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

                                  FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended March 31, 2006
                        Commission file number 1-9601

                         K-V PHARMACEUTICAL COMPANY
           (Exact name of registrant as specified in its charter)
                           2503 South Hanley Road
                          St. Louis, Missouri 63144
                               (314) 645-6600

             DELAWARE                                     43-0618919
    (State of Incorporation)                   (IRS Employer Identification No.)

           Securities Registered Pursuant to Section 12(b) of the Act:
 Class A Common Stock, par value $.01 per share       New York Stock Exchange
 Class B Common Stock, par value $.01 per share       New York Stock Exchange

           Securities Registered Pursuant to Section 12(g) of the Act:
          7% Cumulative Convertible Preferred, par value $.01 per share

Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ X ] No [  ]

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

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

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2
of the Act).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [  ] No [ X ]

The aggregate market value of the shares of Class A and Class B Common Stock
held by non-affiliates of the registrant as of September 30, 2005, the last
business day of the registrant's most recently completed second fiscal
quarter, was $548,161,941 and $89,557,184, respectively. As of June 8,
2006, the registrant had outstanding 36,974,977 and 12,524,759 shares of
Class A and Class B Common Stock, respectively, exclusive of treasury shares.



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                     DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of the definitive proxy statement of the registrant (to
be filed pursuant to Regulation 14A for registrant's 2006 Annual Meeting of
Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12, 13 and 14 to the extent stated in such
items.

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           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-K, including the documents that we incorporate herein by
reference, contains various forward-looking statements within the meaning of
the United States Private Securities Litigation Reform Act of 1995, and
which may be based on or include assumptions concerning our operations,
future results and prospects. Such statements may be identified by the use
of words like "plans," "expect," "aim," "believe," "projects," "anticipate,"
"commit," "intend," "estimate," "will," "should," "could," and other
expressions that indicate future events and trends.

All statements that address expectations or projections about the future,
including without limitation, statements about our strategy for growth,
product development, regulatory approvals, market position, expenditures and
financial results, are forward-looking statements.

All forward-looking statements are based on current expectations and are
subject to risk and uncertainties. In connection with the "safe harbor"
provisions, we provide the following cautionary statements identifying
important economic, political, regulatory and technological factors which,
among others, could cause the actual results or events to differ materially
from those set forth or implied by the forward-looking statements and
related assumptions.

Such factors include (but are not limited to) the following: (1) changes in
the current and future business environment, including interest rates and
capital and consumer spending; (2) the difficulty of predicting FDA
approvals, including the timing, and whether any period of exclusivity will
be realized; (3) acceptance and demand for new pharmaceutical products; (4)
the impact of competitive products and pricing; (5) new product development
and launch, including the possibility that any product launch may be delayed
or that product acceptance may be less than anticipated; (6) reliance on key
strategic alliances; (7) the availability of raw materials; (8) the
regulatory environment; (9) fluctuations in operating results; (10) the
difficulty of predicting international regulatory approval, including the
timing; (11) the difficulty of predicting the pattern of inventory movements
by our customers; (12) the impact of competitive response to our sales,
marketing and strategic efforts; (13) risks that we may not ultimately
prevail in our litigation; (14) risks that we may see increased spending as
we continue to ramp up our branded business; and (15) the risks detailed
from time to time in our filings with the Securities and Exchange
Commission.

This discussion is by no means exhaustive, but is designed to highlight
important factors that may impact the Company's outlook.

Because the factors referred to above, as well as the statements included
under the captions "Narrative Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance
on any forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and, unless applicable law
requires to the contrary, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which the statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to predict which factors will arise, when they will arise and/or their
effects. In addition, we cannot assess the impact of each factor on our
business or financial condition or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.


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ITEM 1.  BUSINESS
         --------

(a)      GENERAL DEVELOPMENT OF BUSINESS
         -------------------------------

         Unless the context otherwise indicates, when we use the words "we,"
         "our," "us," "our company" or "KV" we are referring to K-V
         Pharmaceutical Company and its wholly-owned subsidiaries, including
         Ther-Rx Corporation, ETHEX Corporation and Particle Dynamics, Inc.

         We were incorporated under the laws of Delaware in 1971 as a
         successor to a business originally founded in 1942. Victor M.
         Hermelin, our Chairman and founder, invented and obtained initial
         patents for early controlled release and enteric coating which
         became part of our core business and a platform for future drug
         delivery emphasis.

         We develop advanced drug delivery technologies which enhance the
         effectiveness of new therapeutic agents, existing pharmaceutical
         products and prescription nutritional products. We have developed
         and patented a wide variety of drug delivery and formulation
         technologies which are primarily focused in four principal areas:
         SITE RELEASE(R) bioadhesives; tastemasking; oral controlled
         release; and oral quick dissolving tablets. We incorporate these
         technologies in the products we market to control and improve the
         absorption and utilization of active pharmaceutical compounds. In
         1990, we established a generic marketing capability through a
         wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which we
         believe makes us one of the only drug delivery research and
         development companies that also markets "technologically
         distinguished" generic products. In 1999, we established a
         wholly-owned subsidiary, Ther-Rx Corporation ("Ther-Rx"), to market
         branded pharmaceuticals directly to physician specialists.

         Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
         acquired in 1972. Through PDI, we develop and market specialty
         value-added raw materials, including drugs, directly compressible
         and microencapsulated products, and other products used in the
         pharmaceutical, nutritional, food, personal care and other markets.

(b)      SIGNIFICANT BUSINESS DEVELOPMENTS
         ---------------------------------

         In May 2005, we entered into a long-term product development and
         marketing license agreement with Strides Arcolab Limited
         ("Strides"), an Indian generic pharmaceutical developer and
         manufacturer, for exclusive marketing rights in the United States
         and Canada for 10 new generic drugs. Under the agreement, Strides
         is responsible for developing, submitting for regulatory approval
         and manufacturing the 10 products and we are responsible for
         exclusively marketing the products in the territories covered by
         the agreement. Under a separate agreement, we invested $11.3
         million in Strides redeemable preferred stock.

         In May 2005, the Company and FemmePharma, Inc. ("FemmePharma")
         mutually agreed to terminate the license agreement between them
         entered into in April 2002. As part of this transaction, we
         acquired all of the common stock of FemmePharma for $25.0 million
         after certain assets of the entity had been distributed to
         FemmePharma's other shareholders. Under a separate agreement, we
         had previously invested $5.0 million in FemmePharma's convertible
         preferred stock. Included in the acquisition of FemmePharma are the
         worldwide marketing rights to an endometriosis product that has
         successfully completed Phase II clinical trials. This product was
         originally part of the licensing arrangement with FemmePharma that
         provided us, among other things, marketing rights for the product
         principally in the United States. In accordance with the new
         agreement, we acquired worldwide licensing rights of the
         endometriosis product, are no longer responsible for milestone
         payments and royalties specified in the original licensing
         agreement, and secured exclusive worldwide rights for use of the
         FemmePharma technology for vaginal anti-infective products. During
         the fiscal year ended March 31, 2006, the Company recorded expense
         of $30.4 million in connection with the FemmePharma acquisition
         that consisted of $29.6 million for acquired in-process research
         and development and $0.9 million in direct expenses related to the
         transaction. The acquired in-process research and development
         charge represented the estimated fair value of the endometriosis
         product being


                                      3

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         developed that, at the time of the acquisition, had no alternative
         future use and for which technological feasibility had not been
         established.

         In December 2005, we entered into a financing arrangement with St.
         Louis County, Missouri related to expansion of our operations in
         St. Louis County. In total, up to $135.5 million of industrial
         revenue bonds may be issued to us by St. Louis County relative to
         capital improvements made through December 31, 2009. This agreement
         provides that 50% of the real and personal property taxes on up to
         $135.5 million of capital improvements will be abated for a period
         of 10 years subsequent to the property being placed in service. The
         industrial revenue bonds are issued by St. Louis County to us upon
         our payment of qualifying costs of capital improvements and
         transfer of such improvements to St. Louis County, which are then
         leased by us for a period ending December 1, 2019, unless earlier
         terminated. We have the option at any time to discontinue the
         arrangement and regain full title to the abated property. The
         industrial revenue bonds bear interest at 4.25% per annum and are
         payable as to principal and interest concurrently with payments due
         under the terms of the lease. Industrial revenue bonds totaling
         $73.0 million were outstanding at March 31, 2006. We have
         classified the leased assets as property and equipment and have
         established a capital lease obligation equal to the outstanding
         principal balance of the industrial revenue bonds. Lease payments
         may be made by tendering an equivalent portion of the industrial
         revenue bonds. As the capital lease payments to St. Louis County
         may be satisfied by tendering industrial revenue bonds (which is
         our intention), the capital lease obligation, industrial revenue
         bonds and related interest expense and interest income,
         respectively, have been offset for presentation purposes in the
         Consolidated Financial Statements.

         In March 2006, we entered into a $43.0 million mortgage loan
         agreement with one of our primary lenders, in part, to refinance
         $9.9 million of existing mortgages. The $32.8 million of net
         proceeds we received from the new mortgage loan will be used for
         working capital and general corporate purposes. The new mortgage
         loan bears interest at a rate of 5.91% and matures on April 1,
         2021.

         In fiscal 2006, we expanded our branded prescription nutritional
         franchise when Ther-Rx introduced Encora(TM), a twice-daily
         prescription nutritional supplement designed to meet the key
         nutritional and preventative health needs of women past their
         childbearing years. Ther-Rx also introduced two new branded
         hematinic products, Niferex(R) Gold and Repliva 21/7(TM) in fiscal
         2006.

         In February 2006, we entered into an exclusive arrangement with
         Gedeon Richter, Ltd., a European pharmaceutical company, to market
         a broad group of generic drug products to the U.S. marketplace. The
         products will serve the cardiovascular, diabetic and central
         nervous system markets. Subject to FDA approval and patent
         expirations, we expect to introduce these products to the U.S.
         market over the next several years through 2017.

         During fiscal 2006, we entered into two additional licensing
         arrangements - one to market both Gynazole-1(R) and Clindesse(TM)
         in five Scandanavian countries, the other to market Clindesse(TM)
         in 18 Eastern European countries. These arrangements expanded
         Gynazole-1(R)'s future international presence beyond the over 50
         markets in Europe, Latin America, the Middle East, Asia, Indonesia,
         the People's Republic of China, Australia and New Zealand covered
         in other previously signed licensing agreements. We have previously
         entered into licensing agreements for the right to market
         Clindesse(TM) in Spain, Portugal, Andorra, Brazil and Mexico.
         During fiscal 2006, we also received regulatory approvals to market
         Gynazole-1(R) in 15 Eastern European countries and our first
         regulatory approval in an Asian market.

         In fiscal 2006, we received a favorable court ruling in a Paragraph
         IV patent infringement action filed against us by AstraZeneca based
         on our ANDA submissions to market generic formulations of
         Toprol-XL(R). We believe we were the first company to file with the
         FDA for generic approval of the 100mg and 200mg dosage strengths, a
         position that may, upon approval, afford us the opportunity for a
         six-month exclusivity period for marketing these generic versions.
         The total branded dollar volume of Toprol-XL(R) in 2005 was $1.3
         billion, of which the 100mg and 200mg strengths represented nearly
         half.


                                     4

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         On June 9, 2006, we replaced our $140.0 million credit line by
         entering into a new credit agreement with ten banks that provides
         for a revolving line of credit for borrowing up to $320.0 million.
         The new credit agreement also includes a provision for increasing
         the revolving commitment, at the lenders' sole discretion, by up to
         an additional $50.0 million. The new credit facility is unsecured
         unless we, under certain specified circumstances, utilize the
         facility to redeem part or all of our outstanding Convertible
         Subordinated Notes. Interest is charged under the facility at the
         lower of the prime rate or one-month LIBOR plus 62.5 to 150 basis
         points depending on the ratio of senior debt to EBITDA. The new
         credit agreement contains financial covenants that impose limits on
         dividend payments, require minimum equity, a maximum senior
         leverage ratio and minimum fixed charge coverage ratio. The new
         credit facility has a five-year term expiring in June 2011.

(c)      INDUSTRY SEGMENTS
         -----------------

         We operate principally in three industry segments, consisting of
         branded products marketing, specialty generics marketing and
         specialty raw materials marketing. Revenues are derived primarily
         from directly marketing our own technologically distinguished
         generic/non-branded and brand-name products. Revenues may also be
         received in the form of licensing revenues and/or royalty payments
         based upon a percentage of the licensee's sales of the product, in
         addition to manufacturing revenues, when marketing rights to
         products using our advanced drug delivery technologies are
         licensed. See Note 21 to our Consolidated Financial Statements.

(d)      NARRATIVE DESCRIPTION OF BUSINESS
         ---------------------------------

         OVERVIEW

         We are a fully integrated specialty pharmaceutical company that
         develops, acquires, manufactures and markets technologically
         distinguished branded and generic/non-branded prescription
         pharmaceutical products. We have a broad range of dosage form
         capabilities including tablets, capsules, creams, liquids and
         ointments. We conduct our branded pharmaceutical operations through
         Ther-Rx and our generic/non-branded pharmaceutical operations
         through ETHEX. Through PDI, we also develop, manufacture and market
         technologically advanced, value-added raw material products for the
         pharmaceutical, nutritional, personal care, food and other markets.

         We have a broad portfolio of drug delivery technologies which we
         leverage to create technologically distinguished brand name and
         specialty generic/non-branded products. We have developed and
         patented 15 drug delivery and formulation technologies primarily in
         four principal areas: SITE RELEASE(R) bioadhesives, oral controlled
         release, tastemasking and oral quick dissolving tablets. We
         incorporate these technologies in the products we market to control
         and improve the absorption and utilization of active pharmaceutical
         compounds. These technologies provide a number of benefits,
         including reduced frequency of administration, reduced side
         effects, improved drug efficacy, enhanced patient compliance and
         improved taste.

         We have a long history of developing drug delivery technologies. In
         the 1950's, we received what we believe to be the first patents for
         sustained release delivery systems which enhance the convenience
         and effectiveness of pharmaceutical products. In our early years,
         we used our technologies to develop products for other drug
         marketers. Our technologies have been used in several well known
         products, including Actifed(R) 12-hour, Sudafed(R) SA, Centrum
         Jr.(R) and Kaopectate(R) Chewable. Since the 1990's, we have chosen
         to focus our drug development expertise on internally developed
         products for our branded and generic/non-branded pharmaceutical
         businesses.

         For example, since its inception in March 1999, our Ther-Rx
         business has successfully launched 11 internally developed branded
         pharmaceutical products, all of which incorporate our drug delivery
         technologies. We have also introduced several technology-improved
         versions of the four product franchises acquired by us.
         Furthermore, most of the internally developed generic/non-branded
         products marketed by our ETHEX business incorporate one or more of
         our drug delivery technologies.

         Our drug delivery technology allows us to differentiate our
         products in the marketplace, both in the branded and
         generic/non-branded pharmaceutical areas. We believe that this
         differentiation provides substantial competitive advantages for our
         products, allowing us to establish a strong record of growth and
         profitability and a leadership position in certain segments of our
         industry. For the past five years, we have grown net revenues at a
         compounded annual growth rate of 15.6%. Ther-Rx has grown
         substantially since its inception in March 1999 and continues to
         gain market share in its women's healthcare and hematinic family of
         products. Also, by focusing on the development and marketing of
         technology-distinguished, multisource drugs, ETHEX has been able to
         identify and bring to market niche products that leverage our
         portfolio of drug delivery technologies in a way that produces
         relatively high gross margin generics/non branded products.

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         THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS

         We established Ther-Rx in 1999 to market brand name pharmaceutical
         products which incorporate our proprietary technologies. Since its
         inception, Ther-Rx has introduced 11 products into two principal
         therapeutic categories - women's health and oral hematinics - where
         physician specialists can be reached using a highly focused sales
         force. By targeting physician specialists, we believe Ther-Rx can
         compete successfully without the need for a sales force as large as
         pharmaceutical companies with less specialized product lines.
         Ther-Rx's net revenues grew from $90.1 million in fiscal 2005 to
         $145.4 million in fiscal 2006 and represented 39.6% of our fiscal
         2006 total net revenues.

         Ther-Rx's cardiovascular product line consists of Micro-K(R), an
         extended-release potassium supplement used to replenish
         electrolytes, primarily in patients who are on medication which
         depletes the levels of potassium in the body. We acquired
         Micro-K(R) in fiscal 1999 from the pharmaceutical division of
         Wyeth. Sales of Micro-K(R) increased 28.2% to $8.3 million in
         fiscal 2006.

         We established our women's healthcare franchise through the August
         1999 acquisition of PreCare(R), a prescription prenatal vitamin,
         from UCB Pharma, Inc. Since the acquisition, Ther-Rx has
         reformulated the original product using proprietary technologies,
         and subsequently has launched five internally developed products as
         extensions to the PreCare(R) product line. Building upon the
         PreCare(R) acquisition, we have developed a line of proprietary
         products which makes Ther-Rx the leading provider of branded
         prescription prenatal vitamins in the United States.

         The first of our internally developed, patented line extensions to
         PreCare(R) was PreCare(R) Chewables, the world's first prescription
         chewable prenatal vitamin. PreCare(R) Chewables addressed a
         longstanding challenge to improve pregnant women's compliance with
         prenatal vitamin regimens by alleviating the difficulty that
         patients experience in swallowing large prenatal pills. Ther-Rx's
         second internally developed product, PremesisRx(TM), is an
         innovative prenatal prescription product that incorporates our
         controlled release Vitamin B6. This product is designed for use in
         conjunction with a physician-supervised program to reduce
         pregnancy-related nausea and vomiting, which is experienced by 50%
         to 90% of women who become pregnant. The third product, PreCare(R)
         Conceive(TM), is the first product designed as a prescription
         nutritional pre-conception supplement. The fourth product,
         PrimaCare(R), is the first prescription prenatal/postnatal
         nutritional supplement with essential fatty acids specially
         designed to help provide nutritional support for women during
         pregnancy, postpartum recovery and throughout the childbearing
         years. The fifth product, PrimaCare(R) ONE, was launched in fiscal
         2005 as a proprietary line extension to PrimaCare(R) and is the
         first prenatal product to contain essential fatty acids in a
         one-dose-per-day dosage form. The PrimaCare(R) franchise has grown
         to be the number one branded prenatal prescription vitamin in the
         U.S. As a result of this, sales of our branded prescription
         prenatal vitamins increased 56.0% in fiscal 2006 to $50.4 million.

         In June 2000, Ther-Rx launched its first NDA approved product,
         Gynazole-1(R), the only one-dose prescription cream treatment for
         vaginal yeast infections. Gynazole-1(R) incorporates our patented
         drug delivery technology, VagiSite(TM), the only clinically proven
         and Federal Food and Drug Administration, or FDA, approved
         controlled release bioadhesive system.

         In addition, we have entered into licensing agreements for the
         right to market Gynazole-1(R) in over 50 markets in Europe, Latin
         America, the Middle East, Asia, Indonesia, the People's Republic of
         China, Australia, New Zealand, Mexico and Scandanavia. We also
         received, during fiscal 2006, regulatory approval to market
         Gynazole-1(R) into 15 Eastern European markets and our first
         regulatory approval in an Asian market.

         We established our hematinic product line by acquiring two leading
         hematinic brands, Chromagen(R) and Niferex(R), in March 2003. We
         re-launched technology-improved versions of these products mid-way
         through fiscal 2004. In fiscal 2006, we introduced two new
         hematinic products - Niferex(R) Gold and Repliva 21/7(TM). As


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         a result of new prescription growth and the introduction of the two
         new products, sales of our hematinic product line grew to $36.8
         million in fiscal 2006, a 44.8% increase over fiscal 2005.

         In January 2005, Ther-Rx introduced its second NDA approved
         product, Clindesse(TM), the first approved single-dose therapy for
         bacterial vaginosis. Similar to Gynazole-1(R), Clindesse(TM)
         incorporates our proprietary VagiSite(TM) bioadhesive drug delivery
         technology. Since its launch, Clindesse(TM) has gained 19.7% of the
         intravaginal bacterial vaginosis market in the United States and
         generated $22.0 million of sales for its first full year in the
         market. We have also entered into licensing agreements for the
         right to market Clindesse(TM) in Spain, Portugal, Andorra, Brazil,
         Mexico, five Scandanavian markets, and 18 Eastern European
         countries.

         In fiscal 2006, we expanded our prescription nutritional franchise
         when Ther-Rx introduced Encora(TM), a twice-daily prescription
         nutritional supplement designed to meet the key nutritional and
         preventative health needs of women past their childbearing years.

         Based on the addition of new products and our expectation of
         continued growth in our branded business, Ther-Rx has expanded its
         branded sales force to approximately 285 specialty sales
         representatives and sales management personnel. Ther-Rx's sales
         force focuses on physician specialists who are identified through
         available market research as frequent prescribers of our
         prescription products. Ther-Rx also has a corporate sales and
         marketing management team dedicated to planning and managing
         Ther-Rx's sales and marketing efforts.

         ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED DRUG
         BUSINESS

         We established ETHEX, currently our largest business segment, in
         1990 to utilize our portfolio of drug delivery systems to develop
         and market hard-to-copy generic/non-branded pharmaceuticals. We
         believe many of our ETHEX products enjoy higher gross margins than
         other generic pharmaceutical companies due to our approach of
         selecting products that benefit from our proprietary drug delivery
         systems and our specialty manufacturing capabilities. These
         advantages can act as barriers to entry which may limit competition
         and reduce the rate of price erosion typically experienced in the
         generic market. ETHEX's net revenues were $203.8 million for fiscal
         2006, which represented 55.4% of our total net revenues.

         We have incorporated our proprietary drug delivery technology in
         many of our generic/non-branded pharmaceutical products. For
         example, we have included METER RELEASE(R), one of our proprietary
         controlled release technologies, into the only generic equivalent
         to Norpace(R) CR, an antiarrhythmic that is taken twice daily.
         Further, we have used our KV/24(R) once daily technology in the
         generic equivalent to IMDUR(R), a cardiovascular drug that is taken
         once per day. In addition, utilizing our specialty manufacturing
         expertise and a sublingual delivery system, we produced and
         marketed the first non-branded alternative to Nitrostat(R)
         sublingual, an anti-angina product which historically has been
         difficult to manufacture.

         To capitalize on ETHEX's unique product capabilities, we continue
         to expand our ETHEX product portfolio. In fiscal 2006, we launched
         a new InveAmp(TM) line extension to our pain management business.
         InveAmp(TM), a unique one unit dose ampoule, was designed to make
         dispensing of schedule II solutions more effective.

         Over the past two years, we have introduced a number of new
         generic/non-branded products and currently have more than 50 new
         product opportunities in our generic/non-branded products pipeline.
         Although specialty generic sales resulting from new product
         introductions were limited during fiscal 2006, we did receive ANDA
         approval for Prednisolone Sodium Phosphate Liquid 15 mg (base)/5 mL
         in June 2005 and late in the 2006 fiscal year ANDA approvals for
         five strengths of Oxycodone Hydrochloride tablets, three strengths
         of Hydromorphone Hydrochloride tablets and the 30 mg strength of
         Morphine Sulfate. We also anticipate ANDA approvals for Diltiazem,
         Levothyroxine and Metoprolol, among other products, in fiscal 2007.

         In addition to our internal marketing efforts, we have entered into
         a long-term product development and marketing license agreement
         with Strides, an Indian generic pharmaceutical developer and
         manufacturer, for


                                     7

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         exclusive marketing rights in the United States and Canada for 10
         new generic drugs. Under the agreement, Strides will be responsible
         for developing, submitting for regulatory approval and
         manufacturing the 10 products and we will be responsible for
         exclusively marketing the products in the territories covered by
         the agreement. Under a separate agreement, we invested $11.3
         million in Strides redeemable preferred stock.

         In February 2006, we entered into an exclusive arrangement with
         Gedeon Richter, Ltd., a European pharmaceutical company, to market
         a broad group of generic drug products to the U.S. marketplace. The
         products will serve the cardiovascular, diabetic and central
         nervous system markets. Subject to FDA approval and patent
         expirations, we expect to introduce these products to the U.S.
         market over the next several years through 2017.

         Also, late in fiscal 2006, we received a favorable court ruling in
         a Paragraph IV patent infringement action filed against us by
         AstraZeneca based on our ANDA submissions to market generic
         formulations of Toprol-XL(R). We believe we were the first company
         to file with the FDA for generic approval of the 100 mg and 200 mg
         dosage strengths, a position that may, upon approval, afford us the
         opportunity for a six month exclusivity period for marketing these
         generic versions. The total branded dollar volume of Toprol-XL(R)
         in 2005 was $1.3 billion, of which the 100 mg and 200 mg strengths
         represented nearly half.

         ETHEX primarily focuses on the therapeutic categories of
         cardiovascular, women's health, pain management and respiratory,
         leveraging our expertise in developing and manufacturing products
         in these areas. In addition, we pursue opportunities outside of
         these categories where we also may differentiate our products based
         upon our proprietary drug delivery systems and our specialty
         manufacturing expertise.

         CARDIOVASCULAR. ETHEX currently markets over 45 products in its
         cardiovascular line, including products to treat angina, arrhythmia
         and hypertension, as well as for potassium supplementation. The
         cardiovascular line accounted for 41.9% of ETHEX's net revenues in
         fiscal 2006.

         PAIN MANAGEMENT. ETHEX currently markets over 20 products in its
         pain management line. Included in this line are several controlled
         substance drugs, such as morphine, hydromorphone and oxycodone.
         Pain management products accounted for 18.4% of ETHEX's net
         revenues in fiscal 2006.

         RESPIRATORY. ETHEX currently markets over 35 products in its
         respiratory line, which consists primarily of cough/cold products.
         ETHEX is the leading provider on a unit basis of prescription
         cough/cold products in the United States today. The cough/cold line
         accounted for 17.7% of ETHEX's net revenues in fiscal 2006.

         WOMEN'S HEALTH CARE. ETHEX currently markets over 20 products in
         its women's healthcare line, all of which are prescription prenatal
         vitamins. The women's healthcare line accounted for 8.3% of ETHEX's
         net revenues in fiscal 2006.

         OTHER THERAPEUTICS. In addition to our core therapeutic lines,
         ETHEX markets over 40 products in the gastrointestinal,
         dermatological, anti-anxiety, digestive enzyme and dental
         categories.

