Updated from 9:07 a.m. EST

King Pharmaceuticals

(KG)

says it will restate financial results for 2002, 2003 and the first six months of 2004, a technical violation of its merger agreement with

Mylan Laboratories

(MYL) - Get Report

.

King said late Wednesday that it had informed Mylan of its restatement plans, adding that Mylan had not yet commented on whether the proposed acquisition will proceed.

The agreement gives Mylan the option to cancel the deal for certain reasons, including a financial restatement.

King added that it is still studying whether it will need to restate results for 2000 and 2001.

Telephone calls on Thursday to Mylan and to investor Carl C. Icahn, who is leading opposition to the King deal, were not returned. Analysts said Thursday that the King announcement wasn't necessarily a deal-breaker, but added that it certainly doesn't help.

The restatement "is related to issues that were already known to

Mylan as part of its due diligence," said Marc Goodman, of Morgan Stanley, in a Thursday report to clients.

"The restatement is an 'out' for Mylan," said Goodman, who is keeping his equal-weight rating on King. "We believe a likely scenario is that Mylan uses this restatement as leverage to potentially renegotiate the transaction for more favorable terms." (He doesn't own shares; his firm has an investment banking relationship.)

David W. Maris, of Banc of America Securities, said he is uncertain whether Mylan will continue pursuing King, adding that King's latest announcement reaffirms his long-held view that the Mylan-King transaction is a bad deal. "The questions about King's operations continue," said Maris, in a report to clients, as he reaffirmed his neutral rating. (He doesn't own shares; his firm has had an investment banking relationship with King.)

King's announcement came more than five hours after markets had closed Wednesday. The company said the restatements reflect the need for earlier recognition "primarily relating to product returns."

King said Oct. 28 that it was considering a restatement because of a high volume of product returns, which were sparked by its enactment of a new inventory management program with drug wholesalers. That was the day the company was supposed to issue third-quarter financial results. Instead, King said those results would be considered preliminary, further angering analysts.

Wall Street has bristled at an assortment of financial misadventures that has led to investigations by the Department of Health and Human Services into King's billing for Medicaid and other government health programs, and by the

Securities and Exchange Commission

into King's record-keeping and internal controls.

King repeated Wednesday night that the restatements are unrelated to the government investigations. The company added that it believes the restatements "will have no effect on King's reported net sales results for any future periods." King said it expects to complete this evaluation by year-end. It also expects to publish final results for the third quarter of 2004 by year-end.

King's announcement further complicates an increasingly complex takeover attempt by Mylan, which, on July 26, offered 0.9 shares of Mylan stock for each share of King. The transaction produced a cool response on Wall Street and red-hot opposition from Icahn, who began buying Mylan stock on the day the deal was announced.

Icahn, who also has been shorting King's stock, opposes the deal as being too expensive for Mylan and too dilutive for Mylan shareholders. He has threatened to run a slate of directors against Mylan's director if the company doesn't abandon its pursuit of King, and he has offered to pay $20 a share for all of the Mylan shares that he doesn't own.

Mylan has rejected the proposals from Icahn, who owns 9.78% of Mylan's shares and is the second-largest shareholder. New York investment manager Richard C. Perry recently revealed that he controls 9.89% of Mylan. Perry, who also owns 2.9% of King's shares, supports the Mylan-King transaction.

King said the decision to restate earnings was made in consultation with the company's independent auditors, adding that it made errors that "resulted from policies adopted in good faith." The primary effect of King's decision "will be to record in prior periods expenses relating to product returns that previously were or would have been recognized during the first nine months of 2004," the company said.

The restatements will increase the preliminary nine-month sales for 2004 by $54.3 million and raise preliminary earnings by $36.5 million, or 15 cents a share. The 2003 full-year net sales will be lowered by $16.5 million, and the profit will be reduced by $13.9 million, or 6 cents a share. King said it is still deciding in which years an additional $37.6 million in sales and $23.8 million in profit, attributed to accounting errors, will be assigned.

King's announcement didn't appear to rattle investors in either company. After dropping early in the day, shares of King were up by 9 cents to $12.64 in midafternoon trading. Mylan's shares also started the day in the red, but they inched up 3 cents to $18.07.