agreement requires the Company to purchase all of its requirements for Tanafed DM from Unisource, subject to certain minimum purchase requirements. The Company entered into a patent and license agreement with Jame Fine Chemicals, Inc., the raw materials supplier for Tanafed in January 2000. The agreement grants the Company a semi-exclusive license to use, sell and distribute finished products containing an active ingredient used in Tanafed. Pursuant to the agreement, the Company must pay a royalty on sales of Tanafed. The license continues through the life of the licensed patent, which expires in 2014.

In June 2002, we entered into an agreement with Jame Fine Chemicals, Inc. for a ten year exclusive license to make, have made, use, distribute, market, promote, advertise and sell pharmaceutical formulations containing the ingredients dextromethorphan tannate and dexchlorpheniramine tannate. Tanafed DP and Tanafed DMX products contain dexchlorpheniramine tannate and Tanafed DMX contains dextromethorphan tannate. The agreement became effective upon the first sale of product containing the ingredients, which occurred in August 2002. We paid a license fee of $0.5 million in cash in connection with the first sale. We have also paid an additional $2.5 million in royalty installments through January 2005. As of December 31, 2004, $0.3 million of these royalty payments is refundable to us based on actual sales levels achieved. A nonrefundable royalty commenced in January 2005. In June 2002, we entered into an exclusive distribution agreement with Unisource granting us exclusive rights to sell Tanafed DP and Tanafed DMX in North America

and for Unisource to supply Tanafed DP and Tanafed DMX to us through June 2007, subject to an automatic three year renewal. The agreement requires us to purchase all of our Tanafed DP and Tanafed DMX requirements from Unisource and subjects us to minimum purchase requirements. We must pay Unisource for the manufacture and supply of Tanafed DP and Tanafed DMX based upon fixed unit costs.

In January 1999, the Company acquired exclusive rights in the U.S. to Robinul and Robinul Forte tablets from American Home Products Corporation. The Company must pay royalties on net sales under its license agreement with American Home Products. The Company entered agreements with Mikart, dated April 23, 1999 and January 21, 2001, for Mikart to become qualified under applicable regulations to manufacture and supply the Company's requirements for Robinul. Mikart became qualified by the FDA to manufacture Robinul on December 3, 2001 and began supplying the Robinul products to the Company in December 2001. Under these agreements, Mikart will manufacture the products for 5 years from the time Mikart became a qualified manufacturer plus renewal terms of one year until either party elects not to renew. The agreement with Mikart requires that the Company purchase certain designated minimum quantities.

In January 2002, the Company entered into a license agreement with Wyeth-Ayerst Canada Inc. and Whitehall-Robins Inc. under which the Company acquired rights to have the product manufactured, and to market and sell Robinul and Robinul Forte in Canada. The Company will pay Wyeth-Ayerst Canada a royalty on net sales of Robinul in Canada. We do not currently have plans to market or sell Robinul or Robinul Forte in Canada.

On March 25, 1999, the Company acquired the rights from Penwest Pharmaceuticals Co. ("Penwest") to use Penwest's TIMERx controlled-release technology to develop FHCP 01 pursuant to a product development agreement. In November 2002, the Company entered into an amended and restated product development agreement with Penwest. Under the Penwest agreements, the Company has the right to manufacture, use and sell the developed migraine product in North America for a period extending 15 years from the date a new drug application is issued for the product, as well as license certain Penwest patents. Under these agreements, the Company is required to pay Penwest up to an aggregate of approximately $2.6 million of non-refundable fees upon achieving specified milestones through the first anniversary of the first commercial sale of the product following the regulatory approval and royalties upon any sales of the migraine product at rates the Company believes are within industry customary ranges. Penwest was able to terminate the product development agreement in the event the Company failed to timely achieve designated performance milestones within prescribed time periods including the completion of clinical trials by April 2002, applying for FDA approval of the product within six months after completing clinical trials and commercially launching the product within two months after obtaining FDA approval. Penwest was also able to terminate the product development agreement if the Company failed to either sell specified minimum quantities of the product each year after approval of the product or pay the applicable royalty to Penwest as if the Company had sold such minimum quantity. The Company did not complete clinical trials of the migraine product by April 2002, however, in November 2002, the Company entered into an amended and restated product development agreement with Penwest under which Penwest agreed to waive this provision. During 2002, the Company paid Penwest $427,000, which is included in research and development expense in the accompanying statements of operations. No payments were made during 2004 or 2003.