         ETHEX has a dedicated sales and marketing team, which includes an
         outside sales team of regional managers and national account
         managers and an inside sales team. The outside sales force calls on
         wholesalers and distributors and national drugstore chains, as well
         as hospitals, nursing homes, independent pharmacies and mail order
         firms. The inside sales force makes calls to independent pharmacies
         to create pull-through at the wholesale level.



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         PDI - OUR VALUE-ADDED RAW MATERIAL BUSINESS

         PDI develops and markets specialty raw material products for the
         pharmaceutical, nutritional, food, personal care and other
         industries. Its products include value-added active drug molecules,
         vitamins, minerals and other raw material ingredients that provide
         benefits such as improved taste, altered or controlled release
         profiles, enhanced product stability or more efficient and other
         manufacturing process advantages. PDI is also a significant
         supplier of value-added raw materials for the development and
         manufacture of both existing and new products at our Ther-Rx and
         ETHEX businesses. Net revenues for PDI were $17.0 million in fiscal
         2006, which represented 4.6% of our total net revenues. PDI
         currently offers three distinct lines of specialty raw material
         products:

         o    DESCOTE(R) is a family of microencapsulated tastemasked
              vitamins and minerals for use in chewable nutritional
              products, quick dissolve dosage forms, foods, children's
              vitamins and other products.

         o    DESTAB(TM) is a family of direct compression products that
              enables pharmaceutical manufacturers to produce tablets and
              caplets more efficiently and economically.

         o    MicroMask(TM) is a family of products designed to alleviate
              problems associated with swallowing tablets. This is
              accomplished by offering superior tasting, chewable or quick
              dissolving dosage forms of medication.

         BUSINESS STRATEGY

         Our goal is to enhance our position as a leading fully integrated
         specialty pharmaceutical company that utilizes its expanding drug
         delivery expertise to bring technologically distinguished brand
         name and generic/non-branded products to market. Our strategies
         incorporate the following key elements:

         INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
         delivery technologies, research and development and manufacturing
         expertise to introduce new brand name products which can expand our
         existing franchises. During the second quarter of fiscal 2006,
         Ther-Rx introduced Encora(TM), a new prescription nutritional
         supplement product, and two new hematinic products, Niferex(R) Gold
         and Repliva 21/7(TM). We plan to continue to use our research and
         development, manufacturing and marketing expertise to create unique
         brand name products within our core therapeutic areas and we
         currently have a number of new products in clinical development.

         CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek
         acquisition opportunities for both Ther-Rx and ETHEX. Ther-Rx
         continually looks for platform acquisition opportunities similar to
         PreCare(R) around which we can build franchises. We believe that
         consolidation among large pharmaceutical companies, coupled with
         cost-containment pressures, has increased the level of sales
         necessary for an individual product to justify active marketing and
         promotion. This has led large pharmaceutical companies to focus
         their marketing efforts on drugs with higher volume sales, newer or
         novel drugs which have the potential for high volume sales and
         products which fit within core therapeutic or marketing priorities.
         As a result, major pharmaceutical companies increasingly have
         sought to divest small or non-strategic product lines, which can be
         profitable for specialty pharmaceutical companies like us.

         In making acquisitions, we apply several important criteria in our
         decision-making process. We pursue products with the following
         attributes:

         o    products which we believe have relevance for treatment of
              significant clinical needs;

         o    promotionally sensitive maintenance drugs which require
              continual use over a long period of time, as opposed to more
              limited use products for acute indications;

         o    products that have strong patent protection or can be
              protected;

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         o    products which are predominantly prescribed by physician
              specialists, which can be cost-effectively marketed by our
              focused sales force; and

         o    products which we believe have potential for technological
              enhancements and line extensions based upon our drug delivery
              technologies.

         FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our
         Ther-Rx sales efforts on niche markets where we believe we can
         target a relatively narrow physician audience. Because our products
         are sold to specialty physician groups that tend to be relatively
         concentrated, we believe that we can address these markets cost
         effectively with a focused sales force. Based on the addition of
         new products and our expectation of continued growth in our branded
         business, Ther-Rx has expanded its branded sales force to
         approximately 285 specialty sales representatives and sales
         management personnel. We plan to continue to build our sales force
         as necessary to accommodate current and future expansions of our
         product lines.

         PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
         We plan to continue introducing generic and non-branded
         alternatives to select drugs whose patents have expired,
         particularly where we can use our drug delivery technologies. Such
         generic or off-patent pharmaceutical products are generally sold at
         significantly lower prices than the branded product. Accordingly,
         generic pharmaceuticals provide a cost-efficient alternative to
         users of branded products. We believe the health care industry will
         continue to support growth in the generic pharmaceutical market and
         that industry trends favor generic product expansion into the
         managed care, long-term care and government contract markets. We
         further believe that we are uniquely positioned to capitalize on
         this growing market given our large base of proprietary drug
         delivery technologies and our proven ability to lead the
         therapeutic categories we enter.

         ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We
         believe our drug delivery platform of 15 distinguished technologies
         has unique breadth and depth. These technologies have enabled us to
         create innovative products, including Gynazole-1(R) and
         Clindesse(TM), which incorporate VagiSite(TM), our proprietary
         bioadhesive controlled release system. In addition, our
         tastemasking and controlled release systems are incorporated into
         our prenatal vitamins, providing them with differentiated benefits
         over other products on the market.

         We plan to continue to develop our drug delivery technologies and
         have various technologies currently under development, such as:
         TransCell(R) for oral esophageal delivery of bioactive peptides and
         proteins that are normally degraded by stomach enzymes or
         first-pass liver effects; PulmoSite(TM) which applies bioadhesive
         and controlled release characteristics to drug agents that are
         inhaled for either local action in the lung or for systemic
         absorption; and Ocusite(TM) for the delivery of active agents by a
         bioadhesive topical application to the eye.

         OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES

         We believe we are a leader in the development of proprietary drug
         delivery systems and formulation technologies which enhance the
         effectiveness of new therapeutic agents, existing pharmaceutical
         products and nutritional supplements. We have used many of these
         technologies to successfully commercialize technologically
         distinguished branded and generic/non-branded products.
         Additionally, we continue to invest our resources in the
         development of new technologies. The following describes our
         principal drug delivery technologies.

         SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family
         of technologies and includes eight systems designed specifically
         for oral, topical or interorificial use. These systems rely on
         controlled bioadhesive properties to optimize the delivery of drugs
         to either wet mucosal tissue or the skin and are the subject of
         issued patents and pending patent applications. Of the technologies
         developed, products using the VagiSite(TM) and DermaSite(TM)
         technologies have been successfully commercialized. Our fully
         developed technologies include the following:

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         o    VagiSite(TM) is a controlled release bioadhesive delivery
              system that incorporates advanced polyphasic principles to
              create a bioemulsion system delivering therapeutic agents to
              the vagina. We have outlicensed VagiSite(TM) for sale in
              international markets for the treatment of vaginal infections.
              VagiSite(TM) technology is used in Gynazole-1(R), a one-dose
              prescription cream treatment for vaginal yeast infections and
              Clindesse(TM), a one-dose prescription cream treatment for
              bacterial vaginosis.

         o    DermaSite(TM) is a semi-solid SITE RELEASE(R) configuration
              for topical applications to the skin. The bioadhesive and
              controlled release properties of the delivery platform have
              made possible the development of products requiring a
              significantly reduced frequency of application.

         o    OraSite(R) is a controlled release mucoadhesive delivery
              system administered orally in a solid or liquid form. A drug
              formulated with the OraSite(R) technology may be formulated as
              a liquid or as a lozenge in which the dosage form liquefies
              upon insertion and adheres to the mucosal surface of the
              mouth, throat and esophagus. OraSite(R) possesses
              characteristics particularly advantageous to therapeutic
              categories such as oral hygiene, sore throat and periodontal
              and upper gastrointestinal tract disorders.

         o    OraSert(TM) is a solid dosage-form application system
              specifically designed for localized delivery of active agents
              to the oral tissues. The product is formulated as a "cough
              drop" type tablet, which immediately liquefies upon placement
              in the mouth and bioadheres to mucosal tissue in the mouth,
              throat and esophagus. OraSert(TM) possesses characteristics
              particularly advantageous to therapeutic applications such as
              periodontal disease, respiratory conditions, pharyngeal
              conditions and upper gastrointestinal tract disorders.

         o    BioSert(TM) is a bioadhesive delivery system in a solid insert
              formulation for vaginal or rectal administration, similar in
              appearance to a vaginal or rectal suppository, which can be
              used for both local and systemic delivery of drugs. The
              BioSert(TM) dosage form liquefies and bioadheres to vaginal or
              rectal tissues, which is of particular benefit when a patient
              can no longer tolerate orally administered medications. We are
              currently developing several drug products that utilize the
              BioSert(TM) technology, including non-steroidal
              anti-inflammatory drugs, or NSAIDs, and antifungals for a
              local effect and opioids for a systemic effect.

         In addition, the following SITE RELEASE(R) technologies are
         currently under development:

         o    Trans-Cell(R) is a novel bioadhesive, controlled release
              delivery system that may permit oral delivery of bioactive
              peptides and proteins that are normally degraded by stomach
              enzymes or first-pass liver effects. This technology was
              specifically designed to provide an oral delivery alternative
              to biotechnology and other compounds that currently are
              delivered as injections or infused.

         o    OcuSite(TM) is a liquid, microemulsion delivery system
              intended for topical applications in the eye. The
              microemulsion formulation lends optical clarity to the
              application and is particularly well suited for ophthalmic
              use. The bioadhesive and controlled release properties of this
              delivery system allow for reduced dosing regimentation.

         o    PulmoSite(TM) applies bioadhesive and controlled release
              characteristics to drug agents that are to be inhaled for
              either local action to the lung or for systemic absorption.

         ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological leadership
         of our advanced drug delivery systems was established in the
         development of our three oral controlled release technologies, all
         of which have been commercialized. Our systems can be individually
         designed to achieve the desired release profile for a given drug.
         The release profile is dependent on many parameters, such as drug
         solubility, protein binding and site of absorption. Some of the
         products utilizing our oral controlled release systems in the
         market include


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         Isosorbide-5-Mononitrate (an AB rated generic equivalent to
         IMDUR(R)) and Disopyramide Phosphate (an AB rated generic
         equivalent of Norpace(R) CR). Our patented technologies include the
         following:

         o    KV/24(R) is a multi-particulate drug delivery system that
              encapsulates one or more drug compounds into spherical
              particles which release the active drug or drugs systemically
              over an 18- to 24-hour period, permitting the development of
              once-a-day drug formulations. We believe that our KV/24(R)
              oral dosing system is the only commercialized 24-hour oral
              controlled release system that is successfully able to
              incorporate more than one active compound.

         o    METER RELEASE(R) is a polymer-based drug delivery system that
              offers different release characteristics than KV/24(R) and is
              used for products that require drug release rates of between
              eight and 12 hours. We have developed METER RELEASE(R) systems
              in tablet, capsule and caplet form that have been
              commercialized in ETHEX products in the cardiovascular,
              gastrointestinal and upper respiratory product categories.

         o    MICRO RELEASE(R) is a microparticulate formulation that
              encapsulates therapeutic agents, employing smaller particles
              than KV/24(R) and METER RELEASE(R). This system is used to
              extend the release of drugs in the body where precise release
              profiles are less important. MICRO RELEASE(R) has been
              commercialized in prescription products marketed by ETHEX and
              Ther-Rx as well as over-the-counter nutritional products.

         TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve
         the taste of unpleasant drugs. Our three patented tastemasking
         systems can be applied to liquids, chewables or dry powders. We
         first introduced tastemasking technologies in 1991 and have
         utilized them in a number of Ther-Rx and ETHEX products, including
         PreCare(R) Chewables and most of the liquid products that are sold
         in ETHEX's cough/cold line. Our patented technologies include the
         following:

         o    LIQUETTE(R) is a tastemasking system that incorporates
              unpleasant tasting drugs into a hydrophilic and lipophilic
              polymer matrix to suppress the taste of a drug. This
              technology is used for mildly to moderately distasteful drugs
              where low manufacturing costs are particularly important.

         o    FlavorTech(R) is a liquid formulation technology designed to
              reduce the objectionable taste of a wide variety of
              therapeutic products. FlavorTech(R) technology has been used
              in cough/cold syrup products sold by ETHEX and has special
              application to other products, such as antibiotic, geriatric
              and pediatric pharmaceuticals.

         o    MicroMask(TM) is a tastemasking technology that incorporates a
              dry powder, microparticulate approach to reducing
              objectionable tastes by sequestering the unpleasant drug agent
              in a specialized matrix. This formulation technique has the
              effect of "shielding" the drug from the taste receptors
              without interfering with the dissolution and ultimate
              absorption of the agent within the gastrointestinal tract.
              MicroMask(TM) is a more potent tastemasking technology than
              LIQUETTE(R) and has been used in connection with two Ther-Rx
              products.

         QUICK DISSOLVING TECHNOLOGY. Our quick dissolving oral tablet
         technology provides the ability to tastemask, yet dissolves in the
         mouth in a matter of seconds. Most other quick-dissolving
         technologies offer either quickness at the expense of poor
         tastemasking or excellent tastemasking at the expense of quickness.
         While still under development, this system allows for a drug to be
         quickly dissolved in the mouth, and can be combined with
         tastemasking capabilities that offer a unique dosage form for the
         most bitter tasting drug compounds. We have been issued patents and
         have patents pending for this system with the U.S. Patent and
         Trademark Office, or PTO.

         SALES AND MARKETING

         Ther-Rx has a national sales and marketing infrastructure which
         includes approximately 285 sales representatives and sales
         management personnel dedicated to promoting and marketing our
         branded pharmaceutical products to


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         targeted physician specialists. The Ther-Rx sales force focuses on
         physician specialists who are identified through available market
         research as frequent prescribers of products in our therapeutic
         categories. Ther-Rx also has a corporate sales and marketing
         management team dedicated to planning and managing Ther-Rx's sales
         and marketing efforts.

         We attempt to increase sales of our branded pharmaceutical products
         through physician sales calls and promotional efforts, including
         sampling, advertising and direct mail. For acquired branded
         products, we generally increase the level of physician sales calls
         and promotion relative to the previous owner. For example, with the
         PreCare(R) prenatal sales efforts, we increased the level of
         physician sales calls and sampling to the highest prescribers of
         prenatal vitamins. We also have enhanced our PreCare(R) brand
         franchise by launching five more line extensions to address unmet
         needs, including the launch of PreCare(R) Chewables, Premesis
         Rx(TM), PreCare(R) Conceive(TM), PrimaCare(R) and PrimaCare(R) ONE.
         The PreCare(R) product line enables us to deliver a full range of
         nutritional products for physicians to prescribe to women in their
         childbearing years. In addition, we added to our women's health
         care family of products in June 2000 with the introduction of our
         first NDA approved product, Gynazole-1(R), the only one-dose
         prescription cream treatment for vaginal yeast infections. In
         fiscal 2004, we further expanded our branded product offerings when
         we launched technology improved versions of the Chromagen(R) and
         Niferex(R) oral hematinic product lines that were acquired at the
         end of fiscal 2003. In January 2005, we introduced our second NDA
         approved product, Clindesse(TM), the first approved single-dose
         therapy for bacterial vaginosis. And in fiscal 2006, we introduced
         Encora(TM), a new prescription nutritional supplement product, and
         two new hematinic products, Niferex(R) Gold and Repliva 21/7(TM).
         By offering multiple products to the same group of physician
         specialists, we believe we are able to maximize the effectiveness
         of our experienced sales force.

         ETHEX has an experienced sales and marketing team, which includes
         an outside sales team, regional account managers, national account
         managers and an inside sales team. The outside sales force calls on
         wholesalers, distributors and national drugstore chains, as well as
         hospitals, nursing homes, mail order firms and independent
         pharmacies. The inside sales team calls on independent pharmacies
         to create pull-through at the wholesale level.

         We believe that industry trends favor generic product expansion
         into the managed care, long-term care and government contract
         markets. Further, we believe that our competitively priced,
         technology-distinguished generic/non-branded products can fulfill
         the increasing need of these markets to contain costs and improve
         patient compliance. Accordingly, we intend to continue to devote
         significant marketing resources to the penetration of those
         markets.

         PDI has a specialized technical sales group that calls on the
         leading companies in the pharmaceutical, nutritional, personal
         care, food and other markets in the United States.

         During fiscal 2006, our three largest customers accounted for 27%,
         16% and 13% of gross revenues. These customers were McKesson Drug
         Company, Cardinal Health and Amerisource Corporation, respectively.
         In fiscal 2005 and 2004, these customers accounted for gross
         revenues of 27%, 16% and 12% and 25%, 16% and 13%, respectively.

         Although we sell internationally, we do not have material
         operations or sales in foreign countries and our sales are not
         subject to significant geographic concentration.

         RESEARCH AND DEVELOPMENT

         We have long recognized that development of successful new products
         is critical to achieving our goal of sustainable growth over the
         long term. As such, our investment in research and development,
         which increased at a compounded annual growth rate of 28.2% over
         the past four fiscal years, reflects our continued commitment to
         develop new products and/or technologies through our internal
         development programs, and with our external strategic partners.

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         Our research and development activities include the development of
         new and next generation drug delivery technologies, the formulation
         of brand name proprietary products and the development of
         technologically distinguished generic/non-branded versions of
         previously approved brand name pharmaceutical products. In fiscal
         2006, 2005 and 2004, total research and development expenses were
         $28.9 million, $23.5 million and $20.7 million, respectively.

         In January 2005, we introduced our second NDA approved product,
         Clindesse(TM), the first approved single-dose therapy for bacterial
         vaginosis. Similar to Gynazole-1(R), Clindesse(TM) incorporates our
         proprietary VagiSite(TM) bioadhesive drug delivery technology. In
         fiscal 2006, we introduced Encora(TM), a new prescription
         nutritional supplement product, and two new hematinic products,
         Niferex(R) Gold and Repliva 21/7(TM). Ther-Rx currently has a
         number of products in its research and development pipeline at
         various stages of development. We believe we have the technological
         expertise required to develop unique products to meet currently
         unmet needs in the area of women's health, as well as other
         therapeutic areas.

         As part of the May 2005 acquisition of FemmePharma, we assumed
         development responsibility and secured full worldwide marketing
         rights to an endometriosis product that had successfully completed
         Phase II clinical trials. We believe that this transaction allows
         us to best monitor the drug's continued development to ultimately
         capitalize on an attractive opportunity in this therapeutic area.
         The Phase III clinical studies began during the latter part of
         fiscal 2006. In connection with the FemmePharma acquisition, the
         Company recorded expense of $30.4 million that consisted of $29.6
         million for acquired in-process research and development and $0.9
         million in direct expenses related to the transaction.

         To capitalize on ETHEX's unique product capabilities, we continue
         to expand our ETHEX product portfolio. Over the past two fiscal
         years, we have introduced a number of new generic/non-branded
         products and currently have a large portfolio of opportunities in
         our generic/non-branded products pipeline. Our development process
         typically consists of formulation, development and laboratory
         testing, and where required (1) preliminary bioequivalency studies
         of pilot batches of the manufactured product, (2) full scale
         bioequivalency studies using commercial quantities of the
         manufactured product and (3) submission of an ANDA to the FDA. We
         believe that, unlike many generic drug companies, we have the
         technical expertise required to develop generic substitutes for
         hard-to-copy branded pharmaceutical products. We received ANDA
         approval for Prednisolone Sodium Phosphate Liquid 15 mg (base)/5 mL
         in June 2005 and late in the 2006 fiscal year ANDA approvals for
         five strengths of Oxycodone Hydrochloride tablets, three strengths
         of Hydromorphone Hydrochloride tablets and the 30 mg. strength of
         Morphine Sulfate. We anticipate receiving ANDA approvals for
         Diltiazem, Levothyroxine and Metoprolol, among other products, in
         fiscal 2007.

         In addition to our internal marketing efforts, we have entered into
         a long-term product development and marketing license agreement
         with Strides, an Indian generic pharmaceutical developer and
         manufacturer, for exclusive marketing rights in the United States
         and Canada for 10 new generic drugs. Under the agreement, Strides
         will be responsible for developing, submitting for regulatory
         approval and manufacturing the 10 products and we will be
         responsible for exclusively marketing the products in the
         territories covered by the agreement.

         In February 2006, we entered into an exclusive arrangement with
         Gedeon Richter, Ltd., a European pharmaceutical company, to market
         a broad group of generic drug products to the U.S. marketplace. The
         products will serve the cardiovascular, diabetic and central
         nervous system markets. Subject to FDA approval and patent
         expirations, we expect to introduce these products to the U.S.
         market over the next several years through 2017.

         Also, late in fiscal 2006, we received a favorable court ruling in
         a Paragraph IV patent infringement action filed against us by
         AstraZeneca based on our ANDA submissions to market generic
         formulations of Toprol-XL(R). We believe we were the first company
         to file with the FDA for generic approval of the 100 mg and 200 mg
         dosage strengths, a position that may, upon approval, afford us the
         opportunity for a six-month exclusivity period for


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         marketing these generic versions. The total branded dollar volume
         of Toprol-XL(R) in 2005 was $1.3 billion, of which the 100 mg and
         200 mg strengths represented nearly half.

         PDI currently has a number of products in its research and
         development pipeline at various stages of development. PDI applies
         its technologies to a diverse number of active and inactive
         chemicals for more efficient processing of materials to achieve
         benefits such as prolonged action of release, manufacturing
         efficiencies, taste-masking, making materials more site specific
         and other benefits. Typically, the finished products into which the
         specialty raw materials are incorporated do not require FDA
         approval.

         We continually apply our scientific and development expertise to
         refine and enhance our existing drug delivery systems and
         formulation technologies and to create new technologies that may be
         used in our drug development programs. Certain of these
         technologies currently under development include advanced oral
         controlled release systems, quick dissolving oral delivery systems
         (with and without tastemasking characteristics) and transesophageal
         and intrapulmonary delivery technologies.

         PATENTS AND OTHER PROPRIETARY RIGHTS

         We actively seek, when appropriate and available, protection for
         our products and proprietary information by means of U.S. and
         foreign patents, trademarks, trade secrets, copyrights and
         contractual arrangements. Patent protection in the pharmaceutical
         field, however, can involve complex legal and factual issues.
         Moreover, broad patent protection for new formulations or new
         methods of use of existing chemical compounds is sometimes
         difficult to obtain, primarily because the active ingredient and
         many of the formulation techniques have been known for some time.
         Consequently, some patents claiming new formulations or new methods
         of use for old drugs may not provide meaningful protection against
         competition. Nevertheless, we intend to continue to seek patent
         protection when appropriate and available and otherwise to rely on
         regulatory-related exclusivity and trade secrets to protect certain
         of our products, technologies and other scientific information.
         There can be no assurance, however, that any steps taken to protect
         such proprietary information will be effective.

         Our policy is to file patent applications in appropriate situations
         to protect and preserve, for our own use, technology, inventions
         and improvements that we consider important to the development of
         our business. We currently hold domestic and foreign issued patents
         the last of which expires in fiscal 2022 relating to our controlled
         release, site-specific, quick dissolve and tastemasking
         technologies. We have been granted 35 U.S. patents and have 50 U.S.
         patent applications pending. In addition, we have 26 foreign issued
         patents and a total of 131 patent applications pending primarily in
         Canada, Europe, Australia, Japan, South America, Mexico and South
         Korea (see Item 1A "Risk Factors - We depend on our patents and
         other proprietary rights" for additional information).

         We currently own more than 150 U.S. and foreign trademark
         registrations and have also applied for trademark protection for
         the names of our proprietary controlled-release, tastemasking,
         site-specific and quick dissolve technologies. We intend to
         continue to trademark new technology and product names as they are
         developed.

         To protect our trademark, domain name, and related rights, we
         generally rely on trademark and unfair competition laws, which are
         subject to change. Some, but not all, of our trademarks are
         registered in the jurisdictions where they are used. Some of our
         other trademarks are the subject of pending applications in the
         jurisdictions where they are used or intended to be used and others
         are not.

         MANUFACTURING AND FACILITIES

         We believe that our administrative, research, manufacturing and
         distribution facilities are an important factor in achieving our
         long-term growth objectives. All facilities at March 31, 2006,
         aggregating approximately 1.2 million square feet, are located in
         the St. Louis, Missouri area. We own facilities with approximately
         1.0 million square feet, with the balance under various leases at
         pre-determined annual rates under agreements expiring from


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         fiscal 2007 through fiscal 2008, subject in most cases to renewal
         at our option. The purchase option on a 129,000 square foot
         building leased by us on March 31, 2006 was exercised by us in
         accordance with the lease agreement and is scheduled to be acquired
         for $4.9 million in June 2006.

         We manufacture drug products in liquid, semi-solid, tablet, capsule
         and caplet forms for distribution by Ther-Rx, ETHEX and our
         corporate licensees and value-added specialty raw materials for
         distribution by PDI. We believe that all of our facilities are in
         material compliance with applicable regulatory requirements.

         We seek to maintain inventories at sufficient levels to support
         current production and sales levels. During fiscal 2006, we
         encountered no serious shortage of any particular raw materials.
         Although there can be no assurance that raw material supply will
         not adversely affect our future operations, we do not believe that
         any shortages will occur in the foreseeable future.

         COMPETITION

         Competition in the development and marketing of pharmaceutical
         products is intense and characterized by extensive research efforts
         and rapid technological progress. Many companies, including those
         with financial and marketing resources and development capabilities
         substantially greater than our own, are engaged in developing,
         marketing and selling products that compete with those that we
         offer. Our branded pharmaceutical products may also be subject to
         competition from alternate therapies during the period of patent
         protection and thereafter from generic equivalents. In addition,
         our generic/non-branded pharmaceutical products may be subject to
         competition from pharmaceutical companies engaged in the
         development of alternatives to the generic/non-branded products we
         offer or of which we undertake development. Our competitors may
         develop generic products before we do or may have pricing
         advantages over our products. In our specialty pharmaceutical
         businesses, we compete primarily on the basis of product efficacy,
         breadth of product line and price. We believe that our patents,
         proprietary trade secrets, technological expertise, product
         development and manufacturing capabilities will enable us to
         maintain a leadership position in the field of advanced drug
         delivery technologies and to continue to develop products to
         compete effectively in the marketplace.

         In addition, we compete for product acquisitions with other
         pharmaceutical companies. These competitors may have substantially
         greater financial and marketing resources than we do. Accordingly,
         our competitors may succeed in product line acquisitions that we
         seek to acquire.

         We also compete with drug delivery companies engaged in the
         development of alternative drug delivery systems. We are aware of a
         number of companies currently seeking to develop new non-invasive
         drug delivery systems, including oral delivery and transmucosal
         systems. Many of these companies may have greater research and
         development capabilities, experience, manufacturing, marketing,
         financial and managerial resources than we do. Accordingly, our
         competitors may succeed in developing competing technologies,
         obtaining FDA approval for products or gaining market acceptance
         more rapidly than we do.

         GOVERNMENT REGULATION

         All pharmaceutical manufacturers are subject to extensive
         regulation by the federal government, principally the FDA, and, to
         a lesser extent, by state, local and foreign governments. The
         Federal Food, Drug and Cosmetic Act, or FDCA, and other federal
         statutes and regulations govern or influence, among other things,
         the development, testing, manufacture, safety, labeling, storage,
         recordkeeping, approval, advertising, promotion, sale and
         distribution of pharmaceutical products. Pharmaceutical
         manufacturers are also subject to certain record-keeping and
         reporting requirements, establishment registration and product
         listing, and FDA inspections.

         With respect to any non-biological "new drug" product with active
         ingredients not previously approved by the FDA, a prospective
         manufacturer must submit a full NDA, including complete reports of
         preclinical, clinical and other studies to prove the product's
         safety and efficacy. A full NDA may also need to be submitted for a
         drug


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         product with a previously approved active ingredient if, among
         other things, the drug will be used to treat an indication for
         which the drug was not previously approved, or if the abbreviated
         procedure discussed below is otherwise not available. A
         manufacturer intending to conduct clinical trials in humans for a
         new drug may be required first to submit a Notice of Claimed
         Investigational Exception for a New Drug, or IND, to the FDA
         containing information relating to preclinical and clinical
         studies. INDs and full NDAs may be required to be filed to obtain
         approval of certain of our products, including those that do not
         qualify for abbreviated application procedures. The full NDA
         process, including clinical development and testing, is expensive,
         time consuming and is subject to inherent uncertainties.

         The Drug Price Competition and Patent Restoration Act of 1984,
         known as the Hatch-Waxman Act, established ANDA procedures for
         obtaining FDA approval for generic versions of many non-biological
         drugs for which patent or marketing exclusivity rights have expired
         and which are bioequivalent to previously approved drugs.
         "Bioequivalence" for this purpose, with certain exceptions,
         generally means that the proposed generic formulation is absorbed
         by the body at the same rate and extent as a previously approved
         "reference drug." Approval to manufacture these drugs is obtained
         by filing abbreviated applications, such as ANDAs. As a substitute
         for clinical studies, the FDA requires data indicating the ANDA
         drug formulation is bio-equivalent to a previously approved
         reference drug among other requirements. The same abbreviated
         application procedures apply to antibiotic drug products that are
         bio-equivalent to previously approved antibiotics, except that
         products containing certain older antibiotic ingredients are not
         subject to the special patent or marketing exclusivity protections
         afforded by the Hatch-Waxman Act to other drug products. The
         advantage of the ANDA approval mechanism, compared to an NDA, is
         that an ANDA applicant is not required to conduct preclinical and
         clinical studies to demonstrate that the product is safe and
         effective for its intended use and may rely, instead, on studies
         demonstrating bio-equivalence to a previously approved reference
         drug.

         In addition to establishing ANDA approval mechanisms, the
         Hatch-Waxman Act fosters pharmaceutical innovation through such
         incentives as non-patent exclusivity and patent restoration. The
         Act provides two distinct exclusivity provisions that either
         preclude the submission or delay the approval of an ANDA. A
         five-year exclusivity period is provided for new chemical
         compounds, and a three-year marketing exclusivity period is
         provided for changes to previously approved drugs which are based
         on new clinical investigations essential to the approval. The
         three-year marketing exclusivity period may be applicable to the
         approval of a novel drug delivery system. The marketing exclusivity
         provisions apply equally to patented and non-patented drug
         products, but do not apply to products containing antibiotic
         ingredients first submitted for approval on or before November 20,
         1997. These provisions do not delay or otherwise affect the
         approvability of full NDAs even when effective ANDA approvals are
         not available. For drugs covered by patents, patent extension may
         be provided for up to five years as compensation for reduction of
         the effective life of the patent resulting from time spent in
         conducting clinical trials and in FDA review of a drug application.

         There has been substantial litigation in the biomedical,
         biotechnology and pharmaceutical industries with respect to the
         manufacture, use and sale of new products that are alleged to
         infringe outstanding patent rights. One or more patents cover most
         of the proprietary products for which we are developing generic
         versions. When we file an ANDA for such drug products, we will, in
         most cases, be required to certify to the FDA that any patent which
         has been listed with the FDA as covering the product is either
         invalid or will not be infringed by the sale of our product.
         Alternatively, we could certify that we would not market our
         proposed product until the applicable patent expires. A patent
         holder may challenge a notice of non-infringement or invalidity by
         filing suit, which would in most cases, prevent FDA approval until
         the suit is resolved or at least 30 months have elapsed (unless the
         patent expires, whichever is earlier). Should any entity commence a
         lawsuit with respect to any alleged patent infringement by us, the
         uncertainties inherent in patent litigation would make the outcome
         of such litigation difficult to predict.

         In addition to marketing drugs which are subject to FDA review and
         approval, we market certain drug products in the United States
         without FDA approval under certain "grandfather" clauses and
         statutory and regulatory exceptions to the pre-market approval
         requirement for "new drugs" under the FDCA. A determination as to

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         whether a particular product does or does not require FDA
         pre-market review and approval can involve consideration of
         numerous complex and imprecise factors. If a determination is made
         by the FDA that any product marketed without approval requires such
         approval, the FDA may institute enforcement actions, including
         product seizure, or an action seeking an injunction against further
         marketing and may or may not allow sufficient time to obtain the
         necessary approvals before it seeks to curtail further marketing.
         We are not in a position to predict whether or when the FDA might
         choose to raise similar objections to the marketing without NDA or
         ANDA approval of another category or categories of drug products
         represented in our product lines. In the event such objections are
         raised, we could be required or could decide to cease distribution
         of additional products until pre-market approval is obtained. In
         addition, we may not be able to obtain any particular approval that
         may be required or such approval may not be obtained on a timely
         basis.

         In addition to obtaining pre-market approval for certain of our
         products, we are required to maintain all facilities in compliance
         with the FDA's current Good Manufacturing Practice, or cGMP,
         requirements. In addition to compliance with cGMP each
         pharmaceutical manufacturer's facilities must be registered with
         the FDA. Manufacturers must also be registered with the U.S. Drug
         Enforcement Administration or DEA, and similar state and local
         regulatory authorities if they handle controlled substances, and
         with the EPA and similar state and local regulatory authorities if
         they generate toxic or dangerous wastes, and must comply with other
         applicable DEA and EPA requirements. Noncompliance with applicable
         requirements can result in fines, recall or seizure of products,
         total or partial suspension of production and distribution, refusal
         of the government to enter into supply contracts or to approve
         NDAs, ANDAs or other applications and criminal prosecution. The FDA
         also has the authority to revoke for-cause drug approvals
         previously granted.

         The Prescription Drug Marketing Act, or PDMA, which amended various
         sections of the FDCA, requires, among other things, state licensing
         of wholesale distributors of prescription drugs under federal
         guidelines that include minimum standards for storage, handling and
         record keeping. All of our facilities are registered with the State
         of Missouri, where they are located, as required by Federal and
         Missouri law. The PDMA also imposes detailed requirements on the
         distribution of prescription drug samples such as those distributed
         by the Ther-Rx sales force. The PDMA sets forth substantial civil
         and criminal penalties for violations of these and other
         provisions. Many states also require registration of out-of-state
         drug manufacturers and distributors who sell products in their
         states, and may also impose additional requirements or restrictions
         on out-of-state firms. These requirements vary widely from
         state-to-state and are subject to change with little or no direct
         notice to potentially affected firms. We believe that we are
         currently in compliance in all material respects with applicable
         state requirements. However, in the event that we are found to have
         failed to comply with applicable state requirements, we may be
         subject to sanctions, including monetary penalties and potential
         restrictions on our sales or other activities within particular
         states.

         For international markets, a pharmaceutical company is subject to
         regulatory requirements, inspections and product approvals
         substantially the same as those in the United States. In connection
         with any future marketing, distribution and license agreements that
         we may enter into, our licensees may accept or assume
         responsibility for such foreign regulatory approvals. The time and
         cost required to obtain these international market approvals may be
         greater or lesser than those required for FDA approval.

         Product development and approval within this regulatory framework
         take a number of years, involve the expenditure of substantial
         resources and is uncertain. Many drug products ultimately do not
         reach the market because they are not found to be safe or effective
         or cannot meet the FDA's other regulatory requirements. In
         addition, the current regulatory framework may change and
         additional regulatory or approval requirements may arise at any
         stage of our product development that may affect approval, delay
         the submission or review of an application or require additional
         expenditures by us. We may not be able to obtain necessary
         regulatory clearances or approvals on a timely basis, if at all,
         for any of our products under development, and delays in receipt or
         failure to receive such clearances or approvals, the loss of
         previously received clearances or approvals, or failure to comply
         with existing or future regulatory requirements could have a
         material adverse effect on our business.

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         EMPLOYEES

         As of March 31, 2006, we employed a total of 1,145 employees. We
         are party to a collective bargaining agreement covering 120
         employees that will expire December 31, 2009. We believe that our
         relations with our employees are good.

         ENVIRONMENT

         We do not expect that compliance with Federal, state or local
         provisions regulating the discharge of materials into the
         environment or otherwise relating to the protection of the
         environment will have a material effect on our capital
         expenditures, earnings or competitive position.

         AVAILABLE INFORMATION

         We make available, free of charge through our Internet website
         (http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
         Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
         amendments to these reports filed or furnished pursuant to Section
         13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
         as soon as reasonably practicable after we electronically file
         these reports with, or furnish them to, the Securities and Exchange
         Commission, or SEC. Also, copies of our Corporate Governance
         Guidelines, Audit Committee Charter, Compensation Committee
         Charter, Nominating and Corporate Governance Committee Charter,
         Code of Ethics for Senior Executives and Standard of Business
         Ethics for all Directors and employees are available on our
         Internet website, and available in print to any stockholder who
         requests them. The information posted on our website is not
         incorporated into this annual report.

         In addition, the SEC maintains an Internet website
         (http://www.sec.gov) that contains reports, proxy and information
         statements, and other information regarding issuers that file
         electronically with the SEC.


ITEM 1A. RISK FACTORS
         ------------

         We operate in a rapidly changing environment that involves a number
         of risks, some of which are beyond our control. The following
         discussion highlights some of these risks and others are discussed
         elsewhere in this report. Additional risks presently unknown to us
         or that we currently consider immaterial or unlikely to occur could
         also impair our operations. These and other risks could materially
         and adversely affect our business, financial condition, operating
         results or cash flows.

                        RISKS RELATED TO OUR BUSINESS

         OUR FUTURE GROWTH IS LARGELY DEPENDENT UPON OUR ABILITY TO DEVELOP
         NEW PRODUCTS.

         We need to continue to develop and commercialize new brand name
         products and generic products utilizing our proprietary drug
         delivery systems to maintain the growth of our business. To do this
         we will need to identify, develop and commercialize technologically
         enhanced branded products and identify, develop and commercialize
         drugs that are off-patent and that can be produced and sold by us
         as generic products using our drug delivery technologies. If we are
         unable to identify, develop and commercialize new products, we may
         need to obtain licenses to additional rights to branded or generic
         products, assuming they would be available for licensing, which
         could decrease our profitability. We cannot assure you that we will
         be successful in pursuing this strategy.

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         IF WE ARE UNABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT, OUR
         FUTURE OPERATING RESULTS MAY SUFFER.

         Certain products we are developing will require significant
         additional development and investment, including preclinical and
         clinical testing, where required, prior to their commercialization.
         We expect that many of these products will not be commercially
         available for several years, if at all. We cannot assure you that
         such products or future products will be successfully developed,
         prove to be safe and effective in clinical trials (if required),
         meet applicable regulatory standards, or be capable of being
         manufactured in commercial quantities at reasonable cost.

         OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

         We intend to continue to acquire pharmaceutical products, novel
         drug delivery technologies and/or companies that fit into our
         research, manufacturing, distribution or sales and marketing
         operations or that could provide us with additional products,
         technologies or sales and marketing capabilities. We may not be
         able to successfully identify, evaluate and acquire any such
         products, technologies or companies or, if acquired, we may not be
         able to successfully integrate such acquisitions into our business.
         We compete with many specialty pharmaceutical companies for
         products and product line acquisitions. These competitors may have
         substantially greater financial and managerial resources than we
         have.

         WE DEPEND ON OUR PATENTS AND OTHER PROPRIETARY RIGHTS AND CANNOT BE
         CERTAIN OF THEIR CONFIDENTIALITY AND PROTECTION.

         Our success depends, in large part, on our ability to protect our
         current and future technologies and products, to defend our
         intellectual property rights and to avoid infringing on the
         proprietary rights of others. We have been issued numerous patents
         in the United States and in certain foreign countries, which cover
         certain of our technologies, and have filed, and expect to continue
         to file, patent applications seeking to protect newly developed
         technologies and products. The pharmaceutical field is crowded and
         a substantial number of patents have been issued. In addition, the
         patent position of pharmaceutical companies can be highly uncertain
         and frequently involves complex legal and factual questions. As a
         result, the breadth of claims allowed in patents relating to
         pharmaceutical applications or their validity and enforceability
         cannot be predicted. Patents are examined for patentability at
         patent offices against bodies of prior art which by their nature
         may be incomplete and imperfectly categorized. Therefore, even
         presuming that the examiner has been able to identify and cite the
         best prior art available to him during the examination process, any
         patent issued to us could later be found by a court or a patent
         office during post issuance proceedings to be invalid in view of
         newly-discovered prior art or already considered prior art or other
         legal reasons. Furthermore, there are categories of "secret" prior
         art unavailable to any examiner, such as the prior inventive
         activities of others, which could form the basis for invalidating
         any patent. In addition, there are other reasons why a patent may
         be found to be invalid, such as an offer for sale or public use of
         the patented invention in the United States more than one year
         before the filing date of the patent application. Moreover, a
         patent may be deemed unenforceable if, for example, the inventor or
         the inventor's agents failed to disclose prior art to the PTO that
         they knew was material to patentability.

         The coverage claimed in a patent application can be significantly
         reduced before a patent is issued, either in the United States or
         abroad. Consequently, there can be no assurance that any of our
         pending or future patent applications will result in the issuance
         of patents. Patents issued to us may be subjected to further
         proceedings limiting their scope and may not provide significant
         proprietary protection or competitive advantage. Our patents also
         may be challenged, circumvented, invalidated or deemed
         unenforceable. Patent applications in the United States filed prior
         to November 29, 2000 are currently maintained in secrecy until and
         unless patents issue, and patent applications in certain other
         countries generally are not published until more than 18 months
         after they are first filed (which generally is the case in the
         United States for applications filed on or after November 29,
         2000). In addition, publication of discoveries in scientific or
         patent literature often lags behind actual discoveries. As a
         result, we cannot be certain that we or our licensors will be
         entitled to any rights in purported inventions claimed in pending
         or future patent applications or that we or our licensors were the
         first to file patent applications on such


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         inventions. Furthermore, patents already issued to us or our
         pending applications may become subject to dispute, and any dispute
         could be resolved against us. For example, we may become involved
         in re-examination, reissue or interference proceedings in the PTO,
         or opposition proceedings in a foreign country. The result of these
         proceedings can be the invalidation or substantial narrowing of our
         patent claims. We also could be subject to court proceedings that
         could find our patents invalid or unenforceable or could
         substantially narrow the scope of our patent claims. In addition,
         statutory differences in patentable subject matter may limit the
         protection we can obtain on some of our inventions outside of the
         United States. For example, methods of treating humans are not
         patentable in many countries outside of the United States.

         These and other issues may prevent us from obtaining patent
         protection outside of the United States. Furthermore, once patented
         in foreign countries, the inventions may be subjected to mandatory
         working requirements and/or subject to compulsory licensing
         regulations.

         We also rely on trade secrets, unpatented proprietary know-how and
         continuing technological innovation that we seek to protect, in
         part by confidentiality agreements with licensees, suppliers,
         employees and consultants. These agreements may be breached by the
         other parties to these agreements. We may not have adequate
         remedies for any breach. Disputes may arise concerning the
         ownership of intellectual property or the applicability or
         enforceability of our confidentiality agreements and there can be
         no assurance that any such disputes would be resolved in our favor.

         Furthermore, our trade secrets and proprietary technology may
         become known or be independently developed by our competitors, or
         patents may not be issued with respect to products or methods
         arising from our research, and we may not be able to maintain the
         confidentiality of information relating to those products or
         methods. Furthermore, certain unpatented technology may be subject
         to intervening rights.

         WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.

         To protect our trademarks and goodwill associated therewith, domain
         name, and related rights, we generally rely on federal and state
         trademark and unfair competition laws, which are subject to change.
         Some, but not all, of our trademarks are registered in the
         jurisdictions where they are used. Some of our other trademarks are
         the subject of pending applications in the jurisdictions where they
         are used or intended to be used, and others are not.

         It is possible that third parties may own or could acquire rights
         in trademarks or domain names in the United States or abroad that
         are confusingly similar to or otherwise compete unfairly with our
         marks and domain names, or that our use of trademarks or domain
         names may infringe or otherwise violate the intellectual property
         rights of third parties. The use of similar marks or domain names
         by third parties could decrease the value of our trademarks or
         domain names and hurt our business, for which there may be no
         adequate remedy.

         THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY
         RIGHTS, OR SEEK TO CIRCUMVENT OURS.

         We may be required to defend against charges of infringement of
         patents, trademarks or other proprietary rights of third parties.
         This defense could require us to incur substantial expense and to
         divert significant effort of our technical and management
         personnel, and could result in our loss of rights to develop or
         make certain products or require us to pay monetary damages or
         royalties to license proprietary rights from third parties. If a
         dispute is settled through licensing or similar arrangements, costs
         associated with such arrangements may be substantial and could
         include ongoing royalties. Furthermore, we cannot be certain that
         the necessary licenses would be available to us on acceptable
         terms, if at all. Accordingly, an adverse determination in a
         judicial or administrative proceeding or failure to obtain
         necessary licenses could prevent us from manufacturing, using,
         selling and/or importing in to the United States certain of our
         products. Litigation also may be necessary to enforce our patents
         against others or to protect our know-how or trade secrets. That
         litigation could result in substantial expense or put our
         proprietary rights at risk of loss, and we cannot assure you that
         any litigation will be resolved in our favor. There currently are
         two patent infringement lawsuits pending against us. Although we do
         not believe they will


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         have a material adverse effect on our future financial condition or
         results of operations, we cannot assure you of that.

         WE MAY BE UNABLE TO MANAGE OUR GROWTH.

         Over the past ten years, our businesses and product offerings have
         grown substantially. This growth and expansion has placed, and is
         expected to continue to place, a significant strain on our
         management and operational and financial resources. To manage our
         growth, we must continue to (1) expand our operational, sales,
         customer support and financial control systems and (2) hire, train
         and retain qualified personnel. We cannot assure you that we will
         be able to adequately manage our growth. If we are unable to manage
         our growth effectively, our business, results of operations and
         financial condition could be materially adversely affected.

         WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR NEW PRODUCTS ON A
         TIMELY BASIS, OR AT ALL.

         Many of our new products will require FDA approval. FDA approval
         typically involves lengthy, detailed and costly laboratory and
         clinical testing procedures, as well as the FDA's review and
         approval of the information submitted. We cannot assure you that
         the products we develop will be determined to be safe and effective
         in these testing procedures, or that they will be approved by the
         FDA. The FDA also has the authority to revoke for-cause drug
         approvals previously granted.

         WE MAY BE ADVERSELY AFFECTED BY THE CONTINUING CONSOLIDATION OF OUR
         DISTRIBUTION NETWORK AND THE CONCENTRATION OF OUR CUSTOMER BASE.

         Our principal customers are wholesale drug distributors, major
         retail drug store chains, independent pharmacies and mail order
         firms. These customers comprise a significant part of the
         distribution network for pharmaceutical products in the United
         States. This distribution network is continuing to undergo
         significant consolidation marked by mergers and acquisitions among
         wholesale distributors and the growth of large retail drug store
         chains. As a result, a small number of large wholesale distributors
         control a significant share of the market, and the number of
         independent drug stores and small drug store chains has decreased.
         We expect that consolidation of drug wholesalers and retailers will
         increase pricing and other competitive pressures on drug
         manufacturers. For the fiscal year ended March 31, 2006, our three
         largest customers, which are wholesale distributors, accounted for
         27%, 16% and 13% of our gross sales. The loss of any of these
         customers could materially and adversely affect our results of
         operations or financial condition.

         THE REGULATORY STATUS OF CERTAIN OF OUR GENERIC PRODUCTS MAY MAKE
         THEM SUBJECT TO INCREASED COMPETITION.

         Many of our products are manufactured and marketed without FDA
         approval. For example, our prenatal products, which contain folic
         acid, are sold as prescription multiple vitamin supplements. These
         types of prenatal vitamins are typically regulated by the FDA as
         prescription drugs, but are not covered by an NDA or ANDA. As a
         result, competitors may more easily and rapidly introduce products
         competitive with our prenatal and other products that have a
         similar regulatory status.

         One of the key motivations for challenging patents is the reward of
         a 180-day period of market exclusivity. Under the Hatch-Waxman Act,
         the developer of a generic version of a product which is the first
         to have its ANDA accepted for filing by the FDA, and whose filing
         includes a certification that the patent is invalid, unenforceable
         and/or not infringed (a so-called "Paragraph IV certification"),
         may be eligible to receive a 180-day period of generic market
         exclusivity. This period of market exclusivity provides the patent
         challenger with the opportunity to earn a risk-adjusted return on
         legal and development costs associated with bringing a product to
         market. In cases such as these where suit is filed by the
         manufacturer of the branded product, final FDA approval of an ANDA
         generally requires a favorable disposition of the suit, either by
         judgment that the patents at issue are invalid and/or not infringed
         or by settlement. There can be no assurance that we will ultimately
         prevail in these litigations, that we will receive final FDA
         approval of our ANDAs, or that any expectation of a period of
         generic


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         exclusivity for certain of these products will actually be realized
         when and if resolution of the litigations and receipt of final
         approvals from the FDA occur.

         Since enactment of the Hatch-Waxman Act in 1984, the interpretation
         and implementation of the statutory provisions relating to the
         180-day period of generic market exclusively have been the subject
         of controversy, court decisions, changes to FDA regulations and
         guidelines, and other changes in FDA interpretation. In addition,
         on December 8, 2003, significant changes were enacted in the
         statutory provisions themselves, some of which were retroactive and
         others of which apply only prospectively or to situations where the
         first ANDA filing with a Paragraph IV certification occurs after
         the date of enactment. These interpretations and changes, over
         time, have had significant effects on the ability of sponsors of
         particular generic drug products to qualify for or utilize fully
         the 180-day generic marketing exclusivity period. These
         interpretations and changes have, in turn, affected the ability of
         sponsors of corresponding innovator drugs to market their branded
         products without any generic competition and the ability of
         sponsors of other generic versions of the same products to market
         their products in competition with the first generic applicant.
         Because application of these provisions, and any changes in them or
         in the applicable interpretations of them, depends almost entirely
         on the specific facts of the particular NDA and ANDA filings at
         issue, many of which are not in our control, we cannot predict
         whether any changes would, on balance, have a positive or negative
         effect on our business as a whole, although particular changes may
         have predictable, and potentially significant positive or negative
         effects on particular pipeline products. In addition, continuing
         uncertainty over the interpretation and implementation of the
         original Hatch-Waxman provisions, as well as the December 8, 2003
         statutory amendments, is likely to continue to impair our ability
         to predict the likely exclusivity that we may be granted, or
         blocked by, based on the outcome of particular patent challenges in
         which we are involved.

         COMMERCIALIZATION OF A GENERIC PRODUCT PRIOR TO THE FINAL
         RESOLUTION OF PATENT INFRINGEMENT LITIGATION COULD EXPOSE US TO
         SIGNIFICANT DAMAGES IF THE OUTCOME OF SUCH LITIGATION IS
         UNFAVORABLE AND COULD IMPAIR OUR REPUTATION.

         We could invest a significant amount of time and expense in the
         development of our generic products only to be subject to
         significant additional delay and changes in the economic prospects
         for our products. If we receive FDA approval for our pending ANDAs,
         particularly our generic version of Toprol-XL(R), we may consider
         commercializing the product prior to the final resolution of any
         related patent infringement litigation. The risk involved in
         marketing a product prior to the final resolution of the litigation
         may be substantial because the remedies available to the patent
         holder could include, among other things, damages measured by the
         profits lost by such patent holder and not by the profits earned by
         us. Patent holders may also recover damages caused by the erosion
         of prices for its patented drug as a result of the introduction of
         our generic drug in the marketplace. Further, in the case of a
         willful infringement, which requires a complex analysis of the
         totality of the circumstances, such damages may be trebled.
         However, in order to realize the economic benefits of some of our
         products, we may decide to risk an amount that may exceed the
         profit we anticipate making on our product. There are a number of
         factors we would need to consider in order to decide whether to
         launch our product prior to final resolution, including, (i)
         outside legal advice, (ii) the status of a pending lawsuit, (iii)
         interim court decisions, (iv) status and timing of the trial, (v)
         legal decisions affecting other competitors for the same product,
         (vi) market factors, (vii) liability sharing agreements, (viii)
         internal capacity issues, (ix) expiration dates of patents, (x)
         strength of lower court decisions and (xi) potential triggering or
         forfeiture of exclusivity. An adverse determination in the
         litigation relating to a product we launch at risk could have a
         material adverse effect on our business and consolidated financial
         statements.

         WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY BE
         INADEQUATELY INSURED.

         Manufacturing, selling and testing pharmaceutical products involve
         a risk of product liability. Even unsuccessful product liability
         claims could require us to spend money on litigation, divert
         management's time, damage our reputation and impair the
         marketability of our products. A successful product liability claim
         outside of or in


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         excess of our insurance coverage could require us to pay
         substantial sums and adversely affect our results of operations and
         financial condition.