In July 1999, we acquired exclusive U.S. rights to distribute, market and sell Nitrolingual from Pohl-Boskamp beginning on February 1, 2000 for five years plus an additional five-year renewal period. In October 2004, the distribution agreement was renewed for an additional five years with an additional renewal period of two years. Under the agreement, Pohl-Boskamp supplies us Nitrolingual at prices that decrease as volume purchased in each year increases. We must purchase designated minimum quantities in each year of the agreement or pay a fee to keep the agreement in effect. We must also pay a royalty on net sales of the product. Also, Pohl-Boskamp can terminate our distribution agreement for Nitrolingual if a company with a product competitive with Nitrolingual acquires direct or indirect influence or control over us, or if a significant change in our stockholders occurs so that Kapoor-Pharma Investments and our employees, management, directors, and any of their respective affiliates, do not in the aggregate directly or indirectly beneficially own at least 20% of our shares. Our agreement with Pohl-Boskamp prohibits us from selling other products which are indicated for the relief of angina pectoris. Aventis had exclusive rights through January 2000 to a version of the product containing CFC named Nitrolingual spray. To promote earlier adoption of Nitrolingual Pumpspray, the Company obtained exclusive rights from Aventis to market this CFC product in the U.S. as of November 22, 1999.

In December 2000, the Company signed an agreement with West-ward Pharmaceuticals to manufacture Ponstel. This agreement expires in April 2005 subject to automatic annual renewals. The Company must purchase all of its requirements for Ponstel from West-ward and is subject to minimum purchase requirements. The Company must pay West-ward a price for Ponstel based on a multiple of West-ward's direct cost of goods sold in the manufacture and supply of the product. In addition, the Company must pay West-ward milestone payments, as long as no generics have been introduced, upon certain anniversary dates of FDA approval of the manufacture of Ponstel by West-ward. During 2004, the Company paid $0.3 million in milestone payments to West-ward. The Company filed a site transfer application with the FDA and received approval in February 2004. West-ward supplies Cognex to us pursuant to an agreement that expires March 4, 2008 and is renewable for two years. For the Cognex product, the Company negotiated a supply agreement with a Warner-Lambert affiliate to continue to manufacture and supply Cognex and the active ingredient in Cognex for 2 years subject to a one-year renewal. The Company will pay Warner-Lambert's affiliate a production fee for its manufacture of Cognex and the active ingredient. The supply agreement contains designated quantities of Cognex and its active ingredient that Warner-Lambert's affiliate will supply and that the Company must purchase.

For the Prenate product line, under the terms of the asset purchase agreement, the Company was assigned a contract between Sanofi and Patheon Inc. to manufacture the product line. The term of the agreement is for 5 years from October 1, 1999 subject to automatic one-year renewals. The Company also assumed a supply and packaging agreement with Banner Pharmacaps Inc. ("Banner") and Sanofi for the supply and packaging of the products. The agreement with Banner is for a term of 5 years subject to two-year renewals. Under the terms of the supply agreement with Banner, as amended, the Company will pay Banner a royalty on net sales. The agreement with Banner was terminated in December 2004 as the Company discontinued Prenate GT and Prenate Advance. The Sanofi packaging agreement is for a term of 3 years subject to a 3 year renewal.

Each of the Company's third-party manufacturing agreements requires that the Company purchase all of their product requirements from the manufacturers that are a party to those agreements.

The Company uses third-party manufacturers for the production of its products for development and commercial purposes. Given the general under-utilization of resources, the availability of excess

capacity for manufacturing in the marketplace, and the lower cost of outsourcing, the Company intends to continue to outsource manufacturing for the near-term.

The Company relies on third-party suppliers to produce its products. The supplier for two products and the suppliers for components of two other products hold patents relating to their respective products. Due to the patent restrictions, the supply of these four products, whose sales comprised 56.3%, 59.7% and 59.9% of the Company's sales in the years ended December 31, 2002, 2003, and 2004, respectively, are exclusively available through these suppliers.

In 1996, the Company began a qualified defined contribution 401(k) plan, which provides benefits to substantially all employees. The annual contribution, if any, to the trust is at the discretion of the Board of Directors of the Company. Employer contributions to the plan for the years ended December 31, 2002, 2003 and 2004 were $0.3 million, $0.5 million and $0.6, respectively.

In December 2001, the Company entered into a lease agreement for a new facility. In April 2002, the Company moved into this facility. This new facility is leased under a non-cancelable operating lease that expires in May 2009. The lease for the previous facility was terminated in June 2002 and the Company has no further obligations related to this lease. The total rent expense for the Company was $0.4 million, $0.6 million and $0.6 million for the years ended December 31, 2002, 2003, and 2004 respectively.

In September 2004, the Company entered into a lease agreement for office space in Dublin, Ireland. In October 2004, the Company moved into this space. This new space is leased under a non-cancelable operating lease that expires in May 2009. The total rent expense for the Company was $6,000 for the year ended December 31, 2004.

The Company leases vehicles for certain employees under non-cancelable lease agreements expiring in 2006. The total vehicle lease expense under the lease agreements for the years ended December 31, 2002, 2003 and 2004 was $2.3 million, $1.8 million and $2.4 million, respectively.

The total minimum future commitments under leases for years succeeding December 31, 2004 is as follows (in thousands):

The Company has employment contracts with certain executives, which provide for certain levels of severance in the event of termination without cause or for certain change of control events, as defined.

First Horizon, certain former and current officers and directors are defendants in a consolidated securities lawsuit initiated on August 22, 2002 in the United States District Court for the Northern District of Georgia. Plaintiffs in the class action alleged in general terms that we violated Sections 11 and 12(a)(a) of the Securities Act of 1933 and that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffs claim that we issued a series of materially false and misleading statements to the market in connection with our public offering on April 24, 2002 and thereafter relating to alleged "channel stuffing" activities. The amended compliant also alleged controlling person liability on behalf of certain of our officers under Section 15 of the Securities Act of 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffs sought an unspecified amount of compensatory damages to be proven at trial.

On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit. Although the class action lawsuit was dismissed, the court granted the plaintiffs the right to refile their class action lawsuit provided that the plaintiffs pay all of the defendant's fees and costs associated with filing the motions to dismiss the class action lawsuit. Plaintiffs failed to refile by the deadline, but have asked the Court to reconsider its dismissal. Should the Court reverse the dismissal, we will vigorously defend against any claims made.

On April 15, 2004, we filed a patent infringement action against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the Northern District of Illinois, on the grounds that their product, Duotan PD, infringes the patents for our products, Tanafed DPand Tanafed DMX. In response, on April 21, 2004, Breckenridge filed for declaratory judgment in the U.S. District Court for the Southern District of Florida seeking to invalidate the Tanafed patents. On July 20, 2004, our action was transferred to the U.S. District Court for the Southern District of Florida.

The Company is also involved with other various routine legal proceedings incident to the ordinary course of business. None of these proceedings are expected to have a material adverse effect on the consolidated financial statements.

In the third quarter of 2004, the company purchased 500,000 shares of common stock from one of Dr. Kapoor's family partnerships, at an aggregate cost of approximately $13.4 million.

On December 10, 2004, the Company, with Board of Directors approval, purchased 1 million shares of common stock at fair market value equal to the December 10, 2004 closing price of the Company's common stock as reported by Nasdaq from certain executives and a board member and significant shareholder of the Company. The Company acquired those shares in part, to establish a pool of authorized shares that will be available for contribution to the Company's Employee Stock Ownership Plan over time as the Company in its discretion deems appropriate.