         We previously distributed several pharmaceutical products that
         contained phenylpropanolamine, or PPA, and that were discontinued
         in 2000 and 2001. We are presently named a defendant in a product
         liability lawsuit in Federal District Court in Mississippi
         involving PPA. The suit originated out of a case, Virginia Madison,
         et al. v. Bayer Corporation, et al. The original suit was filed in
         December 2002, but was not served on us until February 2003. The
         case was originally filed in the Circuit Court of Hinds County,
         Mississippi, and was removed to the Federal District Court for the
         Southern District of Mississippi by then co-defendant Bayer
         Corporation. The case has been transferred to a Judicial Panel on
         Multi-District Litigation for PPA claims sitting in the Western
         District of Washington. The claims against us have been segregated
         into a lawsuit brought by Johnny Fulcher individually and on behalf
         of the wrongful death beneficiaries of Linda Fulcher, deceased,
         against the Company. It alleges bodily injury, wrongful death,
         economic injury, punitive damages, loss of consortium and/or loss
         of services from the use of our distributed pharmaceuticals
         containing PPA that have since been discontinued and/or
         reformulated to exclude PPA. In May 2004, the case was dismissed
         with prejudice by the Federal District Court for the Western
         District of Washington for a failure to timely file an individual
         complaint as required by certain court orders. The plaintiff filed
         a request for reconsideration which was opposed and subsequently
         denied by the Court in June 2004. In July 2004, the plaintiff filed
         a notice of appeal of the dismissal. We have opposed this appeal.
         We intend to vigorously defend our interests; however, we cannot
         give any assurance we will prevail.

         We have also been advised that one of our former distributor
         customers is being sued in Florida state court in a case captioned
         Darrian Kelly v. K-Mart et. al. for personal injury allegedly
         caused by ingestion of K-Mart diet caplets that are alleged to have
         been manufactured by us and to contain PPA. The distributor has
         tendered defense of the case to us and has asserted a right to
         indemnification for any financial judgment it must pay. We
         previously notified our product liability insurer of this claim in
         1999, and we have demanded that the insurer assume the Company's
         defense. The insurer has stated that it has retained counsel to
         secure additional factual information and will defer its coverage
         decision until that information is received. We intend to
         vigorously defend our interests; however, we cannot give any
         assurance that we will not be impleaded into the action, or that,
         if we are impleaded, that we would prevail.

         Our product liability coverage for PPA claims expired for claims
         made after June 15, 2002. Although we renewed our product liability
         coverage for coverage after June 15, 2002, that policy excludes
         future PPA claims in accordance with the standard industry
         exclusion. Consequently, as of June 15, 2002, we will provide for
         legal defense costs and indemnity payments involving PPA claims on
         a going forward basis as incurred, including the Mississippi
         lawsuit that was filed after June 15, 2002. Moreover, we may not be
         able to obtain product liability insurance in the future for PPA
         claims with adequate coverage limits at commercially reasonable
         prices for subsequent periods. From time to time in the future, we
         may be subject to further litigation resulting from products
         containing PPA that we formerly distributed. We intend to
         vigorously defend our interests; however, we cannot give any
         assurance we will prevail.

         WE DEPEND ON LICENSES FROM OTHERS, AND ANY LOSS OF THESE LICENSES
         COULD HARM OUR BUSINESS, MARKET SHARE AND PROFITABILITY.

         We have acquired the rights to manufacture, use and/or market
         certain products. We also expect to continue to obtain licenses for
         other products and technologies in the future. Our license
         agreements generally require us to develop the markets for the
         licensed products. If we do not develop these markets, the
         licensors may be entitled to terminate these license agreements.

         We cannot be certain that we will fulfill all of our obligations
         under any particular license agreement for any variety of reasons,
         including insufficient resources to adequately develop and market a
         product, lack of market development despite our efforts and lack of
         product acceptance. Our failure to fulfill our obligations could
         result in the loss of our rights under a license agreement.

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         Certain products we have the right to license are at certain stages
         of clinical tests and FDA approval. Failure of any licensed product
         to receive regulatory approval could result in the loss of our
         rights under its license agreement.

         OUR POLICIES REGARDING RETURNS, ALLOWANCES AND CHARGEBACKS, AND
         MARKETING PROGRAMS ADOPTED BY WHOLESALERS, MAY REDUCE OUR REVENUES
         IN FUTURE FISCAL PERIODS.

         Based on industry practice, generic product manufacturers,
         including us, have liberal return policies and have been willing to
         give customers post-sale inventory allowances. Under these
         arrangements, from time to time, we give our customers credits on
         our generic products that our customers hold in inventory after we
         have decreased the market prices of the same generic products.
         Therefore, if additional competitors enter the marketplace and
         significantly lower the prices of any of their competing products,
         we would likely reduce the price of our comparable products. As a
         result, we would be obligated to provide significant credits to our
         customers who are then holding inventories of such products, which
         could reduce sales revenue and gross margin for the period when the
         credits are accrued. Like our competitors, we also give credits for
         chargebacks to wholesale customers that have contracts with us for
         their sales to hospitals, group purchasing organizations,
         pharmacies or other retail customers. A chargeback is the
         difference between the price the wholesale customer pays and the
         price that the wholesale customer's end-customer pays for a
         product. Although we establish allowances based on our prior
         experience and our best estimates of the impact that these policies
         may have in subsequent periods, we cannot assure you that our
         allowancess are adequate or that actual product returns, allowances
         and chargebacks will not exceed our estimates.

         INVESTIGATIONS OF THE CALCULATION OF AVERAGE WHOLESALE PRICES MAY
         ADVERSELY AFFECT OUR BUSINESS.

         Many government and third-party payors, including Medicare,
         Medicaid, health maintenance organizations, or HMOs, and managed
         care organizations, or MCOs, reimburse doctors and others for the
         purchase of certain prescription drugs based on a drug's average
         wholesale price, or AWP. In the past several years, state and
         federal government agencies have conducted ongoing investigations
         of manufacturers' reporting practices with respect to AWP, in which
         they have suggested that reporting of inflated AWP's have led to
         excessive payments for prescription drugs.

         KV and/or ETHEX have been named as defendants in certain
         multi-defendant cases alleging that the defendants reported
         improper or fraudulent pharmaceutical pricing information, i.e.,
         AWP and/or Wholesale Acquisition Cost, or WAC, information, which
         caused the governmental plaintiffs to incur excessive costs for
         pharmaceutical products under the Medicaid program. Cases of this
         type have been filed against KV and/or ETHEX and other
         pharmaceutical manufacturer defendants by the State of
         Massachusetts, the State of Alabama, the State of Mississippi, New
         York City, and approximately 40 counties in New York State. The New
         York City case and all New York County cases have been transferred
         to the Federal District Court for the District of Massachusetts for
         coordinated or consolidated pretrial proceedings under the Average
         Wholesale Price Multidistrict Litigation. One of the counties, Erie
         County, challenged the transfer and the Erie County Case has been
         remanded to state court. Each of these actions is in the early
         stages, with fact discovery at beginning phases in the Alabama,
         Massachusetts and Mississippi cases, but has not yet commenced in
         the New York City/Counties or the Erie County case. We intend to
         vigorously defend our interests in the actions described above;
         however, we cannot give any assurance we will prevail.

         We believe that various other governmental entities have commenced
         investigations into the generic and branded pharmaceutical industry
         at large regarding pricing and price reporting practices. Although
         we believe our pricing and reporting practices have complied in all
         material respects with our legal obligations, we cannot give any
         assurance that we would prevail if legal actions are instituted by
         these governmental entities.


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         RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY.

         The cost of insurance, including workers' compensation, product
         liability and general liability insurance, has risen significantly
         in the past few years and is expected to continue to increase. In
         response, we may increase deductibles and/or decrease certain
         coverages to mitigate these costs. These increases, and our
         increased risk due to increased deductibles and reduced coverages,
         could have a negative impact on our results of operations,
         financial condition and cash flows.

         OUR GROSS PROFIT MAY FLUCTUATE FROM PERIOD TO PERIOD DEPENDING UPON
         OUR PRODUCT SALES MIX, OUR PRODUCT PRICING, AND OUR COSTS TO
         MANUFACTURE OR PURCHASE PRODUCTS.

         Our future results of operations, financial condition and cash
         flows will depend to a significant extent upon our branded and
         generic/non-branded product sales mix. Our sales of branded
         products create higher gross margins than our sales of
         generic/non-branded products. As a result, our sales mix (the
         proportion of total sales between branded products and
         generic/non-branded products) will significantly impact our gross
         profit from period to period. During fiscal 2006, sales of our
         branded products and generic/non-branded products accounted for
         39.6% and 55.4%, respectively, of our net revenues. During that
         same period, branded products and generic/non-branded products
         contributed 52.7% and 45.9%, respectively, to our consolidated
         gross profits. Factors that may cause our sales mix to vary
         include:

         o    the amount of new product introductions;
         o    marketing exclusivity, if any, which may be obtained on
              certain products;
         o    the level of competition in the marketplace for certain
              products;
         o    the availability of raw materials and finished products from
              our suppliers;
         o    the scope and outcome of governmental regulatory action that
              may involve us; and
         o    periodic dependence on a small number of products for a
              significant portion of net revenue or income.

         The profitability of our product sales is also dependent upon the
         prices we are able to charge for our products, the costs to
         purchase products from third parties, and our ability to
         manufacture our products in a cost effective manner.

         INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         At March 31, 2006, we had $243.0 million of outstanding debt,
         consisting of $200.0 million of 2.5% Contingent Convertible
         Subordinated Notes (the "Notes") and a $43.0 million mortgage loan
         entered into in March 2006. We also have credit agreements with two
         banks that provide revolving lines of credit for borrowing up to
         $140.0 million. The credit agreements provide for $80.0 million in
         revolving lines of credit along with supplemental credit lines of
         $60.0 million that are available for financing acquisitions. These
         credit facilities expire in October 2006 and June 2006,
         respectively. At March 31, 2006, we had no cash borrowings under
         either credit facility. Our level of indebtedness may have several
         important effects on our future operations, including:

                  o    we will be required to use a portion of our cash flow
                       from operations for the payment of any principal or
                       interest due on our outstanding indebtedness;

                  o    our outstanding indebtedness and leverage will
                       increase the impact of negative changes in general
                       economic and industry conditions, as well as
                       competitive pressures; and

                  o    the level of our outstanding debt and the impact it
                       has on our ability to meet debt covenants associated
                       with our revolving line of credit arrangement may
                       affect our ability to obtain additional financing for
                       working capital, capital expenditures, acquisitions
                       or general corporate purposes.

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         General economic conditions, industry cycles and financial,
         business and other factors affecting our operations, many of which
         are beyond our control, may affect our future performance. As a
         result, our business might not continue to generate cash flow at or
         above current levels. If we cannot generate sufficient cash flow
         from operations in the future to service our debt, we may, among
         other things:

                  o    seek additional financing in the debt or equity
                       markets;

                  o    refinance or restructure all or a portion of our
                       indebtedness;

                  o    sell selected assets;

                  o    reduce or delay planned capital expenditures; or

                  o    reduce or delay planned research and development
                       expenditures.

         These measures might not be sufficient to enable us to service our
         debt. In addition, any financing, refinancing or sale of assets
         might not be available on economically favorable terms or at all.

         We may also consider issuing additional debt or equity securities
         in the future to fund potential acquisitions or investments, to
         refinance existing debt, or for general corporate purposes. If a
         material acquisition or investment is completed, our operating
         results and financial condition could change materially in future
         periods. However, no assurance can be given that additional funds
         will be available on satisfactory terms, or at all, to fund such
         activities.

         Holders of the Notes may require us to offer to repurchase their
         Notes for cash upon the occurrence of a change in control or on May
         16, 2008, 2013, 2018, 2023 and 2028. The source of funds for any
         repurchase required as a result of any such events will be our
         available cash or cash generated from operating activities or other
         sources, including borrowings, sales of assets, sales of equity or
         funds provided by a new controlling entity. The use of available
         cash to fund the repurchase of the Notes may impair our ability to
         obtain additional financing in the future.

         WE MAY HAVE FUTURE CAPITAL NEEDS AND FUTURE ISSUANCES OF EQUITY
         SECURITIES WILL RESULT IN DILUTION.

         We anticipate that funds generated internally, together with funds
         available under our credit facility, and the proceeds received from
         our Notes offering completed in May 2003, will be sufficient to
         implement our business plan for the foreseeable future, subject to
         additional needs that may arise if acquisition opportunities become
         available. We also may need additional capital if unexpected events
         occur or opportunities arise. Additional capital might be raised
         through the public or private sale of debt or equity securities. If
         we sell equity securities, holders of our common stock could
         experience dilution. Furthermore, those securities could have
         rights, preferences and privileges more favorable than those of the
         Class A or Class B common stock. We cannot assure you that
         additional funding will be accessible or available on terms
         favorable to us. If the funding is not available, we may not be
         able to fund our expansion, take advantage of acquisition
         opportunities or respond to competitive pressures.

         WE MAY INCUR CHARGES FOR INTANGIBLE ASSET IMPAIRMENT.

         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 consolidated statement of income 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

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         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 charges 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
         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.

         THERE ARE INHERENT UNCERTAINTIES INVOLVED IN THE ESTIMATES,
         JUDGMENTS AND ASSUMPTIONS USED IN THE PREPARATION OF OUR FINANCIAL
         STATEMENTS, AND ANY CHANGES IN THOSE ESTIMATES, JUDGMENTS AND
         ASSUMPTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
         POSITION AND RESULTS OF OPERATIONS.

         The consolidated and condensed consolidated financial statements
         that we file with the SEC are prepared in accordance with U.S.
         generally accepted accounting principles ("U.S. GAAP"). The
         preparation of financial statements in accordance with U.S. GAAP
         involves making estimates and judgments that affect the reported
         amounts of assets, liabilities, revenues and expenses, and the
         related disclosure of contingent assets and liabilities. The most
         significant estimates we are required to make under U.S. GAAP
         include, but are not limited to, those related to revenue
         recognition, sales allowances, inventories and cost of goods sold,
         determining the useful life or impairment of goodwill and other
         long-lived assets, litigation outcomes and related liabilities,
         income taxes and self-insurance programs. We periodically evaluate
         estimates used in the preparation of the consolidated financial
         statements for reasonableness, including estimates provided by
         third parties. Appropriate adjustments to the estimates will be
         made prospectively, as necessary, based on such periodic
         evaluations. We base our estimates on, among other things,
         currently available information, market conditions, historical
         experience and various assumptions, which together form the basis
         of making judgments about the carrying values of assets and
         liabilities that are not readily apparent from other sources.
         Although we believe that our assumptions are reasonable under the
         circumstances, estimates would differ if different assumptions were
         utilized and these estimates may prove in the future to have been
         inaccurate.

         OUR INTERNAL CONTROLS MAY NOT BE SUFFICIENT TO ENSURE TIMELY AND
         RELIABLE FINANCIAL INFORMATION.

         As reported under Item 9A of this Form 10-K, our management
         completed its assessment of the effectiveness of our internal
         control over financial reporting as of March 31, 2006, and based on
         that assessment concluded that we maintained effective internal
         control over financial reporting as of March 31, 2006. Our
         independent registered public accounting firm, KPMG LLP, has issued
         an attestation report on management's assessment that expresses
         unqualified opinions on management's assessment and on the
         effectiveness of our internal control over financial reporting.
         However, our operations continue to place stress on our internal
         controls, and there can be no assurance that our control procedures
         will continue to be adequate. The effectiveness of our controls and
         procedures may be limited by a variety of risks, including, among
         other things, faulty human judgment, simple errors, omissions and
         mistakes, collusion of two or more people or inappropriate override
         of procedures. If we fail to have effective internal controls and
         procedures for financial reporting in place, we may be unable to
         provide timely, accurate and reliable financial information.

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                        RISKS RELATED TO OUR INDUSTRY

         LEGISLATIVE PROPOSALS, REIMBURSEMENT POLICIES OF THIRD PARTIES,
         COST CONTAINMENT MEASURES AND HEALTH CARE REFORM COULD AFFECT THE
         MARKETING, PRICING AND DEMAND FOR OUR PRODUCTS.

         Various legislative proposals, including proposals relating to
         prescription drug benefits, could materially impact the pricing and
         sale of our products. Further, reimbursement policies of third
         parties may affect the marketing of our products. Our ability to
         market our products will depend in part on reimbursement levels for
         the cost of the products and related treatment established by
         health care providers, including government authorities, private
         health insurers and other organizations, such as HMOs and MCOs.
         Insurance companies, HMOs, MCOs, Medicaid and Medicare
         administrators and others are increasingly challenging the pricing
         of pharmaceutical products and reviewing their reimbursement
         practices. In addition, the following factors could significantly
         influence the purchase of pharmaceutical products, which could
         result in lower prices and a reduced demand for our products:

                  o    the trend toward managed health care in the United
                       States;

                  o    the growth of organizations such as HMOs and MCOs;

                  o    legislative proposals to reform health care and
                       government insurance programs; and

                  o    price controls and non-reimbursement of new and
                       highly priced medicines for which the economic
                       therapeutic rationales are not established.

         These cost-containment measures and health care reform proposals
         could affect our ability to sell our products.

         The reimbursement status of a newly approved pharmaceutical product
         may be uncertain. Reimbursement policies may not include some of
         our products. Even if reimbursement policies of third parties grant
         reimbursement status for a product, we cannot be sure that these
         reimbursement policies will remain in effect. Limits on
         reimbursement could reduce the demand for our products. The
         unavailability or inadequacy of third party reimbursement for our
         products could reduce or possibly eliminate demand for our
         products. We are unable to predict whether governmental authorities
         will enact additional legislation or regulation which will affect
         third party coverage and reimbursement that reduces demand for our
         products.

         Our ability to market generic pharmaceutical products successfully
         depends, in part, on the acceptance of the products by independent
         third parties, including pharmacies, government formularies and
         other retailers, as well as patients. We manufacture a number of
         prescription drugs which are used by patients who have severe
         health conditions. Although the brand-name products generally have
         been marketed safely for many years prior to our introduction of a
         generic/non-branded alternative, there is a possibility that one of
         these products could produce a side effect which could result in an
         adverse effect on our ability to achieve acceptance by managed care
         providers, pharmacies and other retailers, customers and patients.
         If these independent third parties do not accept our products, it
         could have a material adverse effect on our financial condition and
         results of operations.

         EXTENSIVE INDUSTRY REGULATION HAS HAD, AND WILL CONTINUE TO HAVE, A
         SIGNIFICANT IMPACT ON OUR BUSINESS, ESPECIALLY OUR PRODUCT
         DEVELOPMENT, MANUFACTURING AND DISTRIBUTION CAPABILITIES.

         All pharmaceutical companies, including us, are subject to
         extensive, complex, costly and evolving regulation by the federal
         government, principally the FDA and, to a lesser extent, the DEA
         and state government agencies. The Federal Food, Drug and Cosmetic
         Act, the Controlled Substances Act and other federal statutes and
         regulations govern or influence the testing, manufacturing,
         packing, labeling, storing, record keeping, safety, approval,
         advertising, promotion, sale and distribution of our products.
         Failure to comply with applicable FDA or other regulatory
         requirements may result in criminal prosecution, civil penalties,
         injunctions, recall or seizure of


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         products and total or partial suspension of production, as well as
         other regulatory actions against our products and us.

         We market certain drug products in the United States without FDA
         approval under certain "grandfather" clauses and statutory and
         regulatory exceptions to the pre-market approval requirement for
         "new drugs" under the Federal Food, Drug and Cosmetic Act, or the
         FDCA. A determination as to whether a particular product does or
         does not require FDA pre-market review and approval can involve
         consideration of numerous complex and imprecise factors. If a
         determination is made by the FDA that any product marketed without
         approval requires such approval, the FDA may institute enforcement
         actions, including product seizure, or an action seeking an
         injunction against further marketing and may or may not allow
         sufficient time to obtain the necessary approvals before it seeks
         to curtail further marketing. For example, in October 2002, FDA
         sent warning letters to us and other manufacturers and distributors
         of unapproved prescription drug products containing the expectorant
         guaifenesin as a single entity in a solid oral extended-release
         dosage form. Citing the recent approval of one such product, the
         FDA warning letters asserted that the marketing of all such
         products without NDA or ANDA approval should stop. The FDA
         subsequently agreed to allow continued manufacture through May 2003
         and sale through November 2003 of the products, and we complied
         with those deadlines. We are not in a position to predict whether
         or when the FDA might choose to raise similar objections to the
         marketing without NDA or ANDA approval of another category or
         categories of drug products represented in our product lines. In
         the event such objections are raised, we could be required or could
         decide to cease distribution of additional products until
         pre-market approval is obtained. In addition, we may not be able to
         obtain any particular approval that may be required or such
         approvals may not be obtained on a timely basis.

         In addition to compliance with current Good Manufacturing Practice,
         or cGMP, requirements, drug manufacturers must register each
         manufacturing facility with the FDA. Manufacturers and distributors
         of prescription drug products are also required to be registered in
         the states where they are located and in certain states that
         require registration by out-of-state manufacturers and
         distributors. Manufacturers also must be registered with the Drug
         Enforcement Administration, or DEA, and similar applicable state
         and local regulatory authorities if they handle controlled
         substances, and with the Environmental Protection Agency, or EPA,
         and similar state and local regulatory authorities if they generate
         toxic or dangerous wastes, and must also comply with other
         applicable DEA and EPA requirements. We believe that we are
         currently in material compliance with cGMP and are registered with
         the appropriate state and federal agencies. Non-compliance with
         applicable cGMP requirements or other rules and regulations of
         these agencies can result in fines, recall or seizure of products,
         total or partial suspension of production and/or distribution,
         refusal of government agencies to grant pre-market approval or
         other product applications and criminal prosecution. Despite our
         ongoing efforts, cGMP requirements and other regulatory
         requirements, and related enforcement priorities and policies may
         evolve over time and we may not be able to remain continuously in
         material compliance with all of these requirements.

         From time to time, governmental agencies have conducted
         investigations of pharmaceutical companies relating to the
         distribution and sale of drug products to government purchasers or
         subject to government or third party reimbursement. We believe that
         we have marketed our products in compliance with applicable laws
         and regulations. However, standards sought to be applied in the
         course of governmental investigations can be complex and may not be
         consistent with standards previously applied to our industry
         generally or previously understood by us to be applicable to our
         activities.

         The process for obtaining governmental approval to manufacture and
         market pharmaceutical products is rigorous, time-consuming and
         costly, and we cannot predict the extent to which we may be
         affected by legislative and regulatory developments. We are
         dependent on receiving FDA and other governmental or third-party
         approvals prior to manufacturing, marketing and shipping many of
         our products. Consequently, there is always the chance that we will
         not obtain FDA or other necessary approvals, or that the rate,
         timing and cost of such approvals, will adversely affect our
         product introduction plans or results of operations. In many
         instances we carry inventories of products in anticipation of
         launch, and if such products are not subsequently launched, we may
         be required to write-off the related inventory.

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         OUR INDUSTRY IS HIGHLY COMPETITIVE.

         Numerous pharmaceutical companies are involved or are becoming
         involved in the development and commercialization of products
         incorporating advanced drug delivery systems. Our business is
         highly competitive, and we believe that competition will continue
         to increase in the future. Many pharmaceutical companies have
         invested, and are continuing to invest, significant resources in
         the development of proprietary drug delivery systems. In addition,
         several companies have been formed to develop specific advanced
         drug delivery systems. Many of these pharmaceutical and other
         companies who may develop drug delivery systems have greater
         financial, research and development and other resources than we do,
         as well as more experience in commercializing pharmaceutical and
         drug delivery products. Those companies may develop products using
         their drug delivery systems more rapidly than we do or develop drug
         delivery systems that are more effective than ours and thus may
         represent significant potential competitors.

         Our branded pharmaceutical business is subject to competition from
         larger companies with greater financial resources that can support
         larger sales forces. The ability of a sales force to compete is
         affected by the number of physician calls it can make, which is
         directly related to its size, the brand name recognition it has in
         the marketplace and its advertising and promotional efforts. We are
         not as well established in our branded product sales initiative as
         larger pharmaceutical companies and could be adversely affected by
         competition from companies with larger, more established sales
         forces and higher advertising and promotional expenditures.

         Our generic pharmaceutical business is also subject to competitive
         pressures from a number of companies, some of which have greater
         financial resources and broader product lines. To the extent that
         we succeed in being first to market with a generic/non-branded
         version of a significant product, our sales and profitability can
         be substantially increased in the period following the introduction
         of such product and prior to additional competitors' introduction
         of an equivalent product. Competition is generally on price, which
         can have an adverse effect on profitability as falling prices erode
         margins. In addition, the continuing consolidation of the customer
         base (wholesale distributors and retail drug chains) and the impact
         of managed care organizations will increase competition as
         suppliers compete for fewer customers. Consolidation of competitors
         will increase competitive pressures as larger suppliers are able to
         offer a broader product line. Further, companies continually seek
         new ways to defeat generic competition, such as filing applications
         for new patents to cover drugs whose original patent protection is
         about to expire, developing and marketing other dosage forms
         including patented controlled-release products or developing and
         marketing as over-the-counter products those branded products which
         are about to lose exclusivity and face generic competition.

         In addition to litigation over patent rights, pharmaceutical
         companies are often the subject of objections by competing
         manufacturers over the qualities of their branded or generic
         products and/or their promotional activities. For example,
         marketers of branded products have challenged the marketing of
         certain of our non-branded products that do not require FDA
         approval and are not rated for therapeutic equivalence.

         Currently, KV and ETHEX are named as defendants in ongoing
         litigation with Solvay Pharmaceuticals, Inc. regarding Solvay's
         allegations that ETHEX's comparative promotion of its
         Pangestyme(TM) CN 10 and Pangestyme(TM) CN 20 products to Solvay's
         Creon(R) 10 and Creon(R) 20 products resulted in false advertising
         and misleading statements under various Federal and state laws, and
         constituted unfair and deceptive trade practices. Discovery has
         concluded. The case is expected to be tried in calendar 2006, but
         no trial date has been set. We intend to vigorously defend our
         interests; however, we cannot give any assurance we will prevail.

         Competitors' objections also may be pursued in complaints before
         governmental agencies or courts. These objections can be very
         expensive to pursue or to defend, and the outcome of agency or
         court review of the issues raised is impossible to predict. In
         these proceedings, companies can be subjected to restrictions on
         their activities or to liability for alleged damages despite their
         belief that their products and procedures are in full compliance

                                     31

<PAGE>
<PAGE>

         with appropriate standards. In addition, companies that pursue what
         they believe are legitimate complaints about competing
         manufacturers and/or their products may nevertheless be unable to
         obtain any relief.

         OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE.

         The drug delivery industry is a rapidly evolving field. A number of
         companies, including major pharmaceutical companies, are developing
         and marketing advanced delivery systems for the controlled delivery
         of drugs. Products currently on the market or under development by
         competitors may deliver the same drugs, or other drugs to treat the
         same indications, as many of the products we market or are
         developing. The first pharmaceutical branded or generic/non-branded
         product to reach the market in a therapeutic area often obtains and
         maintains significant market share relative to later entrants to
         the market. Our products also compete with drugs marketed not only
         in similar delivery systems but also in traditional dosage forms.
         New drugs, new therapeutic approaches or future developments in
         alternative drug delivery technologies may provide advantages over
         the drug delivery systems and products that we are marketing, have
         developed or are developing.

         Changes in drug delivery technology may require substantial
         investments by companies to maintain their competitive position and
         may provide opportunities for new competitors to enter the
         industry. Developments by others could render our drug delivery
         products or other technologies uncompetitive or obsolete. If others
         develop drugs which are cheaper or more effective or which are
         first to market, sales or prices of our products could decline.

                      RISKS RELATED TO OUR COMMON STOCK

         THE MARKET PRICE OF OUR STOCK HAS BEEN AND MAY CONTINUE TO BE
         VOLATILE.

         The market prices of securities of companies engaged in
         pharmaceutical development and marketing activities historically
         have been highly volatile. In addition, any or all of the following
         may have a significant impact on the market price of our common
         stock: announcements by us or our competitors of technological
         innovations or new commercial products; delays in the development
         or approval of products; developments or disputes concerning patent
         or other proprietary rights; publicity regarding actual or
         potential medical results relating to products marketed by us or
         products under development; regulatory developments in both the
         United States and foreign countries; publicity regarding actual or
         potential acquisitions; public concern as to the safety of drug
         technologies or products; financial results which are different
         from securities analysts' forecasts; economic and other external
         factors; and period-to-period fluctuations in our financial
         results.

         FUTURE SALES OF COMMON STOCK COULD ADVERSELY AFFECT THE MARKET
         PRICE OF OUR CLASS A OR CLASS B COMMON STOCK.

         As of March 31, 2006, an aggregate of 3,162,307 shares of our Class
         A common stock and 356,849 shares of our Class B common stock were
         issuable upon exercise of outstanding stock options under our stock
         option plans, and an additional 611,494 shares of our Class A
         common stock and 1,879,500 shares of Class B common stock were
         reserved for the issuance of additional options and shares under
         these plans. In addition, as of March 31, 2006, 8,691,880 shares of
         Class A common stock were reserved for issuance upon conversion of
         $200.0 million principal amount of convertible notes, and 337,500
         shares of our Class A common stock were reserved for issuance upon
         conversion of our outstanding 7% cumulative convertible preferred
         stock.

         MANAGEMENT STOCKHOLDERS CONTROL OUR COMPANY.

         At March 31, 2006, our directors and executive officers
         beneficially own approximately 13% of our Class A Common Stock and
         approximately 62% of our Class B Common Stock. As a result, these
         persons control approximately 55% of the combined voting power
         represented by our outstanding securities. These persons will
         retain effective voting control of our company and are expected to
         continue to have the ability to effectively


                                     32

<PAGE>
<PAGE>

         determine the outcome of any matter being voted on by our
         stockholders, including the election of directors and any merger,
         sale of assets or other change in control of our company.

         Future sales of our common stock and instruments convertible or
         exchangeable into our common stock and transactions involving
         equity derivatives relating to our common stock, or the perception
         that such sales or transactions could occur, could adversely affect
         the market price of our common stock. This could, in turn, have an
         adverse effect on the trading price of the Notes resulting from,
         among other things, a delay in the ability of holders to convert
         their Notes into our Class A common stock.

         OUR CHARTER PROVISIONS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
         EFFECTS.

         Our Amended Certificate of Incorporation authorizes the issuance of
         common stock in two classes, Class A common stock and Class B
         common stock. Each share of Class A common stock entitles the
         holder to one-twentieth of one vote on all matters to be voted upon
         by stockholders, while each share of Class B common stock entitles
         the holder to one full vote on each matter considered by the
         stockholders. In addition, our directors have the authority to
         issue additional shares of preferred stock and to determine the
         price, rights, preferences, privileges and restrictions of those
         shares without any further vote or action by the stockholders. The
         rights of the holders of common stock will be subject to, and may
         be adversely affected by, the rights of the holders of any
         preferred stock that may be issued in the future. The existence of
         two classes of common stock with different voting rights and the
         ability of our directors to issue additional shares of preferred
         stock could make it more difficult for a third party to acquire a
         majority of our voting stock. Other provisions of our Amended
         Certificate of Incorporation and Bylaws, such as a classified board
         of directors, also may have the effect of discouraging, delaying or
         preventing a merger, tender offer or proxy contest, which could
         have an adverse effect on the market price of our Class A common
         stock.

         In addition, certain provisions of Delaware law applicable to our
         company could also delay or make more difficult a merger, tender
         offer or proxy contest involving our company, including Section 203
         of the Delaware General Corporation Law, which prohibits a Delaware
         corporation from engaging in any business combination with any
         "interested stockholder" (as defined in the statute) for a period
         of three years unless certain conditions are met. In addition, our
         senior management is entitled to certain payments upon a change in
         control and all of our stock option plans provide for the
         acceleration of vesting in the event of a change in control of our
         company.



ITEM 1B. UNRESOLVED STAFF COMMENTS
         -------------------------

         None.






                                     33

<PAGE>
<PAGE>

ITEM 2.  PROPERTIES
         ----------

         Our corporate headquarters is located at 2503 South Hanley Road in
         St. Louis County, Missouri, and contains approximately 40,000
         square feet of floor space. We have a lease on the building for a
         period of ten years expiring December 31, 2006, with one five-year
         option to renew and a successive three-year renewal option. The
         building is leased from an affiliated partnership of an officer and
         director of the Company.

         In addition, we lease or own the facilities shown in the following
         table. All of these facilities are located in the St. Louis
         metropolitan area.

<TABLE>
<CAPTION>
                   SQUARE                                                           LEASE              RENEWAL
                   FOOTAGE     USAGE                                                EXPIRES            OPTIONS
                 -----------------------------------------------------------------------------------------------------
                   <C>         <C>                                                  <C>                <C>
                     30,150    PDI Mfg./Whse.                                       11/30/07           5 Years(1)
                     10,000    PDI/KV Lab/Whse.                                     11/30/06           None
                     15,000    KV/PDI Office                                        02/29/08           2 Years(3)
                     23,000    KV Office/R&D/Mfg.                                   12/31/06           5 Years(2)
                     44,100    KV Warehouse                                         11/30/06           1 Year(4)
                    128,960    KV Office/Mfg(7)                                     06/14/11           N/A
                    121,500    KV Office/Whse./Lab(8)                               Owned              N/A
                     87,250    KV Mfg.                                              Owned              N/A
                     86,800    KV Lab(5)                                            Owned              N/A
                    302,940    KV Mfg/Whse/ETHEX/Ther-Rx Office(6)(8)               Owned              N/A
                    260,160    ETHEX/Ther-Rx/PDI Distribution(8)                    Owned              N/A
                     96,360    KV Warehouse                                         Owned              N/A

<FN>
         ----------------------------------------
         (1)  One five-year option.
         (2)  Two five-year options.
         (3)  Two two-year options.
         (4)  One one-year option.
         (5)  This facility was renovated into an additional research lab
              facility.
         (6)  This facility was renovated into office space for ETHEX,
              Ther-Rx and certain KV administrative functions and production
              space for additional operations.
         (7)  The purchase option on this building, which was leased by the
              Company on March 31, 2006, was exercised by the Company in
              accordance with the lease agreement and is scheduled to be
              acquired for $4.9 million in June 2006.
         (8)  In March 2006, we entered into a $43.0 million mortgage loan
              agreement with one of our primary lenders secured, in part, by
              this property. This loan bears interest at a rate of 5.91% and
              matures on April 1, 2021.
</TABLE>

         Properties used in our operations are considered suitable for the
         purposes for which they are used and are believed to be adequate to
         meet our needs for the reasonably foreseeable future. However, we
         will consider leasing or purchasing additional facilities from time
         to time, when attractive facilities become available, to
         accommodate the consolidation of certain operations and to meet
         future expansion plans.


ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         The information set forth under Note 12 - Commitments and
         Contingencies - to the Consolidated Financial Statements included
         in Item 8 of this report is incorporated in this Item 3 by
         reference.


                                     34

<PAGE>
<PAGE>

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

         No matters were submitted to a vote of security holders during the
         fourth quarter of the Company's fiscal year ended March 31, 2006.


ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
           ------------------------------------

         The following is a list of current executive officers of our
         Company, their ages, their positions with our Company and their
         principal occupations for at least the past five years.

<TABLE>
<CAPTION>
NAME                       AGE      POSITION HELD AND PAST EXPERIENCE
-------------------------------------------------------------------------------------------------
<C>                        <C>      <C>
Marc S. Hermelin            64      Vice Chairman of the Board of the Company since 1974; Vice Chairman and Chief
                                    Executive Officer since 1975.

Gerald R. Mitchell          67      Director since March 2006, Vice President and Chief Financial Officer since
                                    1981.

Richard H. Chibnall         50      Vice President, Finance since February 2000.

Michael S. Anderson         57      Vice President, Industry Presence and Development since March 2006;
                                    Chief Executive Officer, Ther-Rx Corporation from February 2000 to February
                                    2006.

Jerald J. Wenker            44      President, Ther-Rx Corporation since June 2004; Vice President, Licensing and
                                    New Business Development, Abbott Corporation from January 2002 to April 2004;
                                    Vice President and General Manager, Anti-Infective Franchise Abbott Corporation
                                    from April 2000 to January 2002.

Patricia K. McCullough      54      Chief Executive Officer, ETHEX Corporation since January 30, 2006;
                                    Group Vice President, Business Development and Strategic Planning, Taro
                                    Pharmaceuticals from September 2003 to January 2006; Senior Vice President,
                                    Account Development, Cardinal Health from June 2000 to July 2003.

Philip J. Vogt              49      President, ETHEX Corporation since February 2000.

Raymond F. Chiostri         72      Chairman and Chief Executive Officer of Particle Dynamics, Inc. since 1999.

Paul T. Brady               43      President, Particle Dynamics, Inc. since 2003; Senior Vice President and
                                    General Manager, International Specialty Products Corporation from June 2002
                                    to January 2003; Senior Vice President, Commercial Director, North and South
                                    America International Specialty Products from 2000 to 2002.

Eric D. Moyermann           48      President, Pharmaceutical Manufacturing since February 2000.

<FN>
     Executive officers of the Company serve at the pleasure of the Board of Directors.

-------------------------------
(1) Marc S. Hermelin is the son of Victor M. Hermelin, Chairman of the Board
of Directors of the Company since 1971 and father of David S. Hermelin, a
member of the Board of Directors since 2004.
</TABLE>



                                     35

<PAGE>
<PAGE>

                                   PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
         --------------------------------------------------------------------
         MATTERS
         -------

    a)   PRINCIPAL MARKET
         ----------------

         Our Class A common stock and Class B common stock are traded on the
         New York Stock Exchange under the symbols KV.A and KV.B,
         respectively.

    b)   APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
         ---------------------------------------------

         The number of holders of record of Class A and Class B common stock
         as of June 8, 2006 was 811 and 364, respectively (not separately
         counting shareholders whose shares are held in "nominee" or "street"
         names, which are estimated to represent approximately 5,000 additional
         Class A common stock and Class B common stock shareholders combined).

    c)   STOCK PRICE AND DIVIDEND INFORMATION
         ------------------------------------

         The high and low closing sales prices of our Class A and Class B
         common stock during each quarter of fiscal 2006 and 2005, as
         reported on the New York Stock Exchange were as follows:


<TABLE>
                                                    CLASS A COMMON STOCK
                                                    --------------------

<CAPTION>
                                            FISCAL 2006                                       FISCAL 2005
                                            -----------                                       -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------
         <C>                         <C>               <C>                           <C>                <C>
         First...................... $24.37            $16.75                        $26.24             $22.25
         Second.....................  18.27             15.53                         23.11              15.31
         Third......................  21.50             16.79                         22.14              18.18
         Fourth.....................  24.22             20.60                         23.20              19.78

<CAPTION>
                                                    CLASS B COMMON STOCK
                                                    --------------------

                                            FISCAL 2006                                       FISCAL 2005
                                            -----------                                       -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------
         <C>                         <C>               <C>                           <C>                <C>
         First...................... $24.72            $16.79                        $29.60             $25.00
         Second.....................  18.24             15.53                         25.05              16.35
         Third......................  21.57             16.83                         22.77              18.65
         Fourth.....................  24.13             21.27                         23.49              20.42
</TABLE>

         Since 1980, we have not declared or paid any cash dividends on our
         common stock and we do not plan to do so in the foreseeable future.
         No dividends may be paid on Class A common stock or Class B common
         stock unless all dividends on the Cumulative Convertible Preferred
         Stock have been declared and paid. Dividends must be paid on Class
         A common stock when, and if, we declare and distribute dividends on
         the Class B common stock. Dividends of $70,000 were paid in fiscal
         2006 and 2005 on 40,000 shares of outstanding Cumulative
         Convertible Preferred Stock. There were no undeclared and unaccrued
         cumulative preferred dividends at March 31, 2006.

         Also, under the terms of our credit agreement, we may not pay cash
         dividends in excess of 25% of the prior fiscal year's consolidated
         net income. For the foreseeable future, we plan to use cash
         generated from operations for


                                     36

<PAGE>
<PAGE>

         general corporate purposes, including funding potential
         acquisitions, research and development and working capital. Our
         board of directors reviews our dividend policy periodically. Any
         payment of dividends in the future will depend upon our earnings,
         capital requirements, financial condition and other factors
         considered relevant by our board of directors. See also Note 16 of
         Notes to Consolidated Financial Statements for information relating
         to our equity compensation plans.


<TABLE>
----------------------------------------------------------------------------------------------------------------------
                                      Issuer Purchases of Equity Securities

----------------------------------------------------------------------------------------------------------------------
<CAPTION>
         Period              Total number of       Average price paid       Total number of       Maximum number of
                            shares purchased           per share          shares purchased as     shares (or units)
                                   (a)                                    part of publicly         that may yet be
                                                                          announced plans or      purchased under the
                                                                               programs            plans or programs
----------------------------------------------------------------------------------------------------------------------
<C>                         <C>                    <C>                    <C>                      <C>
1/1/06 - 1/31/06                  4,541                  $21.88                    -                      -
----------------------------------------------------------------------------------------------------------------------
2/1/06 - 2/28/06                    600                  $22.64                    -                      -
----------------------------------------------------------------------------------------------------------------------
3/1/06 - 3/31/06                    -                      -                       -                      -
----------------------------------------------------------------------------------------------------------------------
Total                             5,141                  $21.97                    -                      -
----------------------------------------------------------------------------------------------------------------------


<FN>
(a)  Shares were purchased from employees upon their termination
     pursuant to the terms of the Company's stock option plan.
</TABLE>






                                     37

<PAGE>
<PAGE>

         EQUITY COMPENSATION PLAN INFORMATION

         The following information regarding compensation plans of the
         Company is furnished as of March 31, 2006, the end of the Company's
         most recently completed fiscal year.

<TABLE>
                                         EQUITY COMPENSATION PLAN INFORMATION
                                            REGARDING CLASS A COMMON STOCK
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                              NUMBER OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                                                                             FUTURE ISSUANCE UNDER
                                 NUMBER OF SECURITIES TO BE   WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                  ISSUED UPON EXERCISE OF        PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    OUTSTANDING OPTIONS,           OPTIONS, WARRANTS              REFLECTED IN
                                    WARRANTS AND RIGHTS                AND RIGHTS                 COLUMN (a))
                                 -------------------------    ------------------------     -------------------------

         PLAN CATEGORY                      (a)                         (b)                          (c)
<C>                                     <C>                          <C>                          <C>
Equity compensation plans
approved by security holders(1)         3,155,557                       $15.83                       611,494

Equity compensation plans not
approved by security holders(2)             6,750                        $3.22                         N/A
                                        ---------
             Total                      3,162,307                       $15.80
                                        =========
<FN>
(1)      Consists of the Company's 2001 Incentive Stock Option Plan. See Note 16 of Notes to Consolidated
         Financial Statements.
(2)      Consists of options granted to non-employee members of the Board of Directors.
</TABLE>





                                     38

<PAGE>
<PAGE>



<TABLE>
                                         EQUITY COMPENSATION PLAN INFORMATION
                                            REGARDING CLASS B COMMON STOCK
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                              NUMBER OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                                                                             FUTURE ISSUANCE UNDER
                                 NUMBER OF SECURITIES TO BE   WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                  ISSUED UPON EXERCISE OF        PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    OUTSTANDING OPTIONS,           OPTIONS, WARRANTS              REFLECTED IN
                                    WARRANTS AND RIGHTS                AND RIGHTS                 COLUMN (a))
                                 -------------------------    ------------------------     -------------------------

         PLAN CATEGORY                      (a)                         (b)                          (c)
<C>                                     <C>                          <C>                        <C>
Equity compensation plans
approved by security holders(1)           328,724                       $14.38                     1,879,500

Equity compensation plans not
approved by security holders(2)            28,125                        $4.82                         N/A
                                          -------
             Total                        356,849                       $13.63
                                          =======
<FN>
(1)      Consists of the Company's 2001 Incentive Stock Option Plan. See Note 16 of Notes to Consolidated
         Financial Statements.
(2)      Consists of options granted to non-employee members of the Board of Directors.
</TABLE>

                                     39

<PAGE>
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------
         (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                       MARCH 31,
                                          --------------------------------------------------------------------
                                            2006           2005           2004            2003          2002
                                            ----           ----           ----            ----          ----
<C>                                       <C>            <C>            <C>             <C>           <C>
BALANCE SHEET DATA:

Total assets                              $618,013       $558,317       $528,438        $352,668      $195,192
Long-term debt                             241,319        209,767        210,741          10,106         4,387
Shareholders' equity                       309,275        292,702        257,749         260,616       158,792


<CAPTION>
INCOME STATEMENT DATA:
                                                                 YEARS ENDED MARCH 31,
                                          --------------------------------------------------------------------
                                            2006           2005           2004            2003          2002
                                            ----           ----           ----            ----          ----

<C>                                       <C>            <C>            <C>             <C>           <C>
Net revenues                              $367,618       $303,493       $283,941        $244,996      $204,105
   % Increase from prior year                21.1%           6.9%          15.9%           20.0%         14.8%
Operating income(a)(b)(c)(d)              $ 39,218       $ 52,412       $ 73,771        $ 42,929      $ 49,294
Net income(a)(b)(c)(d)                      15,787         33,269         45,848          28,110        31,464
Net income
   per common
   share-diluted(e) (f)                   $   0.31       $   0.63       $   0.84        $   0.55      $   0.65
Preferred stock dividends                 $     70       $     70       $    436        $     70      $     70


<FN>
(a)      Operating income in fiscal 2006 included an expense of $30.4 million
         recognized in connection with the FemmePharma acquisition that
         consisted of $29.6 million for acquired in-process research and
         development and $0.9 million for direct expenses related to the
         transaction (see Note 3 in the accompanying Notes to Consolidated
         Financial Statements). The impact of this item, which was determined by
         the Company to not be deductible for tax purposes, was to reduce our
         diluted earnings per share for fiscal 2006 by $0.60.

(b)      Operating income in fiscal 2005 included a $0.6 million net payment
         received by us in accordance with a legal settlement and additional
         income of $0.8 million for the reversal of a portion of the
         Healthpoint litigation reserve that remained after payment of the
         $16.5 million settlement amount and related litigation costs. The
         impact of these items, net of applicable income taxes, was to
         increase net income by $1.0 million and diluted earnings per share
         by $0.02 in fiscal 2005.

(c)      Operating income in fiscal 2004 included a $3.5 million net payment
         received by us in accordance with a legal settlement and an
         additional reserve of $1.8 million for attorneys' fees associated
         with a lawsuit. The impact of these items, net of applicable income
         taxes, was to increase net income by $1.1 million and diluted
         earnings per share by $0.02 in fiscal 2004.

(d)      Operating income in fiscal 2003 included a provision of $16.5
         million for potential damages associated with the Healthpoint
         litigation. The impact of the litigation reserve, net of applicable
         income taxes, was to reduce net income by $10.4 million and diluted
         earnings per share by $0.20 in fiscal 2003.

(e)      Previously reported amounts give effect to the three-for-two stock
         split effected in the form of a 50% stock dividend that occurred on
         September 29, 2003.

(f)      Amounts for fiscal 2004 have been restated to report shares
         issuable upon conversion of contingent convertible notes, which
         were issued in May 2003, pursuant to Emerging Issues Task Force
         (EITF) Issue No. 04-08, the Effect of Contingently Convertible Debt
         on Diluted Earnings per Share.
</TABLE>


                                     40

<PAGE>
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, AND
         ------------------------------------------------------------------
         LIQUIDITY AND CAPITAL RESOURCES
         -------------------------------

         Except for the historical information contained herein, the
         following discussion contains forward-looking statements that are
         subject to known and unknown risks, uncertainties, and other
         factors that may cause our actual results to differ materially from
         those expressed or implied by such forward-looking statements.
         These risks, uncertainties and other factors are discussed
         throughout this report and specifically under the captions
         "Cautionary Statement Regarding Forward-Looking Information" and
         "Risk Factors." In addition, the following discussion and analysis
         of the financial condition and results of operations should be read
         in conjunction with "Selected Financial Data" and our Consolidated
         Financial Statements and the notes thereto appearing elsewhere in
         this Form 10-K.

         BACKGROUND

         We are a fully integrated specialty pharmaceutical company that
         develops, acquires, manufactures and markets technologically-
         distinguished branded and generic/non-branded prescription
         pharmaceutical products. We have a broad range of dosage form
         capabilities, including tablets, capsules, creams, liquids and
         ointments. We conduct our branded pharmaceutical operations through
         Ther-Rx Corporation and our generic/non-branded pharmaceutical
         operations through ETHEX Corporation, which focuses principally on
         technologically-distinguished generic products. Through Particle
         Dynamics, Inc., we develop, manufacture and market technologically
         advanced, value-added raw material products for the pharmaceutical,
         nutritional, personal care, food and other markets.

         We have a broad portfolio of drug delivery technologies which we
         leverage to create technologically-distinguished brand name and
         specialty generic products. We have developed and patented 15 drug
         delivery and formulation technologies primarily in four principal
         areas: SITE RELEASE(R) bioadhesives, oral controlled release,
         tastemasking and oral quick dissolving tablets. We incorporate
         these technologies in the products we market to control and improve
         the absorption and utilization of active pharmaceutical compounds.
         These technologies provide a number of benefits, including reduced
         frequency of administration, reduced side effects, improved drug
         efficacy, enhanced patient compliance and improved taste.

         Our drug delivery technologies allow us to differentiate our
         products in the marketplace, both in the branded and
         generic/non-branded pharmaceutical areas. We believe that this
         differentiation provides substantial competitive advantages for our
         products, allowing us to establish a strong record of growth and
         profitability and a leadership position in certain segments of our
         industry.

         RESULTS OF OPERATIONS

         During fiscal 2006, we recorded expense of $30.4 million in
         connection with the FemmePharma acquisition (see Note 3 to
         Consolidated Financial Statements) that consisted of $29.6 million
         for acquired in-process research and development and $0.9 million
         for direct expenses related to the transaction. The valuation of
         acquired in-process research and development represented the
         estimated fair value of the worldwide marketing rights to an
         endometriosis product we acquired as part of the FemmePharma
         acquisition that, at the time of the acquisition, had no
         alternative future use and for which technological feasibility had
         not been clinically proven. The FemmePharma acquisition expense of
         $30.4 million reduced our fiscal 2006 diluted earnings per share by
         $0.60 to $0.31 per diluted share and reduced our fiscal 2006 net
         income to $15.8 million.

         Net revenues for fiscal 2006 increased $64.1 million, or 21.1%,
         from fiscal 2005 as we reported sales growth of 61.4% and 5.4% in
         our branded products and specialty generics segments, respectively.
         The resulting $47.9 million increase in gross profit was offset
         in part by a $30.7 million increase in operating expenses before
         taking into account the $30.4 million of expense associated with
         the FemmePharma acquisition. This increase in operating expenses
         was primarily due to increases in personnel costs, branded
         marketing and promotions expense, legal and professional expenses,
         and research and development expense.

                                     41

<PAGE>
<PAGE>

         FISCAL 2006 COMPARED TO FISCAL 2005


         NET REVENUES BY SEGMENT
         -----------------------

<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Branded products                               $  145,435    $   90,085      $   55,350       61.4%
   as % of net revenues                              39.6%         29.7%
Specialty generics                                203,833       193,402          10,431        5.4%
   as % of net revenues                              55.4%         63.7%
Specialty materials                                16,988        18,345         (1,357)      (7.4)%
   as % of net revenues                               4.6%          6.0%
Other                                               1,362         1,661           (299)     (18.0)%
                                               ----------    ----------      ----------
   Total net revenues                          $  367,618    $  303,493      $   64,125       21.1%
</TABLE>

         The growth in branded product sales was due primarily to increased
         sales of our two anti-infective brands, Clindesse(TM) and
         Gynazole-1(R), and continued sales growth from our hematinic and
         prescription prenatal product lines. Clindesse(TM), a single-dose
         prescription cream therapy indicated to treat bacterial vaginosis,
         contributed $22.0 million of sales during fiscal 2006. Since its
         launch in January 2005, Clindesse(TM) has gained 19.7% of the
         intravaginal bacterial vaginosis market. Sales of Gynazole-1(R),
         our vaginal antifungal cream product, increased $3.9 million, or
         18.3%, to $25.2 million during fiscal 2006. This increase was due
         primarily to higher pricing as our prescription volume declined
         3.6% in fiscal 2006. Sales of our hematinic products in fiscal 2006
         increased $11.4 million, or 44.8%, to $36.8 million. The growth in
         hematinic sales resulted from a 13.8% increase in prescription
         volume during fiscal 2006, higher pricing and $3.3 million of
         incremental sales associated with the introduction of two new
         products, Niferex(R) Gold and Repliva 21/7(TM). Also included in
         branded product sales was our PreCare(R) product line which
         continued as the leading branded line of prescription prenatal
         nutritional supplements in the United States. Sales from our
         PreCare(R) product line increased $18.1 million, or 56.0%, to $50.4
         million in fiscal 2006. This increase was primarily due to sales
         growth experienced by PrimaCare(R) ONE, our proprietary line
         extension to PrimaCare(R), as its share of the branded prenatal
         nutritional supplement market increased to 17.5% at the end of
         fiscal 2006. The increase in PreCare(R) product sales was also
         impacted by a temporary fourth quarter supply disruption of
         PrimaCare(R) ONE in the prior year. The increase in branded product
         sales was further supplemented by the introduction of Encora(TM), a
         new prescription nutritional supplement with essential fatty acids,
         which contributed $1.8 million of incremental revenue during fiscal
         2006 and a $1.8 million increase in sales of our Micro-K(R) product
         line.

         The increase in specialty generic sales resulted from $16.0 million
         of increased sales volume from existing products in our cough/cold,
         pain management and digestive enzyme product lines coupled with
         $1.5 million of incremental sales volume from new product
         introductions primarily in our pain management product line. These
         increases were offset in part by product price erosion of $7.1
         million that resulted from pricing pressures on certain products.
         Although specialty generic sales resulting from new product
         introductions were limited during fiscal 2006, we did receive late
         in the fiscal year ANDA approval for five strengths of Oxycodone
         Hydrochloride tablets and three strengths of Hydromorphone
         Hydrochloride tablets. Also, late in fiscal 2006, we received a
         favorable court ruling in a Paragraph IV patent infringement action
         filed against us by AstraZeneca based on our ANDA submissions to
         market generic formulations of Toprol-XL(R). We believe we were the
         first company to file with the FDA for generic approval of the
         100 mg and 200 mg dosage strengths, a position that may, upon
         approval, afford us the opportunity for a six-month exclusivity
         period for marketing these generic versions. The


                                     42

<PAGE>
<PAGE>

         total branded dollar volume of Toprol-XL(R) in 2005 was $1.3 billion,
         of which the 100 mg and 200 mg strengths represented nearly half.

         The decrease in specialty material product sales was primarily due
         to reduced sales on a product that is used by a customer in a
         chewable vitamin that the customer was in the process of
         reformulating, coupled with increased competition on our calcium
         carbonate products.


         GROSS PROFIT BY SEGMENT
         -----------------------

<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Branded products                               $  128,516    $   78,844      $   49,672       63.0%
   as % of net revenues                              88.4%         87.5%
Specialty generics                                111,982       114,616         (2,634)      (2.3)%
   as % of net revenues                              54.9%         59.3%
Specialty materials                                 4,732         6,394         (1,662)     (26.0)%
   as % of net revenues                              27.9%         34.9%
Other                                             (1,506)       (4,043)           2,537       62.8%
                                               ----------    ----------      ----------
   Total gross profit                          $  243,724    $  195,811      $   47,913       24.5%
   as % of total net revenues                        66.3%         64.5%
</TABLE>

         The increase in gross profit was primarily due to the significant
         sales growth experienced by our branded products segment. The
         higher gross profit percentage on a consolidated basis reflected
         the impact of our higher margin branded products comprising a
         larger percentage of net revenues. This effect was offset in part
         by lower margins in the specialty generics segment due primarily to
         the impact of price erosion on certain products in the
         cardiovascular and pain management product lines coupled with a
         shift in the mix of sales toward lower margin products,
         particularly in the cough/cold category. The gross profit
         percentage decrease experienced by specialty materials primarily
         resulted from higher production costs associated with lower volume
         and an unfavorable mix of products sold.


         RESEARCH AND DEVELOPMENT
         ------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Research and development                       $   28,886    $   23,538      $    5,348       22.7%
   as % of net revenues                               7.9%          7.8%
</TABLE>

         The increase in research and development expense was due to
         increased spending on bioequivalency studies as we continued active
         development of various branded and generic/non-brand products in
         our internal and external pipelines and increased personnel
         expenses related to the growth of our research and development
         staff.

         We anticipate that research and development costs for fiscal 2007
         will continue to increase based on our growing product development
         pipeline, the expected cost of the Phase III clinical study on the
         endometriosis product acquired in the first quarter of fiscal 2006
         and other branded and generic opportunities.

                                     43

<PAGE>
<PAGE>


         PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
         ---------------------------------------------

<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Purchased in-process research
         and development                       $   30,441    $        -      $   30,441          NM
</TABLE>

         During fiscal 2006, we recorded expense of $30.4 million in
         connection with the FemmePharma acquisition that consisted of $29.6
         million for acquired in-process research and development and $0.9
         million in direct expenses related to the transaction. The
         valuation of acquired in-process research and development
         represents the estimated fair value of the worldwide marketing
         rights to an endometriosis product we acquired as part of the
         FemmePharma acquisition that, at the time of the acquisition, had
         no alternative future use and for which technological feasibility
         had not been established. The FemmePharma acquisition expense of
         $30.4 million reduced our diluted earnings per share for the year
         ended March 31, 2006 by $0.60.


         SELLING AND ADMINISTRATIVE
         --------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Selling and administrative                     $  140,395    $  116,638      $   23,757       20.4%
   as % of net revenues                              38.2%         38.4%
</TABLE>

         The increase in selling and administrative expense was primarily
         due to:

         o  $9.8 million increase in personnel costs associated with
            expansion of the branded sales force in fiscal 2005 and
            2006 and increases in management and other personnel to
            support the overall growth of the business;
         o  $7.3 million increase in branded marketing and promotions
            expense for promotion of our existing brands, to further
            promote the launch of Clindesse(TM) and to support the
            introduction in fiscal 2006 of a new prescription
            nutritional supplement product and two new hematinic
            products; and
         o  $6.4 million increase in legal and professional expense
            commensurate with an increase in litigation activity and
            evaluation of potential acquisition opportunities. The
            increase in litigation activity included ongoing costs
            associated with certain patent infringement actions
            brought against us on products we market or propose to
            market.


                                     44

<PAGE>
<PAGE>

         AMORTIZATION OF INTANGIBLE ASSETS
         ---------------------------------

<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Amortization of intangible assets              $    4,784    $    4,653      $      131        2.8%
    as % of net revenues                              1.3%          1.5%
</TABLE>

         The increase in amortization of intangible assets was due primarily
         to a full year's amortization in fiscal 2006 of license costs
         incurred for a product launched in fiscal 2005 under a
         co-development arrangement, an increase in amortization of patent
         and trademark costs, and amortization of the purchase price
         allocated to the non-compete agreement obtained in the FemmePharma
         acquisition.


         LITIGATION
         ----------

<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Litigation                                     $        -    $   (1,430)     $    1,430          NM
</TABLE>

         The $1.4 million of income reflected in "Litigation" for fiscal
         2005 consisted of a $0.6 million net payment received by us in
         accordance with a favorable legal settlement of vitamin antitrust
         litigation and $0.8 million associated with the reversal of excess
         reserves that resulted from settlement of the Healthpoint
         litigation in fiscal 2005.


         OPERATING INCOME
         ----------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                              -----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Operating income                               $   39,218    $   52,412      $  (13,194)    (25.2)%
</TABLE>

         The decrease in operating income resulted from the $30.4 million
         in-process research and development charge recorded in connection
         with the FemmePharma acquisition.



                                     45

<PAGE>
<PAGE>

         INTEREST EXPENSE
         ----------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Interest expense                               $    6,045    $    5,432      $      613      11.3%
</TABLE>

         The increase in interest expense was primarily due to the
         completion of a number of capital projects during fiscal 2006 and
         the related reduced level of capitalized interest thereon.


         INTEREST AND OTHER INCOME
         -------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Interest and other income                      $    5,737    $    3,048      $    2,689      88.2%
</TABLE>

         The increase in interest and other income was primarily due to an
         increase in interest income on short-term investments and dividends
         earned on redeemable preferred stock. The increase in interest
         income resulted from a full year's effect of investing excess cash
         into short-term investments with higher yielding interest rates. The
         higher weighted average interest rate earned on short-term
         investments was offset in part by a decline in the average balance
         of invested cash.


         PROVISION FOR INCOME TAXES
         --------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Provision for income taxes                     $   23,123    $   16,759      $    6,364      38.0%
   effective tax rate                                59.4%         33.5%
</TABLE>

         The increase in the effective tax rate was attributable to the
         non-deductibility for tax purposes of the $30.4 million of expense
         we recorded for the FemmePharma acquisition. For fiscal 2006, the
         provision for income taxes was based on an effective tax rate of
         33.3 % which was applied to a pre-tax income amount that excluded
         the FemmePharma acquisition expense of $30.4 million.

         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2006          2005              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Net income                                     $   15,787    $   33,269      $  (17,482)    (52.6)%
    Diluted earnings per share                       0.31          0.63           (0.32)    (50.8)%
</TABLE>

                                     46

<PAGE>
<PAGE>

         The decrease in net income resulted from the $30.4 million
         in-process research and development charge, or $0.60 per share, we
         recorded in connection with the FemmePharma acquisition.


         FISCAL 2005 COMPARED TO FISCAL 2004

         NET REVENUES BY SEGMENT
         -----------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Branded products                               $   90,085    $   82,868      $    7,217       8.7%
   as % of net revenues                              29.7%         29.2%
Specialty generics                                193,402       182,825          10,577       5.8%
   as % of net revenues                              63.7%         64.4%
Specialty materials                                18,345        16,550           1,795      10.8%
   as % of net revenues                               6.0%          5.8%
Other                                               1,661         1,698            (37)     (2.2)%
                                               ----------- -------------     -----------
   Total net revenues                          $  303,493    $  283,941      $   19,552       6.9%
</TABLE>

         The increase in branded product sales was due primarily to the
         introduction of Clindesse(TM) in the fourth quarter of fiscal 2005,
         continued growth of Gynazole-1(R) and increased sales of our two
         hematinic brands. The introduction of Clindesse(TM), a single-dose
         prescription cream therapy indicated to treat bacterial vaginosis,
         contributed $4.2 million of incremental sales during the fourth
         quarter of fiscal 2005. Sales of Gynazole-1(R), our vaginal
         antifungal cream product, increased $2.7 million, or 14.4%, to
         $21.3 million during fiscal 2005 as our share of the prescription
         vaginal antifungal cream market increased. Sales from our two
         hematinic product lines, Chromagen(R) and Niferex(R), increased
         22.6% to $25.4 million during fiscal 2005 as both product lines
         experienced significant growth in new prescriptions filled. During
         the year, new prescription growth for Chromagen(R) and Niferex(R)
         was 74.7% and 52.7%, respectively, compared to the prior year. Also
         included in branded product sales was the PreCare(R) product line
         which contributed $31.7 million of sales during fiscal 2005.
         Although sales of our PreCare(R) product line declined 2.7% during
         the year, the PreCare(R) family of products continued to be the
         leading branded line of prescription prenatal nutritional
         supplements in the United States. The $0.9 million decrease in
         sales of our PreCare(R) product line was partially the result of a
         temporary fourth quarter supply disruption of PrimaCare(R) ONE, our
         proprietary line extension to PrimaCare(R), that was launched in
         the second quarter. Prior to the occurrence of this supply issue,
         which has since been resolved, PrimaCare(R) ONE generated $4.1
         million of incremental sales in fiscal 2005. The increase in
         branded product sales for fiscal 2005 was partially offset by a
         $2.2 million decline in sales of our Micro-K(R) product line.

         The growth in specialty generic sales resulted from $15.9 million
         of incremental sales volume from new product introductions,
         principally in our lower margin cough/cold product line, coupled
         with $9.0 million of increased sales volume from existing products
         in our cardiovascular and pain management product lines. These
         increases were offset in part by product price erosion of $14.3
         million principally in the second half of the fiscal year, that
         resulted from pricing pressures on certain products in the
         cardiovascular, pain management and cough/cold product lines.
         Although specialty generic sales increased in fiscal 2005, we
         experienced an $8.6 million, or 17.6%, decline in sales for the
         three months ended March 31, 2005. This decrease resulted from a
         significant decline in cardiovascular products sales due in part to
         the absence of trade shows that occurred in the fourth quarter of
         the prior year and resulted in an unfavorable mix in product
         categories in the fourth quarter of fiscal 2005. The anticipated
         approval of Diltiazem and another product in the fourth quarter of
         fiscal 2005, would have more than offset the above decrease, had
         the approval been received.

                                     47

<PAGE>
<PAGE>

         The increase in specialty material product sales was primarily due
         to renewed focus on expanding the specialty materials business, the
         addition of a new major customer in fiscal 2005 that resulted in
         $1.3 million of incremental sales and an increased emphasis on
         international markets that provided additional sales of $1.0
         million in fiscal 2005.


         GROSS PROFIT BY SEGMENT
         -----------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Branded products                               $   78,844    $   72,008      $    6,836        9.5%
   as % of net revenues                              87.5%         86.9%
Specialty generics                                114,616       111,550           3,066        2.7%
   as % of net revenues                              59.3%         61.0%
Specialty materials                                 6,394         4,789           1,605       33.5%
   as % of net revenues                              34.9%         28.9%
Other                                             (4,043)       (2,833)         (1,210)     (42.7)%
                                               -----------  ------------     -----------
   Total gross profit                          $  195,811    $  185,514      $   10,297        5.6%
   as % of total net revenues                        64.5%         65.3%
</TABLE>

         The increase in gross profit was primarily attributable to the
         sales growth experienced by all three of our segments: branded
         products, specialty generics and specialty materials. The lower
         gross profit percentage on a consolidated basis primarily reflected
         the impact of price erosion on certain specialty generic products
         beginning in the second quarter and extending through the balance
         of fiscal 2005, offset in part by certain selective price increases
         implemented near the end of the third quarter. The gross profit
         percentage decline experienced by the specialty generics segment
         was offset in part by a shift in the mix of branded product sales
         toward higher margin products with the introduction of
         Clindesse(TM) in the fourth quarter coupled with improved pricing
         and lower raw material costs at our specialty materials business.

         RESEARCH AND DEVELOPMENT
         ------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Research and development                       $   23,538    $   20,651      $    2,887      14.0%
   as % of net revenues                               7.8%          7.3%
</TABLE>

                                     48

<PAGE>
<PAGE>

         The increase in research and development expense primarily resulted
         from increased spending on bioequivalency studies for products in
         our internal development pipeline and higher personnel expenses
         related to the growth of our research and development staff.


         SELLING AND ADMINISTRATIVE
         --------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Selling and administrative                     $  116,638    $   88,333      $   28,305      32.0%
   as % of net revenues                              38.4%         31.1%
</TABLE>

         The increase in selling and administrative expense was due
         primarily to: greater personnel expenses resulting from an increase
         in management and other personnel ($4.3 million) and expansion of
         the branded sales force ($5.1 million including approximately $1.1
         million for sales representatives during the fourth quarter of
         fiscal 2005); a $2.2 million increase in branded marketing and
         promotions expense commensurate with the growth of the segment due
         to the investment of hiring additional management and field
         personnel to provide additional resources for future planned
         product launches; a $2.9 million increase in rent, depreciation,
         insurance and utilities expense associated with expansion of our
         office facilities over the past two years; a $1.7 million increase
         in professional fees associated primarily with implementation of
         the internal control provisions of the Sarbanes-Oxley Act of 2002;
         a $1.2 million increase in legal expense; and $3.0 million of costs
         incurred in the fourth quarter to support the launch of
         Clindesse(TM). The increase in legal expense was due to an increase
         in litigation activity, which included various patent infringement
         actions brought by potential competitors with respect to products
         we propose to market and for which we have submitted ANDA filings
         and provided notice of certification required under the provisions
         of the Hatch-Waxman Act.

         AMORTIZATION OF INTANGIBLE ASSETS
         ---------------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Amortization of intangible assets              $    4,653    $    4,459      $      194       4.4%
    as % of net revenues                              1.5%          1.6%
</TABLE>

         The increase in amortization of intangible assets was due primarily
         to the amortization of license costs incurred for a product
         launched under a co-development arrangement in fiscal 2005.

                                     49

<PAGE>
<PAGE>


         LITIGATION
         ----------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Litigation                                     $   (1,430)   $   (1,700)     $      270     (15.9)%
</TABLE>

         The $1.4 million of income reflected in "Litigation" in fiscal 2005
         consisted of a $0.6 million net payment received by us in
         accordance with a favorable legal settlement of vitamin antitrust
         litigation and $0.8 million related to the reversal of excess
         reserves related to the Healthpoint litigation.

         In the second quarter of fiscal 2004, we received $3.5 million for
         settlement with a branded company of our claim that the branded
         company interfered with our right to a timely introduction of a
         generic product in a previous fiscal year. The impact of this
         payment was offset in part by an additional litigation reserve of
         $1.8 million related to attorneys' fees awarded in the Healthpoint
         matter, which subsequently was settled.


         OPERATING INCOME
         ----------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Operating income                               $   52,412    $   73,771      $  (21,359)    (29.0)%
</TABLE>

         The decrease in operating income resulted primarily from a $28.3
         million, or 32.0%, increase in selling and administrative expense
         coupled with a $2.9 million increase in research and development
         expense, offset in part by a $10.3 million increase in gross
         profit.

         INTEREST EXPENSE
         ----------------
<TABLE>
<CAPTION>
                                                                YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Interest expense                               $    5,432    $    5,865      $     (433)     (7.4)%
</TABLE>

         The decrease in interest expense was primarily due to an increase
         in the level of capitalized interest recorded on capital projects
         that we had in process.


                                     50

<PAGE>
<PAGE>

         INTEREST AND OTHER INCOME
         -------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Interest and other income                      $    3,048    $    2,092      $      956       45.7%
</TABLE>

         The increase in interest and other income was primarily due to an
         increase in the weighted average interest rate earned on short-term
         investments, offset in part by a decline in the average balance of
         short-term investments.


         PROVISION FOR INCOME TAXES
         --------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Provision for income taxes                     $   16,759    $   24,150      $   (7,391)    (30.6)%
   effective tax rate                                33.5%         34.5%
</TABLE>

         The decrease in the provision for income taxes resulted from a
         corresponding decrease in income before taxes coupled with a
         decline in the effective tax rate. The decline in the effective tax
         rate primarily resulted from the implementation of various tax
         planning initiatives, as well as the generation of income tax
         credits at both the Federal and state levels.

         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------
<TABLE>
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                     CHANGE
                                                                             ----------------------
             ($ IN THOUSANDS):                    2005          2004              $            %
                                               ----------    ----------      ----------     -------
<C>                                            <C>           <C>             <C>            <C>
Net income                                     $   33,269    $   45,848      $  (12,579)    (27.4)%
    Diluted earnings per share                       0.63          0.84           (0.21)    (25.0)%
</TABLE>

         The decrease in net income resulted primarily from a $28.3 million,
         or 32.0%, increase in selling and administrative expense coupled
         with a $2.9 million increase in research and development expense,
         offset in part by a $10.3 million increase in gross profit.


                                     51

<PAGE>
<PAGE>

         LIQUIDITY AND CAPITAL RESOURCES
         -------------------------------

         Cash and cash equivalents and working capital were $100.7 million
         and $311.2 million, respectively, at March 31, 2006, compared to
         $159.8 million and $302.5 million, respectively, at March 31, 2005.
         The increase in working capital resulted primarily from a $16.8
         million increase in inventories related primarily to new specialty
         generic products we expect to launch in fiscal 2007, offset in part
         by a $7.6 million decrease in receivables associated primarily with
         a $5.2 million increase in the reserve for chargebacks and a $1.7
         million increase in the reserve for Medicaid rebates. The increase
         in the reserve for chargebacks at March 31, 2006 was primarily due
         to our specialty generics segment experiencing continued price
         erosion during fiscal 2006 coupled with higher customer inventory
         levels of our specialty generic products at the end of the year.
         The impact of increased utilization of our branded products by
         state Medicaid programs during the past two years resulted in a
         larger reserve for Medicaid rebates at March 31, 2006.

         The primary source of operating cash flow used in the funding of
         our businesses continues to be internally generated funds from
         product sales. Net cash flow from operating activities was $64.6
         million in fiscal 2006 compared to $49.0 in fiscal 2005. This
         increase resulted primarily from the operating cash flows for
         fiscal 2005 including an $18.3 million reduction in accrued
         liabilities attributable to settlement of the Healthpoint
         litigation which was resolved during fiscal 2005.

         Net cash used in investing activities included capital expenditures
         of $58.3 million in fiscal 2006 compared to $63.6 million for the
         prior year. In April 2005, the Company completed the purchase of a
         260,000 square foot building in the St. Louis metropolitan area for
         $11.8 million. The property had been leased by the Company since
         April 2000 and continues to function as the Company's main
         distribution facility. The purchase price was paid with cash. The
         remaining capital expenditures during fiscal 2006 were primarily
         for building renovation projects and for purchasing machinery and
         equipment to upgrade and expand our pharmaceutical manufacturing
         and distribution capabilities. Other investing activities in fiscal
         2006 consisted of $61.2 million in purchases of short-term
         marketable securities that were classified as available for sale.
         In addition, in May 2005, the Company and FemmePharma mutually
         agreed to terminate the license agreement we entered into with them
         in April 2002 (see Note 3 to Consolidated Financial Statements). As
         part of this transaction, we acquired all of the common stock of
         FemmePharma for a $25.0 million cash payment. In connection with
         this transaction, we acquired the worldwide marketing rights to an
         endometriosis product that we are now developing. Also, in May
         2005, we entered into a long-term product development and marketing
         license agreement with Strides, an Indian generic pharmaceutical
         developer and manufacturer, for exclusive marketing rights in the
         United States and Canada for 10 new generic drugs. Under a separate
         agreement, the Company invested $11.3 million in Strides
         redeemable preferred stock (see Note 3 to Consolidated Financial
         Statements).

         Our debt balance was $243.0 million at March 31, 2006 compared to
         $210.7 million at March 31, 2005 (see Note 10 to Consolidated
         Financial Statements). In March 2006, we entered into a $43.0
         million mortgage loan agreement with one of our primary lenders, in
         part, to refinance $9.9 million of existing mortgages. The $32.8
         million of net proceeds we received from the new mortgage loan will
         be used for working capital and general corporate purposes. The new
         mortgage loan bears interest at a rate of 5.91% and matures on
         April 1, 2021.

         In May 2003, we issued $200.0 million principal amount of
         Convertible Subordinated Notes that are convertible, under certain
         circumstances, into shares of our Class A common stock at an
         initial conversion price of $23.01 per share. The Convertible
         Subordinated Notes bear interest at a rate of 2.50% and mature on
         May 16, 2033. We are also obligated to pay contingent interest at a
         rate equal to 0.5% per annum during any six-month period commencing
         May 16, 2006, if the average trading price of the Notes per $1,000
         principal amount for the five-trading day period ending on the
         third trading day immediately preceding the first day of the
         applicable six-month period equals $1,200 or more. We may redeem
         some or all of the Convertible Subordinated Notes at any time on or
         after May 21, 2006, at a redemption price, payable in cash, of 100%
         of the principal amount of the Convertible Subordinated Notes, plus
         accrued and unpaid interest (including contingent interest, if any)
         to the date of redemption. Holders may require us to repurchase all
         or a portion of their Convertible Subordinated Notes on


                                     52

<PAGE>
<PAGE>

         May 16, 2008, 2013, 2018, 2023 and 2028, or upon a change in
         control, as defined in the indenture governing the Convertible
         Subordinated Notes, at 100% of the principal amount of the
         Convertible Subordinated Notes, plus accrued and unpaid interest
         (including contingent interest, if any) to the date of repurchase,
         payable in cash. The Convertible Subordinated Notes are subordinate
         to all of our existing and future senior obligations.

         At March 31, 2006, we had credit agreements with two banks that
         provided revolving lines of credit for borrowing up to $140.0
         million. The credit agreements provided for $80.0 million in
         revolving lines of credit along with supplemental credit lines of
         $60.0 million that were available for financing acquisitions. These
         credit facilities were to expire in October 2006 and June 2006,
         respectively. The revolving and supplemental credit lines were
         unsecured and interest was charged at the lower of the prime rate
         or the one-month LIBOR rate plus 175 basis points. At March 31,
         2006, we had $3.9 million in an open letter of credit issued under
         the revolving credit line and no cash borrowings under either
         credit facility. The credit agreements contained financial
         covenants that imposed minimum levels of earnings before interest,
         taxes, depreciation and amortization, a maximum funded debt ratio,
         a limit on capital expenditures and dividend payments, a minimum
         fixed charge coverage ratio and a maximum senior leverage ratio. As
         of March 31, 2006, we were in compliance with all of our covenants.

         On June 9, 2006, we replaced our $140.0 million credit line by
         entering into a new credit agreement with ten banks that provides
         for a revolving line of credit for borrowing up to $320.0 million.
         The new credit agreement also includes a provision for increasing
         the revolving commitment, at the lenders' sole discretion, by up to
         an additional $50.0 million. The new credit facility is unsecured
         unless we, under certain specified circumstances, utilize the
         facility to redeem part or all of our outstanding Convertible
         Subordinated Notes. Interest is charged under the facility at the
         lower of the prime rate or one-month LIBOR plus 62.5 to 150 basis
         points depending on the ratio of senior debt to EBITDA. The new
         credit agreement contains financial covenants that impose limits on
         dividend payments, require minimum equity, a maximum senior
         leverage ratio and minimum fixed charge coverage ratio. The new
         credit facility has a five-year term expiring in June 2011.

         In December 2005, we entered into a financing arrangement with St.
         Louis County, Missouri related to expansion of our operations in
         St. Louis County (see Note 11 to Consolidated Financial
         Statements). Up to $135.5 million of industrial revenue bonds may
         be issued to us by St. Louis County relative to capital
         improvements made through December 31, 2009. This agreement
         provides that 50% of the real and personal property taxes on up to
         $135.5 million of capital improvements will be abated for a period
         of 10 years subsequent to the property being placed in service.
         Industrial revenue bonds totaling $73.0 million were outstanding at
         March 31, 2006. The industrial revenue bonds are issued by St.
         Louis County to us upon our payment of qualifying costs of capital
         improvements, which are then leased by us for a period ending
         December 1, 2019, unless earlier terminated. We have the option at
         any time to discontinue the arrangement and regain full title to
         the abated property. The industrial revenue bonds bear interest at
         4.25% per annum and are payable as to principal and interest
         concurrently with payments due under the terms of the lease. We
         have classified the leased assets as property and equipment and
         have established a capital lease obligation equal to the
         outstanding principal balance of the industrial revenue bonds.
         Lease payments may be made by tendering an equivalent portion of
         the industrial revenue bonds. As the capital lease payments to St.
         Louis County may be satisfied by tendering industrial revenue bonds
         (which is our intention), the capital lease obligation, industrial
         revenue bonds and related interest expense and interest income,
         respectively, have been offset for presentation purposes in the
         Consolidated Financial Statements.