The following table sets forth summary quarterly financial information for the years ended December 31, 2003 and 2004 (in thousands):

2003 by Quarter	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net revenues	$	12,495		$	20,958		$	24,722	$	37,130
Gross profit		8,406			15,021			21,330		32,814
Operating income (loss)		(13,617	)		(9,418	)		5,334		14,724
Net income (loss)		(8,679	)		(6,104	)		3,440		9,605
Earnings (loss) per share:
Basic	$	(0.25	)	$	(018	)	$	0.10	$	0.27
Diluted	$	(0.25	)	$	(0.18	)	$	0.10	$	0.27

Quarterly 2004 results have been restated to reflect the companies adoption of EITF 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share."

In March 2005, the Company entered into a definitive agreement to acquire U.S. rights to the type 2 diabetes prescription medication Fortamet(TM) (metformin hydrochloride) and the cholesterol medication Altoprev(R) (lovastatin) from Andrx Corporation ("Andrx"). The Company also entered into a long-term manufacturing and supply agreement with Andrx.

The Company will pay Andrx $50 million at closing and up to $35 million in additional purchase price when Andrx achieves and maintains certain defined manufacturing service levels. Andrx is also entitled to royalties on net sales of both products, as defined. The agreement also contemplates possible future development collaborations. The Company anticipates that it will close the transaction in March or April 2005, subject to approval under the Hart-Scott-Rodino Anti-Trust Improvement Act and the satisfaction of certain other customary closing conditions.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(IN THOUSANDS)

(MARK ONE)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

PART I
ITEM 1.	BUSINESS	3
ITEM 2.	PROPERTIES	33
ITEM 3.	LEGAL PROCEEDINGS	33
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	33
PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	34
ITEM 6.	SELECTED FINANCIAL DATA	37
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	53
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	54
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	54
ITEM 9A.	CONTROLS AND PROCEDURES	54
ITEM 9B.	OTHER INFORMATION	58
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	58
ITEM 11.	EXECUTIVE COMPENSATION	58
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	58
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	58
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	58
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	59

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans(1) (excluding securities reflected in column(a)) (c)
2003 Non-Qualified Stock Option Plan	870,541	$	8.38	166,968
2002 Stock Plan Approved by Stockholders(1)	1,568,242		12.34	1,192,495
2000 Stock Plan Approved by Stockholders	354,423		19.76	—
1997 Stock Option Plan Approved by Stockholders	25,500		3.86	—
Employee Stock Purchase Plan Approved by Stockholders	N/A		N/A	659,321

Total	2,818,706			2,018,784

Fiscal Period	Plan	Total Number of Shares Purchased	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans
January 1, 2004 through April 30, 2004	(1)	—	$	—	—	$	6,920,000
May 1, 2004 through May 31, 2004	(1)	142,369		17.33	142,369		4,453,000
June 1, 2004 through June 30, 2004	(1)	117,631		17.76	117,631		2,363,000
July 1, 2004 through July 31, 2004	(2)	—		—	—		20,000,000
August 1, 2004 through August 31, 2004	(2)	231,580		16.77	231,580		16,117,000
September 1, 2004 through September 30, 2004	(2),(3)	500,000		19.04	500,000		6,597,000
October 1, 2004 through October 31, 2004	(2)	—		—	—		6,597,000
November 1, 2004 through November 30, 2004	(2)	15,427		19.81	15,427		6,291,000
December 1, 2004 through December 31, 2004	(2)	50,000		19.36	50,000		5,323,395

Total 2004		1,057,007	$	18.32	1,057,007

	As of December 31,
	2000		2001		2002		2003		2004
	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	14,228	$	53,458	$	47,409	$	33,722	$	36,586
Marketable securities		—		—		—		9,996		160,636
Total assets		50,083		170,150		352,932		325,153		498,484
Total debt		221		—		—		—		150,000
Total stockholders' equity		38,572		143,364		305,683		305,777		308,409

	Payment due by period
Contractual Obligations	Payment due by period
Contractual Obligations	Total		2005		2006-2007		2008-2009		Thereafter
Operating lease obligations	$	5,059	$	1,572	$	2,561	$	926	$	—
Purchase obligations		19,493		18,107		462		462		462
Long-term debt obligations		150,000		—		—		—		150,000