         The following table summarizes our contractual obligations (in
         thousands):

<TABLE>
<CAPTION>
                                                                   LESS THAN                               MORE THAN
                                                        TOTAL       1 YEAR        1-3 YEARS   3-5 YEARS     5 YEARS
                                                        -----       ------        ---------   ---------     -------
   OBLIGATIONS AT MARCH 31, 2006
   -----------------------------
<C>                                                   <C>          <C>             <C>        <C>          <C>
   Long-term debt obligations(a)                      $ 243,000    $   1,681       $  3,998   $  4,497     $ 232,824
   Operating lease obligations(b)                         1,693        1,186            502          5             -
   Other long-term obligations                            5,442            -              -          -         5,442
                                                    ------------------------------------------------------------------
    Total contractual cash obligations(c)             $ 250,135    $   2,867       $  4,500   $  4,502     $ 238,266
                                                    ------------------------------------------------------------------

<FN>
         (a) Holders of the $200.0 million aggregate principal amount of
             Convertible Subordinated Notes may require the Company to
             repurchase them for an amount equal to the unpaid principal
             amount in May 2008.

         (b) The purchase option on a 129,000 square foot building leased by
             us on March 31, 2006 was exercised by us in accordance with the
             lease agreement and is scheduled to be acquired for $4.9 million
             in June 2006.

         (c) The Company has licensed the exclusive rights to co-develop and
             market various generic equivalent products with other drug
             delivery companies. These collaboration agreements require the
             Company to make up-front and ongoing payments as development
             milestones are attained. If all milestones remaining under these
             agreements were reached, payments by the Company could total up
             to $42,138.
</TABLE>

                                     53

<PAGE>
<PAGE>

         We believe our cash and cash equivalents balance, cash flows from
         operations and funds available under our credit facilities, will be
         adequate to fund operating activities for the presently foreseeable
         future, including the payment of short-term and long-term debt
         obligations, capital improvements, research and development
         expenditures, product development activities and expansion of
         marketing capabilities for the branded pharmaceutical business. In
         addition, we continue to examine opportunities to expand our
         business through the acquisition of or investment in companies,
         technologies, product rights, research and development and other
         investments that are compatible with our existing businesses. We
         intend to use our available cash to help in funding any
         acquisitions or investments. As such, cash has been invested in
         short-term, highly liquid instruments. We also may use funds
         available under our credit facilities, or financing sources that
         subsequently become available, including the future issuances of
         additional debt or equity securities, to fund these acquisitions or
         investments. If we were to fund one or more such acquisitions or
         investments, our capital resources, financial condition and results
         of operations could be materially impacted in future periods.


         INFLATION

         Inflation may apply upward pressure on the cost of goods and
         services used by us in the future. However, we believe that the net
         effect of inflation on our operations during the past three years
         has been minimal. In addition, changes in the mix of products sold
         and the effect of competition has made a comparison of changes in
         selling prices less meaningful relative to changes in the overall
         rate of inflation over the past three fiscal years.

         CRITICAL ACCOUNTING ESTIMATES

         Our consolidated financial statements are presented on the basis of
         U.S. generally accepted accounting principles. Our significant
         accounting policies are described in Note 2 in the accompanying
         notes to the Consolidated Financial Statements. Certain of our
         accounting policies are particularly important to the portrayal of
         our financial position and results of operations and require the
         application of significant judgment by our management. As a result,
         these policies are subject to an inherent degree of uncertainty. In
         applying these policies, we make estimates and judgments that
         affect the reported amounts of assets, liabilities, revenues and
         expenses and related disclosures. We base our estimates and
         judgments on historical experience, the terms of existing
         contracts, observance of trends in the industry, information that
         is obtained from customers and outside sources, and on various
         other assumptions that are believed to be reasonable and
         appropriate under the circumstances, the results of which form the
         basis for making judgments about the carrying values of assets and
         liabilities that are not readily apparent from other sources.
         Although we believe that our estimates and assumptions are
         reasonable, actual results may differ significantly from our
         estimates. Changes in estimates and assumptions based upon actual
         results may have a material impact on our results of operations
         and/or financial condition. Our critical accounting estimates are
         described below.

         REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO
         --------------------------------------------------------------
         GROSS REVENUES. Revenue is generally realized or realizable and
         ---------------
         earned when persuasive evidence of an arrangement exists, the
         seller's price to the buyer is fixed or determinable, the
         customer's payment ability has been reasonably assured and title
         and risk of ownership have been transferred to the customer, which
         is typically upon shipment to the customer.

         Simultaneously with the recognition of revenue, we reduce the
         amount of gross revenues by recording estimated sales provisions
         for chargebacks, sales rebates, sales returns, cash discounts and
         other allowances, and Medicaid rebates. These sales provisions are
         established based upon consideration of a variety of factors,
         including but not limited to, historical relationship to revenues,
         historical payment and return experience, estimated and actual
         customer inventory levels, customer rebate arrangements, and
         current contract sales terms with wholesale and indirect customers.

                                     54

<PAGE>
<PAGE>

         From time to time, we provide incentives to our wholesale
         customers, such as trade show allowances or stocking allowances
         that they in turn use to accelerate distribution to their end
         customers. We believe that such incentives are normal and customary
         in the industry. Sales allowances are accrued and revenue is
         recognized as sales are made pursuant to the terms of the
         allowances offered to the customer. Due to the nature of these
         allowances, we are able to accurately calculate the required
         provisions for the allowances based on the specific terms in each
         agreement. Additionally, customers will normally purchase
         additional product ahead of regular demand to take advantage of the
         temporarily lower cost resulting from the sales allowances. This
         practice has been customary in the industry and we believe would be
         part of a customer's ordinary course of business inventory level.
         We reserve the right, with our major wholesale customers, to limit
         the amount of these forward buys. Sales made as a result of
         allowances offered on our specialty generics product line in
         conjunction with trade shows sponsored by our major wholesale
         customers and for other promotional programs accounted for 11.8%
         and 15.2% of total gross revenues for fiscal 2006 and fiscal 2005,
         respectively.

         In addition, we understand that certain of our wholesale customers
         have anticipated the timing of price increases and have made, and
         may continue to make, business decisions to buy additional product
         in anticipation of future price increases. This practice has been
         customary in the industry and we believe would be part of a
         customer's ordinary course of business inventory level.

         We evaluate inventory levels at our wholesale customers, which
         accounted for approximately 59% of our unit sales in fiscal 2006,
         through an internal analysis that considers, among other things,
         wholesaler purchases, wholesaler contract sales, available end
         consumer prescription information and inventory data received from
         our three largest wholesale customers. We believe that our
         evaluation of wholesaler inventory levels allows us to make
         reasonable estimates of our reserve balances. Further, our products
         are typically sold with adequate shelf life to permit sufficient
         time for our wholesaler customers to sell our products in their
         inventory through to the end consumer.

         The following table reflects the fiscal 2006 activity for each
         reserve that serves to reduce our receivables balance:

<TABLE>
<CAPTION>
                                                        Current Provision  Current Provision  Actual Returns
                                                        Related to Sales   Related to Sales     or Credits
              (in thousands)                 Beginning     Made in the         Made in            in the         Ending
                                              Balance    Current Period     Prior Periods     Current Period     Balance
                                             ---------  -----------------  -----------------  --------------     -------
<C>                                          <C>          <C>                 <C>             <C>             <C>
YEAR ENDED MARCH 31, 2006
 Accounts Receivable Reserves:
    Chargebacks                              $ 9,409        $ 97,605            $   -           $ (92,393)       $14,621
    Sales Rebates                              1,246          14,158                -             (13,142)         2,262
    Sales Returns                              2,286          14,212                -             (14,325)         2,173
    Cash Discounts and Other Allowances        3,880          17,362                -             (16,925)         4,317
    Medicaid Rebates                           4,235          11,031                -              (9,322)         5,944
                                             -------        ---------           -----           ----------       -------
      TOTAL                                  $21,056        $154,368            $   -           $(146,107)       $29,317
                                             =======        =========           =====           ==========       =======
</TABLE>

                                     55

<PAGE>
<PAGE>

         The increase in the reserve for chargebacks at March 31, 2006 was
         primarily due to our specialty generics segment experiencing price
         erosion during fiscal 2006 coupled with higher customer inventory
         levels of our specialty generic products at the end of the year.
         The reserve for sales returns at March 31, 2006 was relatively
         consistent with the prior year-end balance as improvement in the
         rate of product returns at our specialty generics segment was
         offset by an increase in the product return rate at our branded
         business. The impact of increased utilization of our branded
         products by state Medicaid programs during the past two years
         resulted in a larger reserve for Medicaid rebates at March 31,
         2006. The increase in reserves for sales rebates and cash discounts
         and other allowances at March 31, 2006 was primarily due to greater
         fourth quarter sales in fiscal 2006 compared to the prior year's
         fourth quarter.

         The following table reflects the fiscal 2005 activity for each
         reserve that serves to reduce our receivables balance:

<TABLE>
<CAPTION>
                                                        Current Provision  Current Provision  Actual Returns
                                                        Related to Sales   Related to Sales     or Credits
              (in thousands)                 Beginning     Made in the         Made in            in the        Ending
                                              Balance    Current Period     Prior Periods     Current Period    Balance
                                             ---------  -----------------  -----------------  --------------    -------
<C>                                            <C>          <C>                 <C>             <C>             <C>
YEAR ENDED MARCH 31, 2005
 Accounts Receivable Reserves:
    Chargebacks                                $ 7,475      $ 81,871            $  -            $ (79,937)      $ 9,409
    Sales Rebates                                1,815        17,479               -              (18,048)        1,246
    Sales Returns                                4,035        10,505               -              (12,254)        2,286
    Cash Discounts and Other Allowances          4,261        14,361               -              (14,742)        3,880
    Medicaid Rebates                             3,062         9,048             211               (8,086)        4,235
                                               -------      --------            ----            ---------       -------
      TOTAL                                    $20,648      $133,264            $211            $(133,067)      $21,056
                                               =======      ========            ====            =========       =======
</TABLE>

         The fiscal 2005 reserve for chargebacks increased primarily due to
         continued price erosion in the specialty generics segment of our
         business, which was reflected in an increase in the current
         provision from 14.2% of sales in fiscal 2004 to 18.7% of sales in
         fiscal 2005. A reduction in the rate of product returns experienced
         during fiscal 2005 to 2.4% of sales from 2.8% of sales in fiscal
         2004 resulted in the lower reserve for sales returns. Increased
         utilization of products in our branded products segment by state
         Medicaid programs during fiscal 2005 resulted in the increase in
         the reserve for Medicaid rebates, which was reflected in an
         increase in the related provision from 1.9% of sales in fiscal 2004
         to 2.1% of sales in fiscal 2005. Reserves for sales rebates and
         cash discounts and other allowances declined primarily due to lower
         fourth quarter sales, in both the retail chain and wholesale
         distribution channels, compared to the prior year's fourth quarter.

         The reserves for sales rebates and cash discounts and other
         allowances require a lower degree of subjectivity, are less complex
         in nature and are more readily ascertainable due to specific
         contract terms, rates and consistent historical performance. The
         reserves for chargebacks, sales returns and Medicaid rebates,
         however, are more complex and require management to make more
         subjective judgments. These reserves and their respective
         provisions are discussed in further detail below.

         Chargebacks - We market and sell products directly to wholesalers,
         -----------
         distributors, warehousing pharmacy chains, mail order pharmacies
         and other direct purchasing groups. We also market products
         indirectly to independent pharmacies, non-warehousing chains,
         managed care organizations, and group purchasing organizations,
         collectively referred to as "indirect customers." We enter into
         agreements with some indirect customers to establish contract
         pricing for certain products. These indirect customers then
         independently select a wholesaler from which to purchase the
         products at these contracted prices. Alternatively, we may
         pre-authorize wholesalers to offer specified contract pricing to
         other indirect customers. Under either arrangement, we provide
         credit to the wholesaler for any difference between the contracted
         price with the indirect customer and the wholesaler's invoice
         price. This credit is called a chargeback.

                                     56

<PAGE>
<PAGE>

         Chargeback transactions are almost exclusively related to our
         specialty generics business segment. During fiscal 2006 and 2005,
         the chargeback provision reduced the gross sales of our specialty
         generics segment by $97.0 million and $80.6 million, respectively.
         These amounts accounted for 99.4% and 98.5% of the total chargeback
         provisions recorded in fiscal 2006 and 2005, respectively.

         The provision for chargebacks is the most significant and complex
         estimate used in the recognition of revenue. The primary factors we
         consider in developing and evaluating the reserve for chargebacks
         include:

         |X|   The amount of inventory in the wholesale distribution
               channel. We receive actual inventory information from our
               three major wholesale customers and estimate the inventory
               position of the remaining wholesalers based on historical
               buying patterns. During fiscal 2006, unit sales to our
               three major wholesale customers accounted for 78% of our
               total unit sales to all wholesalers, and the aggregate
               inventory position of the three major wholesalers at March
               31, 2006 was approximately equivalent to our last eight
               weeks of shipments during the fiscal year. We currently
               use the last six weeks of our shipments as an estimate of
               the inventory held by the remaining wholesalers where we
               do not receive actual inventory data, as our experience
               and buying patterns indicate that our smaller wholesale
               customers carry less inventory than our large wholesale
               customers. As of March 31, 2006, each week of inventory
               for those remaining wholesalers represented approximately
               $0.2 million, or 1.6%, of the reported reserve for
               chargebacks.

         |X|   The percentage of sales to our wholesale customers that
               will result in chargebacks. Using our automated chargeback
               system we track, at the product level, the percentage of
               sales units shipped to our wholesale customers that
               eventually result in chargebacks to us. The percentage for
               each product, which is based on actual historical
               experience, is applied to the respective inventory units
               in the wholesale distribution channel. As of March 31,
               2006, the aggregate weighted average percentage of sales
               to wholesalers assumed to result in chargebacks was
               approximately 95%, with each 1% representing approximately
               $0.2 million, or 1.1%, of the reported reserve for
               chargebacks.

         |X|   Contract pricing and the resulting chargeback per unit.
               The chargeback provision is based on the difference
               between our invoice price to the wholesaler (referred to
               as wholesale acquisition cost, or "WAC") and the contract
               price negotiated with either our indirect customer or with
               the wholesaler for sales by the wholesaler to the indirect
               customers. We calculate the price difference, or
               chargeback per unit, for each product and for each major
               wholesale customer using historical weighted average
               pricing, based on actual chargeback experience. Use of
               weighted average pricing over time compensates for changes
               in the mix of indirect customers and products from period
               to period. As of March 31, 2006, a 5% shift in the
               calculated chargeback per unit in the same direction
               across all products and customers would result in a $0.7
               million, or 5.0%, impact on the reported reserve for
               chargebacks.

         Shelf-Stock Adjustments - These adjustments represent credits
         -----------------------
         issued to our wholesale customers that result from a decrease in
         our WAC. Decreases in our invoice prices are discretionary
         decisions we make to reflect market conditions. These credits are
         customary in the industry and are intended to reduce a wholesale
         customer's inventory cost to better reflect current market prices.
         Generally, we provide credits to customers at the time the price
         reduction occurs based on the inventory that is owned by them on
         the effective date of the price reduction. Since a reduction in WAC
         reduces the chargeback per unit, or the difference between WAC and
         the contract price, shelf-stock adjustments are typically included
         as part of the reserve for chargebacks because the price reduction
         credits act essentially as accelerated chargebacks. Although we
         have contractually agreed to provide price adjustment credits to
         our major wholesale customers at the time they occur, the impact of
         any such price reductions not included in the reserve for
         chargebacks is immaterial to the amount of revenue recognized in
         any given period.

         Sales Returns - Consistent with industry practice, we maintain a
         -------------
         returns policy that allows our direct and indirect customers to
         return product six months prior to expiration and within one year
         after expiration. This policy is applicable to both our branded and
         specialty generics business segments. Upon recognition of revenue
         from


                                     57

<PAGE>
<PAGE>

         product sales to customers, we provide for an estimate of
         product to be returned. This estimate is determined by applying a
         historical relationship of customer returns to gross sales. We
         evaluate the reserve for sales returns by calculating historical
         return rates using data from the last 12 months on a product
         specific basis and by class of trade (wholesale versus retail
         chain). The calculated percentages are applied against estimates of
         inventory in the distribution channel on a product specific basis.
         To determine the inventory levels in the wholesale distribution
         channel, we utilize actual inventory information from our major
         wholesale customers and estimate the inventory positions of the
         remaining wholesalers based on historical buying patterns. For
         inventory held by our non-wholesale customers, we use the last two
         months of sales to the direct buying chains and the indirect buying
         retailers as an estimate. A 10% change in the product specific
         historical return rates used in the reserve analysis would have
         changed the reserve balance at March 31, 2006 by approximately $0.1
         million, or 5.7%, of the reported reserve for sales returns. A 10%
         change in the amount of estimated inventory in the distribution
         channel would have changed the reserve balance at March 31, 2006 by
         approximately $0.1 million, or 6.9%, of the reported reserve for
         sales returns.

         Medicaid Rebates - Established in 1990, the Medicaid Drug Rebate
         ----------------
         Program requires a drug manufacturer to provide to each state a
         rebate every calendar quarter for covered outpatient drugs
         dispensed to Medicaid patients. Medicaid rebates apply to both our
         branded and specialty generic segments. Individual states invoice
         us for Medicaid rebates on a quarterly basis using statutorily
         determined rates for generic (11%) and branded (15%) products,
         which are applied to the Average Manufacturer's Price, or "AMP",
         for a particular product to arrive at a Unit Rebate Amount, or
         "URA". The amount owed is based on the number of units dispensed by
         the pharmacy to Medicaid patients extended by the URA. The reserve
         for Medicaid rebates is based on expected payments, which are
         driven by patient usage and estimated inventory in the distribution
         channel. We estimate patient usage by calculating a payment rate as
         a percentage of net sales lagged six months, which is then applied
         to an estimate of customer inventory. We currently use the last two
         months of our shipments to wholesalers and direct buying chains as
         an estimate of inventory in the wholesale and chain channels and an
         additional month of wholesale sales as an estimate of inventory
         held by the indirect buying retailer. A 10% change in the amount of
         customer inventory subject to Medicaid rebates would have changed
         the reserve at March 31, 2006 by $0.6 million, or 9.8% of the
         reported reserve for Medicaid rebates. Similarly, a 10% change in
         estimated patient usage would have changed the reserve by $0.6
         million, or 9.8% of the reported reserve for Medicaid rebates.

         INVENTORY VALUATION. Inventories consist of finished goods held for
         -------------------
         distribution, raw materials and work in process. Our inventories
         are stated at the lower of cost or market, with cost determined on
         the first-in, first-out basis. In evaluating whether inventory
         should be stated at the lower of cost or market, we consider such
         factors as the amount of inventory on hand and in the distribution
         channel, estimated time required to sell existing inventory,
         remaining shelf life and current and expected market conditions,
         including levels of competition. We establish reserves, when
         necessary, for slow-moving and obsolete inventories based upon our
         historical experience and management's assessment of current
         product demand.

         INTANGIBLE ASSETS. Our intangible assets principally consist of
         -----------------
         product rights, license agreements and trademarks resulting from
         product acquisitions and legal fees and similar costs relating to
         the development of patents and trademarks. Intangible assets that
         are acquired are stated at cost, less accumulated amortization, and
         are amortized on a straight-line basis over their estimated useful
         lives. Upon approval, costs associated with the development of
         patents and trademarks are amortized on a straight-line basis over
         estimated useful lives ranging from five to 17 years. We determine
         amortization periods for intangible assets that are acquired based
         on our assessment of various factors impacting estimated useful
         lives and cash flows of the acquired products. Such factors include
         the product's position in its life cycle, the existence or absence
         of like products in the market, various other competitive and
         regulatory issues, and contractual terms. Significant changes to
         any of these factors may result in a reduction in the intangible
         asset's useful life and an acceleration of related amortization
         expense.

         We assess the impairment of intangible assets whenever events or
         changes in circumstances indicate that the carrying value may not
         be recoverable. Some factors we consider important which could
         trigger an impairment review include the following: (1) significant
         underperformance relative to expected historical or projected
         future


                                     58

<PAGE>
<PAGE>

         operating results; (2) significant changes in the manner of
         our use of the acquired assets or the strategy for our overall
         business; and (3) significant negative industry or economic trends.

         When we determine that the carrying value of an intangible asset
         may not be recoverable based upon the existence of one or more of
         the above indicators of impairment, we first perform an assessment
         of the asset's recoverability. Recoverability is determined by
         comparing the carrying amount of an intangible asset against an
         estimate of the undiscounted future cash flows expected to result
         from its use and eventual disposition. If the sum of the expected
         future undiscounted cash flows is less than the carrying amount of
         the intangible asset, an impairment loss is recognized based on the
         excess of the carrying amount over the estimated fair value of the
         intangible asset.

         CONTINGENCIES. We are involved in various legal proceedings, some
         -------------
         of which involve claims for substantial amounts. An estimate is
         made to accrue for a loss contingency relating to any of these
         legal proceedings if it is probable that a liability was incurred
         as of the date of the financial statements and the amount of loss
         can be reasonably estimated. Because of the subjective nature
         inherent in assessing the outcome of litigation and because of the
         potential that an adverse outcome in legal proceedings could have a
         material impact on our financial position or results of operations,
         such estimates are considered to be critical accounting estimates.
         After review, it was determined at March 31, 2006 that for each of
         the various legal proceedings in which we are involved, the
         conditions mentioned above were not met. We will continue to
         evaluate all legal matters as additional information becomes
         available.

         RECENTLY ISSUED ACCOUNTING STANDARDS

         In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,
         an Amendment to ARB No. 43, Chapter 4" which requires that abnormal
         amounts of idle facility expense, freight, handling costs, and
         wasted material (spoilage) costs be recognized as current period
         charges. In addition, this statement requires that allocation of
         fixed production overheads to the costs of conversion be based on
         the normal capacity of the production facilities. This statement is
         effective for inventory costs incurred during fiscal years
         beginning after June 15, 2005. We are currently determining the
         impact, if any, the adoption of this statement will have on our
         financial condition and results of operations.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
         "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
         "Accounting for Stock-Based Compensation" ("SFAS 123"), and
         supersedes APB Opinion No. 25, "Accounting for Stock Issued to
         Employees." SFAS 123R requires all share-based payments to
         employees, including grants of employee stock options, to be
         recognized in the financial statements based on their fair values.
         The pro forma disclosures previously permitted under SFAS 123 no
         longer will be an alternative to financial statement recognition.
         Under SFAS 123R, the Company must determine the appropriate fair
         value model to be used for valuing share-based payments, the
         amortization method for compensation cost and the transition method
         to be used at date of adoption. The transition methods include
         modified prospective and modified retrospective adoption options.
         Under the modified retrospective option, prior periods may be
         restated either as of the beginning of the year of adoption or for
         all periods presented. The modified prospective method requires
         that compensation expense be recorded for all unvested stock
         options and restricted stock at the beginning of the first quarter
         of adoption of SFAS 123R, while the modified retrospective method
         would record compensation expense for all unvested stock options
         and restricted stock beginning with the first period restated.

         In April 2005, the Securities and Exchange Commission announced an
         amendment to Regulation S-X to amend the date for compliance with
         SFAS 123R. The amendment requires each registrant that is not a
         small business issuer to adopt SFAS 123R in the first fiscal year
         commencing after June 15, 2005. As a result, the Company adopted
         SFAS 123R beginning April 1, 2006 using the modified prospective
         method. Adoption of SFAS 123R will have a significant impact on the
         Company's consolidated financial statements, as it will be required
         to expense the fair value of employee stock option grants rather
         than disclose the pro forma impact on its consolidated net income
         within the footnotes to the Company's Consolidated Financial
         Statements. Based on the unvested stock option grants at March 31,
         2006, the Company estimates that the adoption of SFAS 123R will

                                     59

<PAGE>
<PAGE>

         reduce consolidated net income for fiscal 2007 between $0.05 and
         $0.06 per diluted share. This estimate is based, in part, on a
         projection of our common stock prices and other valuation
         assumptions related to potential fiscal 2007 stock option grants
         which are subject to various uncertainties, including our future
         share-based compensation strategy, stock price volatility,
         estimated forfeiture rate and employee stock option exercise
         behavior. Changes in any of the Company's assumptions could cause
         future expenses to vary significantly from the Company's current
         estimates.

         In March 2005, the SEC issued SEC Staff Accounting Bulletin No. 107
         ("SAB 107") which describes the SEC staff's position on the
         application of SFAS 123R. SAB 107 contains interpretive and certain
         transitional guidance relating to the interaction between SFAS 123R
         and certain SEC rules and regulations including the SEC's views
         regarding the valuation of share-based payment arrangements
         including assumptions related to expected volatility and expected
         term, first time adoption of SFAS 123R in an interim period, the
         modification of certain terms of employee share options prior to
         the adoption of SFAS 123R and disclosures within Management's
         Discussion and Analysis subsequent to the adoption of SFAS 123R. We
         are currently evaluating SAB 107 and its guidance and will be
         adopting it as part of our adoption of SFAS 123R beginning April 1,
         2006.

         In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
         Error Corrections" ("SFAS 154"), which replaces Accounting
         Principles Board ("APB") Opinion No. 20, "Accounting Changes" ("APB
         20") and SFAS No. 3, "Reporting Accounting Changes in Interim
         Financial Statements" ("SFAS 3"). SFAS 154 applies to all voluntary
         changes in accounting principle and changes the requirements for
         the accounting for and reporting of a change in accounting
         principle. SFAS 154 also requires retrospective application to
         prior period financial statements involving changes in accounting
         principle unless it is impracticable to determine either the
         period-specific or cumulative effect of the change. This statement
         also requires that a change in the method of depreciation,
         amortization or depletion of long-lived assets be accounted for as
         a change in accounting estimate that is accounted for
         prospectively. SFAS 154 also retains many provisions of APB 20
         including those related to reporting a change in accounting
         estimate, a change in the reporting entity and a correction of an
         error and also carries forward provisions of SFAS 3 governing the
         reporting of accounting changes in interim financial statements.
         SFAS 154 is effective for accounting changes and corrections of
         errors made in fiscal years beginning after December 15, 2005. We
         believe that the adoption of SFAS 154 will not have a material
         effect on our Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

         Our exposure to market risk is limited to fluctuating interest
         rates associated with variable rate indebtedness that is subject to
         interest rate changes.