Total	$	174,552	$	19,679	$	3,023	$	1,388	$	150,462

10.24(2)	—	2003 Nonqualified Stock Option Plan
10.25(14)	—	Amendment to Exclusive Distribution Agreement dated July 9, 2003, between the Registrant and Unisource, Inc.
10.26(14)	—	First Amendment to Supply Agreement dated as of January 1, 2003 between the Registrant and Banner Pharmacaps Inc.
10.27(15)	—	Amended and Restated Employment Agreement dated September 17, 2003 between the Registrant and Patrick Fourteau
10.28(15)	—	Amended and Restated Employment Agreement dated September 17, 2003 between the Registrant and Darrell Borne
10.29(15)	—	Employment Agreement dated September 25, 2003 between the Registrant and Brent Dixon
10.30*	—	Employment Agreement dated December 30, 2004 between Registrant and Leslie Zacks
10.31*	—	Employment Agreement between Registrant and Michael Mavrogordato dated October 27, 2004
10.32*	—	Employment Agreement between Registrant and Sam Gibbons dated October 16, 2004
10.33(16)+	—	Inventory Management Agreement dated June 10, 2003 by and between the Registrant and McKesson Corporation
10.34(16)+	—	Inventory Management Agreement dated February 5, 2003 by and between the Registrant and Cardinal Health
10.35(16)+	—	Inventory Management Agreement dated June 16, 2003 by and between the Registrant and AmerisourceBergen Drug Corporation
10.36(16)	—	Credit Agreement dated February 11, 2003 among the Registrant, the Lenders party thereto from time to time, LaSalle Bank National Association, as Administrative Agent
10.37(16)	—	First Amendment dated March 3, 2003 to Credit Agreement dated February 11, 2003 among the Registrant, LaSalle Bank National Association, as Administrative Agent, and Lenders signatory thereto
10.38(16)	—	Second Amendment and Waiver dated August 11, 2003 to Credit Agreement dated February 11, 2003 among the Registrant, LaSalle Bank National Association, as Administrative Agent, and Lenders signatory thereto
10.39(17)	—	Registration Rights Agreement with Deutsche Bank Securities Inc. and UBS Securities LLC dated as of March 8, 2004;
10.40+*	—	Distribution and Inventory Management Services Agreement with Cardinal Health dated as of January 1, 2005;
10.41+*	—	Amendment of Distribution and Inventory Management Services Agreement with McKesson Corporation dated as of June 10, 2004; and
10.42*	—	Executive Compensation Table.
10.43*	—	Director Compensation Table.
14.1*	—	Code of Ethics
21.1*	—	Subsidiaries of the Registrant
23.1*	—	Consent of Deloitte & Touche LLP
31.1*	—	Certification of Chief Executive Officer and President
31.2*	—	Certification of Chief Financial Officer
32.1*	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

				December 31,
				2003		2004
ASSETS
Current assets:
	Cash and cash equivalents			$	33,722	$	36,586
	Marketable securities				9,996		160,636
	Accounts receivable, net of allowance for doubtful accounts and discounts of $546 and $749 December 31, 2003 and December 31, 2004, respectively				15,759		23,833
	Inventories				11,188		15,824
	Income taxes receivable				4,839		5,438
	Current deferred tax assets				3,005		3,419
	Other current assets				2,392		7,581

		Total current assets			80,901		253,317

Property and equipment, net					2,830		5,110
Other assets:
	Intangibles, net				240,356		229,953
	Deferred tax assets				333		—
	Other				733		10,104

		Total other assets			241,422		240,057

		Total assets		$	325,153	$	498,484

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Account payable			$	5,661	$	14,569
	Accrued expenses				13,210		20,508

		Total current liabilities			18,871		35,077

Long-term liabilities:
	Convertible debt				—		150,000
	Deferred tax liabilities				—		4,404
	Other long-term liabilities				505		594

		Total liabilities			19,376		190,075
COMMITMENTS AND CONTINGENCIES (NOTE 11 and 13)
Stockholders' equity:
	Preferred stock, 1,000,000 shares authorized and none outstanding				—		—
	Common stock, $0.001 par value; 100,000,000 shares authorized; 35,595,442 and 36,087,044 issued at December 31, 2003 and December 31, 2004, respectively				36		36
	Additional paid-in capital				288,666		288,335
	Retained earnings				16,761		43,315
	Accumulated other comprehensive income (loss)				314		(87	)

					305,777		331,599
Less: Treasury stock at cost,
Common stock, 0 and 1,000,000 shares at December 31, 2003 and December 31, 2004, respectively					—		(23,190	)

		Total stockholders' equity			305,777		308,409

			Total liabilities and stockholders' equity	$	325,153	$	498,484

	Treasury Stock				Common Stock														Accumulated Other Comprehensive Income (Loss)
	Treasury Stock				Common Stock					Additional Paid-in Capital			Deferred Compensation			Accumulated (Deficit) Earnings
	Shares		Amount		Shares		Amount			Additional Paid-in Capital			Deferred Compensation			Accumulated (Deficit) Earnings						Total
BALANCE, December 31, 2001	—		—		27,626,002		$	28		$	131,560		$	(557	)	$	12,333		$	—		$	143,364
Stock options exercised	—		—		332,485			—			1,689			—			—			—			1,689
Net proceeds from the sale of shares	—		—		7,475,000			7			153,075			—			—			—			153,082
Employee stock purchase plan	—		—		19,542			—			194			—			—			—			194
Shares repurchased and retired	—		—		(16,400	)		—			(76	)		—			—			—			(76	)
Tax benefit from nonqualified stock option exercises	—		—		—			—			864			—			—			—			864
Deferred compensation	—		—		—			—			—			350			—			—			350
Net income	—		—		—			—			—			—			6,166			—			6,166
Foreign currency translation	—		—		—			—			—			—			—			50			50

BALANCE, December 31, 2002	—		—		35,436,629		$	35		$	287,306		$	(207	)	$	18,499		$	50		$	305,683
Stock options exercised	—		—		1,093,007			1			2,552			—			—			—			2,553
Employee stock purchase plan	—		—		35,031			—			115			—			—			—			115
Shares repurchased and retired	—		—		(969,225	)		—			(3,004	)		—			—			—			(3,004	)
Tax benefit from nonqualified stock option exercises	—		—		—			—			1,697			—			—			—			1,697
Deferred compensation	—		—		—			—			—			207			—			—			207
Net loss	—		—		—			—			—			—			(1,738	)		—			(1,738	)
Foreign currency translation	—		—		—			—			—			—			—			257			257
Unrealized gain on marketable securities	—		—		—			—			—			—			—			7			7

BALANCE, December 31, 2003	—		—		35,595,442		$	36		$	288,666		$	—		$	16,761		$	314		$	305,777
Stock options exercised	—		—		1,537,688			1			11,331			—			—			—			11,332
Employee stock purchase plan	—		—		10,921			—			129			—			—			—			129
Shares repurchased and retired	—		—		(1,057,007	)		(1	)		(19,232	)		—			—			—			(19,233	)
Tax benefit from nonqualified stock option exercises	—		—		—			—			7,441			—			—			—			7,441
Shares repurchased for treasury	(1,000,000	)	(23,190	)	—			—			—			—			—			—			(23,190	)
Net income	—		—		—			—			—			—			26,554			—			26,554
Foreign currency translation	—		—		—															686			686
Unrealized loss on marketable securities																				(1,087	)		(1,087	)

BALANCE, December 31, 2004	(1,000,000	)	(23,190	)	36,087,044		$	36		$	288,335		$	—		$	43,315		$	(87	)	$	308,409

	2003		2004
Bulk product	$	6,050	$	6,882
Finished product		5,138		8,942

Total inventories	$	11,188	$	15,824

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government and Federal agency obligations	$	93,964	$	14	$	(1,082	)	$	92,896
Corporate bonds		68,443		—		(703	)		67,740

Total	$	162,407	$	14	$	(1,785	)	$	160,636

	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and Federal agency obligations	$	90,904	$	(998	)	$	—	$	—	$	90,904	$	(998	)
Corporate bonds		67,740		(787	)		—		—		67,740		(787	)

Total	$	158,644	$	(1,785	)	$	—	$	—	$	158,644	$	(1,785	)

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government and Federal agency obligations	$	5,062	$	10	$	—		$	5,072
Corporate bonds		4,923		4		(3	)		4,924

Total	$	9,985	$	14	$	(3	)	$	9,996

	Number of Shares Subject to Option		Weighted Average Exercise Price
Outstanding at December 31, 2001	2,984,076		$	10.78
Granted	758,350			16.82
Canceled	(199,147	)		15.05
Exercised	(327,237	)		13.43

Outstanding at December 31, 2002	3,216,042			12.34

Granted	2,977,725			6.09
Canceled	(1,268,780	)		14.19
Exercised	(1,093,007	)		2.29

Outstanding at December 31, 2003	3,831,980			9.65

Granted	1,112,525			16.64
Canceled	(588,111	)		17.86
Exercised	(1,537,688	)		7.37

Outstanding at December 31, 2004	2,818,706			11.97

		Outstanding				Exercisable
Range of Exercise Price		Outstanding at December 31, 2004	Weighted Average Remaining Life	Weighted Average Price		Exercisable at December 31, 2004	Weighted Average Price
$ 0.42 – $ 2.88		253,028	5.8 years	$	2.43	24,948	$	1.97
3.04 – 4.89		511,102	5.9 years		3.62	82,826		3.25
5.08 – 8.08		190,428	5.3 years		6.33	58,284		5.33
10.47 – 12.00		612,827	6.1 years		11.17	311,066		8.22
12.93 – 19.86		640,739	6.6 years		14.88	51,977		12.85
20.28 – 29.20		610,582	6.1 years		22.35	134,922		23.05

	Total	2,818,706				664,023

	Pro forma for the Year Ended 2002
Net revenues	$	121,545

Net income	$	8,951

Diluted net income per share	$	0.27

	Gross Amount		Accumulated Amortization			Net Amount		Average Life
Licensing rights	$	249,715	$	(41,285	)	$	208,430	20 years
Trade names		11,060		(1,739	)		9,321	20 years
Contracts		8,300		(4,832	)		3,468	5 years
Supply/Distribution agreements		11,490		(4,056	)		7,434	1 to 10 years
Other intangibles		3,082		(1,782	)		1,300	20 years

Total	$	283,647	$	(53,694	)	$	229,953	19 years

	Gross Amount		Accumulated Amortization			Net Amount		Average Life
Licensing rights	$	244,415	$	(30,439	)	$	213,976	20 years
Tradenames		11,060		(1,186	)		9,874	20 years
Contracts		8,300		(3,172	)		5,128	5 years
Supply/Distribution agreements		11,490		(2,821	)		8,669	1 to 10 years
Other intangibles		3,082		(373	)		2,709	20 years

Total	$	278,347	$	(37,991	)	$	240,356	19 years

2004 by Quarter	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Net revenues	$	32,018	$	35,990	$	41,559	$	42,400
Gross profit		26,443		29,165		32,664		34,613
Operating income		8,280		8,926		11,156		9,297
Net income		5,047		5,509		7,435		8,563
Earnings per share:
Basic	$	0.14	$	0.15	$	0.21	$	0.24
Diluted	$	0.13	$	0.14	$	0.18	$	0.21

Classification		Balance of Beginning of Year	Charged to Costs and Expenses	Deductions		Balance End of Year
2002	Allowance for doubtful accounts and discounts	1,087	1,185	(1,505	)	767
	Allowance for product returns	3,374	16,047	(7,205	)	12,216
	Allowance for product rebates	3,866	12,269	(7,765	)	8,370
	Allowance for sales deductions	1,771	10,415	(9,885	)	2,301
2003	Allowance for doubtful accounts and discounts	767	3,034	(3,255	)	546
	Allowance for product returns	12,216	5,694	(14,097	)	3,813
	Allowance for product rebates	8,370	9,280	(14,477	)	3,173
	Allowance for sales deductions	2,301	6,425	(7,612	)	1,114
2004	Allowance for doubtful accounts and discounts	546	4,229	(4,026	)	749
	Allowance for product returns	3,813	6,410	(8,660	)	1,563
	Allowance for product rebates	3,173	9,553	(10,695	)	2,031
	Allowance for sales deductions	1,114	25,781	(24,346	)	2,549