         Advances to us under our credit facilities bear interest at a rate
         that varies consistent with increases or decreases in the publicly
         announced prime rate and/or the LIBOR rate with respect to
         LIBOR-related loans, if any. A material increase in such rates
         could significantly increase borrowing expenses. We did not have
         any cash borrowings under our credit facilities at March 31, 2006.

         In May 2003, we issued $200.0 million principal amount of
         Convertible Subordinated Notes. The interest rate on the
         Convertible Subordinated Notes is fixed at 2.50% per annum and not
         subject to market interest rate changes. Beginning May 16, 2006, we
         will become obligated to pay contingent interest at a rate equal to
         0.5% per annum during any six-month period, if the average trading
         price of the Convertible Subordinated Notes per $1,000 principal
         amount for the five-trading day period ending on the third trading
         day immediately preceding the first day of the applicable six-month
         period equals $1,200 or more.

                                     60

<PAGE>
<PAGE>

         In March 2006, we entered into a $43.0 million mortgage loan
         secured by three of our buildings that matures in April 2021. The
         interest rate on this loan is fixed at 5.91% per annum and not
         subject to market interest rate changes.

                                     61

<PAGE>
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         -------------------------------------------

           Report of Independent Registered Public Accounting Firm
           -------------------------------------------------------

The Board of Directors and Shareholders
K-V Pharmaceutical Company:

We have audited the accompanying consolidated balance sheets of K-V
Pharmaceutical Company and subsidiaries as of March 31, 2006 and 2005, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for the years then ended. In connection
with our audits of the consolidated financial statements, we have also
audited the accompanying financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of K-V
Pharmaceutical Company and subsidiaries as of March 31, 2006 and 2005, and
the results of their operations and their cash flows for the years then
ended, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related 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.

As discussed in Note 2 to the consolidated financial statements, during
fiscal 2005, the Company adopted EITF 03-6 Participating Securities and the
Two-Class Method under SFAS No. 128 and EITF 04-8 The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of internal
control over financial reporting of K-V Pharmaceutical Company as of March
31, 2006, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated June 14, 2006 expressed an
unqualified opinion on management's assessment of, and the effective
operation of, internal control over financial reporting.

/s/ KPMG LLP

St. Louis, Missouri
June 14, 2006


                                     62

<PAGE>
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors
K-V Pharmaceutical Company



We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of K-V Pharmaceutical Company and
Subsidiaries for the year ended March 31, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of K-V Pharmaceutical Company and Subsidiaries for the year ended
March 31, 2004 in conformity with accounting principles generally accepted
in the United States of America.

                                                      /s/ BDO Seidman, LLP


Chicago, Illinois
June 4, 2004


                                     63

<PAGE>
<PAGE>

<TABLE>
                                     K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                              (Dollars in thousands)


<CAPTION>
                                                                                                  MARCH 31,
                                                                                         ---------------------------
                                                                                             2006           2005
                                                                                             ----           ----
<C>                                                                                      <C>             <C>
                                            ASSETS
                                            ------

CURRENT ASSETS:
Cash and cash equivalents............................................................    $   100,706     $   159,825
Marketable securities................................................................        106,763          45,694
Receivables, less allowance for doubtful accounts of $397 and $461
   in 2006 and 2005, respectively....................................................         54,746          62,361
Inventories, net.....................................................................         70,778          53,945
Prepaid and other assets.............................................................          6,963           9,530
Deferred tax asset...................................................................          8,034           5,827
                                                                                         -----------     -----------
   Total Current Assets..............................................................        347,990         337,182
Property and equipment, less accumulated depreciation................................        178,042         131,624
Intangible assets and goodwill, net..................................................         72,955          76,430
Other assets.........................................................................         19,026          13,081
                                                                                         -----------     -----------
TOTAL ASSETS.........................................................................    $   618,013     $   558,317
                                                                                         ===========     ===========

                                         LIABILITIES
                                         -----------
CURRENT LIABILITIES:
Accounts payable.....................................................................    $    17,975     $    18,011
Accrued liabilities..................................................................         17,100          15,733
Current maturities of long-term debt.................................................          1,681             973
                                                                                         -----------     -----------
   Total Current Liabilities.........................................................         36,756          34,717
Long-term debt.......................................................................        241,319         209,767
Other long-term liabilities..........................................................          5,442           4,477
Deferred tax liability...............................................................         25,221          16,654
                                                                                         -----------     -----------
TOTAL LIABILITIES....................................................................        308,738         265,615
                                                                                         -----------     -----------

COMMITMENTS AND CONTINGENCIES
                                    SHAREHOLDERS' EQUITY
                                    --------------------

7% cumulative convertible Preferred Stock, $.01 par value; $25.00 stated and
   liquidation value; 840,000 shares authorized; issued and outstanding --
   40,000 shares at both March 31, 2006 and 2005 (convertible into Class A
   shares at a ratio of  8.4375 to one)..............................................             --              --
Class A and Class B Common Stock, $.01 par value; 150,000,000 and
   75,000,000 shares authorized, respectively;
     Class A - issued 39,984,919 and 39,059,428 at March 31, 2006
       and 2005, respectively........................................................            400             391
     Class B - issued 12,695,561 and 13,422,101 at March 31, 2006 and
       2005, respectively (convertible into Class A shares on a one-for-one basis)...            127             134
Additional paid-in capital...........................................................        129,367         128,182
Retained earnings....................................................................        233,496         217,779
Accumulated other comprehensive loss.................................................           (211)           (133)
Less: Treasury stock, 3,123,975 shares of Class A and 92,902 shares of Class B
   Common Stock at March 31, 2006, and 3,111,003 shares of Class A and 92,902 shares
   of Class B Common Stock at March 31, 2005, at cost................................        (53,904)        (53,651)
                                                                                         -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................        309,275         292,702
                                                                                         -----------     -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................    $   618,013     $   558,317
                                                                                         ===========     ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                     64

<PAGE>
<PAGE>

<TABLE>
                                           K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF INCOME
                                             (In thousands, except per share data)


<CAPTION>
                                                                                              YEARS ENDED MARCH 31,
                                                                                 -----------------------------------------------
                                                                                     2006              2005             2004
                                                                                 ------------      -----------      ------------

<C>                                                                              <C>               <C>              <C>
Net revenues...........................................................          $    367,618      $   303,493      $    283,941
Cost of sales..........................................................               123,894          107,682            98,427
                                                                                 ------------      -----------      ------------
Gross profit...........................................................               243,724          195,811           185,514
                                                                                 ------------      -----------      ------------

Operating expenses:
   Research and development............................................                28,886           23,538            20,651
    Purchased in-process research and
       development and transaction costs...............................                30,441               --                --
   Selling and administrative..........................................               140,395          116,638            88,333
   Amortization of intangible assets...................................                 4,784            4,653             4,459
   Litigation..........................................................                    --           (1,430)           (1,700)
                                                                                 ------------      -----------      ------------
Total operating expenses...............................................               204,506          143,399           111,743
                                                                                 ------------      -----------      ------------

Operating income.......................................................                39,218           52,412            73,771
                                                                                 ------------      -----------      ------------

Other expense (income):
   Interest expense....................................................                 6,045            5,432             5,865
   Interest and other income...........................................                (5,737)          (3,048)           (2,092)
                                                                                 ------------      -----------      ------------
Total other expense, net..............................................                    308            2,384             3,773
                                                                                 ------------      -----------      ------------

Income before income taxes.............................................                38,910           50,028            69,998
Provision for income taxes.............................................                23,123           16,759            24,150
                                                                                 ------------      -----------      ------------
Net income.............................................................          $     15,787      $    33,269      $     45,848
                                                                                 ============      ===========      ============

Earnings per common share:
   Basic - Class A common..............................................          $       0.33      $      0.71      $       0.98
   Basic - Class B common..............................................                  0.28             0.59              0.82

   Diluted.............................................................          $       0.31      $      0.63      $       0.84
                                                                                 ============      ===========      ============

Weighted Average Shares Outstanding:
   Basic - Class A common..............................................                36,277           34,228            33,046
   Basic - Class B common..............................................                13,065           15,005            15,941

   Diluted.............................................................                50,729           59,468            58,708



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                     65

<PAGE>
<PAGE>


<TABLE>
                                           K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                                     (Dollars in thousands)


<CAPTION>
                                                                                              YEARS ENDED MARCH 31,
                                                                                 -----------------------------------------------
                                                                                     2006              2005             2004
                                                                                 ------------      -----------      ------------

<C>                                                                              <C>               <C>              <C>
Net income.............................................................          $     15,787      $    33,269      $     45,848
Other comprehensive income (loss):
   Unrealized loss on available for sale securities....................                  (118)            (201)               --
   Less related taxes..................................................                    40               68                --
                                                                                 ------------      -----------      ------------
      Total unrealized loss on available for sale securities, net......                   (78)            (133)               --
                                                                                 ------------      -----------      ------------

Total comprehensive income.............................................          $     15,709      $    33,136      $     45,848
                                                                                 ============      ===========      ============


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>



                                     66

<PAGE>
<PAGE>

<TABLE>
                                  K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<CAPTION>
                                                                 YEARS ENDED MARCH 31, 2006, 2005 AND 2004
                                                            -----------------------------------------------------
                                                                          CLASS A        CLASS B     ADDITIONAL
                                                             PREFERRED    COMMON         COMMON       PAID-IN
                                                               STOCK       STOCK          STOCK       CAPITAL
                                                               -----       -----          -----       -------
                                                                                        (Dollars in thousands)

<C>                                                          <C>           <C>            <C>        <C>
BALANCE AT MARCH 31, 2003................................    $     --      $ 236          $ 106      $120,961
Net income...............................................          --         --             --            --
Dividends paid on preferred stock........................          --         --             --            --
Conversion of 117,187 Class B shares to Class A shares...          --          1             (1)           --
Issuance of 27,992 Class A shares
   under product development agreement...................          --         --             --           505
Purchase of common stock for treasury....................          --         --             --            --
Three-for-two stock dividend.............................          --        120             53            --
Stock options exercised - 552,617 shares of Class A less
   91,538 shares repurchased and 413,419 shares of
   Class B less 15,625 shares repurchased................          --          5              4         2,362
                                                            -----------------------------------------------------
BALANCE AT MARCH 31, 2004................................          --        362            162       123,828
Net income...............................................          --         --             --            --
Dividends paid on preferred stock........................          --         --             --            --
Conversion of 2,783,537 Class B shares to
   Class A shares........................................          --         28            (28)           --
Issuance of 14,679 Class A shares
   under product development agreement...................          --         --             --           237
Purchase of common stock for treasury....................          --         --             --            --
Stock options exercised - 180,629 shares of Class A
   and 56,899 shares of Class B..........................          --          1             --         4,117
Unrealized loss on marketable securities available
   for sale, net of related taxes of $68.................          --         --             --            --
                                                            -----------------------------------------------------
BALANCE AT MARCH 31, 2005................................          --        391            134       128,182
Net income...............................................          --         --             --            --
Dividends paid on preferred stock........................          --         --             --            --
Conversion of 736,778 Class B shares to Class A shares             --          7             (7)           --
Purchase of common stock for treasury....................          --         --             --            --
Stock options exercised - 188,713 shares of Class A
   and 10,238 shares of Class B..........................          --          2             --         1,185
Unrealized loss on marketable securities available
   for sale, net of related taxes of $40.................          --         --             --            --
                                                            -----------------------------------------------------
BALANCE AT MARCH 31, 2006................................    $     --      $ 400          $ 127      $129,367
=================================================================================================================

<CAPTION>
                                                                       YEARS ENDED MARCH 31, 2006, 2005 AND 2004
                                                            -----------------------------------------------------------------
                                                                                            ACCUMULATED OTHER       TOTAL
                                                               TREASURY        RETAINED       COMPREHENSIVE     SHAREHOLDERS'
                                                                 STOCK         EARNINGS            LOSS            EQUITY
                                                                 -----         --------            ----            ------
                                                                                        (Dollars in thousands)

<C>                                                            <C>             <C>                 <C>            <C>
BALANCE AT MARCH 31, 2003................................      $    (28)       $139,341            $  --          $260,616
Net income...............................................            --          45,848               --            45,848
Dividends paid on preferred stock........................            --            (436)              --              (436)
Conversion of 117,187 Class B shares to Class A shares...            --              --               --                --
Issuance of 27,992 Class A shares
   under product development agreement...................            --              --               --               505
Purchase of common stock for treasury....................       (51,155)             --               --           (51,155)
Three-for-two stock dividend.............................            --            (173)              --                --
Stock options exercised - 552,617 shares of Class A less
   91,538 shares repurchased and 413,419 shares of
   Class B less 15,625 shares repurchased................            --              --               --             2,371
                                                            -----------------------------------------------------------------
BALANCE AT MARCH 31, 2004................................       (51,183)        184,580               --           257,749
Net income...............................................            --          33,269               --            33,269
Dividends paid on preferred stock........................            --             (70)              --               (70)
Conversion of 2,783,537 Class B shares to
   Class A shares........................................            --              --               --                --
Issuance of 14,679 Class A shares
   under product development agreement...................            --              --               --               237
Purchase of common stock for treasury....................        (2,468)             --               --            (2,468)
Stock options exercised - 180,629 shares of Class A
   and 56,899 shares of Class B..........................            --              --               --             4,118
Unrealized loss on marketable securities available
   for sale, net of related taxes of $68.................            --              --             (133)             (133)
                                                            -----------------------------------------------------------------
BALANCE AT MARCH 31, 2005................................        (53,651)       217,779             (133)          292,702
Net income...............................................            --          15,787               --            15,787
Dividends paid on preferred stock........................            --             (70)              --               (70)
Conversion of 736,778 Class B shares to Class A shares               --              --               --                --
Purchase of common stock for treasury....................          (253)             --               --              (253)
Stock options exercised - 188,713 shares of Class A
   and 10,238 shares of Class B..........................            --              --               --             1,187
Unrealized loss on marketable securities available
   for sale, net of related taxes of $40.................            --              --              (78)              (78)
                                                            -----------------------------------------------------------------
BALANCE AT MARCH 31, 2006................................      $(53,904)       $233,496            $(211)         $309,275
=============================================================================================================================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                     67

<PAGE>
<PAGE>

<TABLE>
                                          K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (Dollars in thousands)

<CAPTION>
                                                                                              YEARS ENDED MARCH 31,
                                                                                -----------------------------------------------
                                                                                     2006             2005             2004
                                                                                -------------     ------------      -----------
<C>                                                                             <C>               <C>               <C>
Operating Activities:
Net income.............................................................         $      15,787     $     33,269      $    45,848
Adjustments to reconcile net income to net cash provided by operating
   activities:
   Acquired in-process research and development........................                29,570               --               --
   Depreciation, amortization and other non-cash charges...............                18,002           13,904           12,663
   Deferred income tax provision.......................................                 6,707           13,582            8,691
   Deferred compensation...............................................                   965            1,355              209
   Litigation..........................................................                    --             (843)           1,825
Changes in operating assets and liabilities:
   Decrease (increase) in receivables, net.............................                 7,615            3,511           (8,487)
   Increase in inventories.............................................               (16,833)          (3,248)          (9,977)
   Decrease (increase) in prepaid and other assets.....................                 1,372           (3,520)          (6,294)
   Increase (decrease) in accounts payable and accrued.................
      liabilities......................................................                 1,424           (8,980)         (10,471)
                                                                                -------------     ------------      -----------
Net cash provided by operating activities..............................                64,609           49,030           34,007
                                                                                -------------     ------------      -----------
Investing Activities:
   Purchase of property and equipment..................................               (58,334)         (63,622)         (21,792)
   Purchase of marketable securities...................................               (61,187)         (10,565)            (278)
   Purchase of stock and intangible assets.............................               (11,300)              --           (4,000)
   Product acquisition.................................................               (25,643)              --          (14,300)
                                                                                -------------     ------------      -----------
Net cash used in investing activities..................................              (156,464)         (74,187)         (40,370)
                                                                                -------------     ------------      -----------
Financing Activities:
   Principal payments on long-term debt................................                  (892)          (8,179)          (8,237)
   Proceeds from borrowing of long-term debt...........................                32,764               --               --
   Dividends paid on preferred stock...................................                   (70)             (70)            (436)
   Proceeds from issuance of convertible notes.........................                    --               --          194,165
   Purchase of common stock for treasury...............................                  (253)          (2,468)         (51,155)
   Exercise of common stock options....................................                 1,187            4,118            2,371
                                                                                -------------     ------------      -----------
Net cash provided by (used in) financing activities...................                 32,736           (6,599)         136,708
                                                                                -------------     ------------      -----------
(Decrease) increase in cash and cash equivalents.......................               (59,119)         (31,756)         130,345
Cash and cash equivalents:
   Beginning of year...................................................               159,825          191,581           61,236
                                                                                -------------     ------------      -----------
   End of year.........................................................         $     100,706     $    159,825      $   191,581
                                                                                =============     ============      ===========
Non-cash investing and financing activities:
   Term loan to finance building purchase..............................         $          --     $         --      $     8,800
   Term loans refinanced...............................................                 9,859               --               --
   Issuance of common stock under product development
      agreement........................................................                    --              237              505

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                     68

<PAGE>
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)


1.       DESCRIPTION OF BUSINESS
         -----------------------

         K-V Pharmaceutical Company and its subsidiaries ("KV" or the
         "Company") are primarily engaged in the development, acquisition,
         manufacture, marketing and sale of technologically distinguished
         branded and generic/non-branded prescription pharmaceutical
         products. The Company was incorporated in 1971 and has become a
         leader in the development of advanced drug delivery and formulation
         technologies that are designed to enhance therapeutic benefits of
         existing drug forms. Through internal product development and
         synergistic acquisitions of products, KV has grown into a fully
         integrated specialty pharmaceutical company. The Company also
         develops, manufactures and markets technologically advanced,
         value-added raw material products for the pharmaceutical,
         nutritional, food and personal care industries.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------

         BASIS OF PRESENTATION
         ---------------------

         The Company's consolidated financial statements are prepared in
         accordance with U.S. generally accepted accounting principles. The
         consolidated financial statements include the accounts of KV and
         its wholly-owned subsidiaries. All material inter-company accounts
         and transactions have been eliminated in consolidation. Certain
         reclassifications, none of which affected net income or retained
         earnings, have been made to prior year amounts to conform to the
         current year presentation.

         USE OF ESTIMATES
         ----------------

         The preparation of financial statements in conformity with U.S.
         generally accepted accounting principles requires management to
         make estimates and assumptions that affect the reported amounts of
         assets and liabilities, the disclosure of contingent liabilities at
         the date of the financial statements, and the reported amounts of
         revenues and expenses during the reporting period. Actual results
         in subsequent periods may differ from the estimates and assumptions
         used in the preparation of the accompanying consolidated financial
         statements.

         The most significant estimates made by management include the
         determination of sales allowances, valuation of inventory balances,
         the determination of useful lives for intangible assets, and the
         evaluation of intangible assets and goodwill for impairment.
         Management periodically evaluates estimates used in the preparation
         of the consolidated financial statements and makes changes on a
         prospective basis when adjustments are necessary.

         CASH EQUIVALENTS
         ----------------

         Cash equivalents consist of interest-bearing deposits that can be
         redeemed on demand and investments that have original maturities of
         three months or less.

         MARKETABLE SECURITIES
         ---------------------

         The Company's marketable securities consist of mutual funds
         comprised of U.S. government investments and auction rate
         securities. The Company classifies its marketable securities as
         available-for-sale securities with net unrealized gains or losses
         recorded as a separate component of shareholders' equity, net of
         any related tax effect. Auction rate securities generally have
         long-term stated maturities of 20 to 30 years. However, these

                                     69

<PAGE>
<PAGE>

         securities have certain economic characteristics of short-term
         investments due to a rate-setting mechanism and the ability to
         liquidate them through a Dutch auction process that occurs on
         pre-determined intervals of less than 90 days.

         INVENTORIES
         -----------

         Inventories consist of finished goods held for distribution, raw
         materials and work in process. Inventories are stated at the lower
         of cost or market, with the cost determined on the first-in,
         first-out (FIFO) basis. Reserves for obsolete, excess or slow
         moving inventory are established by management based on evaluation
         of inventory levels, forecasted demand and market conditions.

         PROPERTY AND EQUIPMENT
         ----------------------

         Property and equipment are stated at cost, less accumulated
         depreciation. Major renewals and improvements are capitalized,
         while routine maintenance and repairs are expensed as incurred. At
         the time properties are retired from service, the cost and
         accumulated depreciation are removed from the respective accounts
         and the related gains or losses are reflected in earnings. The
         Company capitalizes interest on qualified construction projects.

         Depreciation expense is computed over the estimated useful lives of
         the related assets using the straight-line method. The estimated
         useful lives are principally 10 years for land improvements, 10 to
         40 years for buildings and improvements, 3 to 15 years for
         machinery and equipment, and 3 to 10 years for office furniture and
         equipment. Leasehold improvements are amortized on a straight-line
         basis over the shorter of the respective lease terms or the
         estimated useful life of the assets.

         The Company assesses property and equipment for impairment whenever
         events or changes in circumstances indicate that an asset's
         carrying amount may not be recoverable.

         INTANGIBLE ASSETS AND GOODWILL
         ------------------------------

         Intangible assets consist of product rights, license agreements and
         trademarks resulting from product acquisitions and legal fees and
         similar costs relating to the development of patents and
         trademarks. Intangible assets that are acquired are stated at cost,
         less accumulated amortization, and are amortized on a straight-line
         basis over estimated useful lives of 20 years. Costs associated
         with the development of patents and trademarks are amortized on a
         straight-line basis over estimated useful lives ranging from 5 to
         17 years. The Company evaluates its intangible assets for
         impairment whenever events or changes in circumstances indicate
         that an intangible asset's carrying amount may not be recoverable.
         Recoverability is determined by comparing the carrying amount of an
         intangible asset against an estimate of the undiscounted future
         cash flows expected to result from its use and eventual
         disposition. If the sum of the expected future undiscounted cash
         flows is less than the carrying amount of the intangible asset, an
         impairment loss is recognized based on the excess of the carrying
         amount over the estimated fair value of the intangible asset.

         Goodwill relates to the 1972 acquisition of the Company's specialty
         materials segment and is recorded net of accumulated amortization
         through March 31, 2002. In accordance with the Company's adoption
         of Statement of Financial Accounting Standards (SFAS) No. 142,
         "Goodwill and Other Intangible Assets," on April 1, 2002,
         amortization of goodwill was discontinued. Instead, goodwill is
         subject to at least an annual assessment of impairment on a fair
         value basis. If the Company determines through the assessment
         process that goodwill has been impaired, the Company will record
         the impairment charge in its results of operations. The Company's
         test for goodwill impairment in fiscal 2006 determined there was no
         goodwill impairment.

                                     70

<PAGE>
<PAGE>

         OTHER ASSETS
         ------------

         Non-marketable equity investments for which the Company does not
         have the ability to exercise significant influence over operating
         and financial policies (generally less than 20% ownership) are
         accounted for using the cost method. Such investments are included
         in "Other assets" in the accompanying consolidated balance sheets
         and relate to the Company's $11,052 investment in the preferred
         stock of Strides Arcolab Limited (see Note 3).

         This investment is periodically reviewed for other-than-temporary
         declines in fair value. An other than temporary decline in fair
         value is identified by evaluating market conditions, the entity's
         ability to achieve forecast and regulatory submission guidelines,
         as well as the entity's overall financial condition.

         REVENUE RECOGNITION
         -------------------

         Revenue is generally realized or realizable and earned when
         persuasive evidence of an arrangement exists, delivery has occurred
         or services have been rendered, the seller's price to the buyer is
         fixed or determinable, and the customer's payment ability has been
         reasonably assured. Accordingly, the Company records revenue from
         product sales when title and risk of ownership have been
         transferred to the customer, which is typically upon shipment to
         the customer. The Company also enters into long-term agreements
         under which it assigns marketing rights for the products it has
         developed to pharmaceutical marketers. Royalties under these
         arrangements are earned based on the sale of products.

         Concurrently with the recognition of revenue, the Company records
         estimated sales provisions for product returns, sales rebates,
         payment discounts, chargebacks and other sales allowances. Sales
         provisions are established based upon consideration of a variety of
         factors, including but not limited to, historical relationship to
         revenues, historical payment and return experience, estimated and
         actual customer inventory levels, customer rebate arrangements, and
         current contract sales terms with wholesale and indirect customers.
         The following briefly describes the nature of each provision and
         how such provisions are estimated.

         |X| Payment discounts are reductions to invoiced amounts offered to
             customers for payment within a specified period and are estimated
             utilizing historical customer payment experience.

         |X| Sales rebates are offered to certain customers to promote
             customer loyalty and encourage greater product sales. These rebate
             programs provide that, upon the attainment of pre-established
             volumes or the attainment of revenue milestones for a specified
             period, the customer receives credit against purchases. Other
             promotional programs are incentive programs periodically offered to
             customers. Due to the nature of these programs, the Company is able
             to estimate provisions for rebates and other promotional programs
             based on the specific terms in each agreement.

         |X| Consistent with common industry practices, the Company has
             agreed to terms with its customers to allow them to return product
             that is within a certain period of the expiration date. Upon
             recognition of revenue from product sales to customers, the Company
             provides for an estimate of product to be returned. This estimate
             is determined by applying a historical relationship of customer
             returns to amounts invoiced.

         |X| The Company markets and sells products directly to wholesalers,
             distributors, warehousing pharmacy chains, mail order pharmacies
             and other direct purchasing groups. The Company also markets
             products indirectly to independent pharmacies, non-warehousing
             chains, managed care organizations, and group purchasing
             organizations, collectively referred to as "indirect customers."
             The Company enters into agreements with some indirect customers to
             establish contract pricing for certain products. These indirect
             customers then independently select a wholesaler from which to
             purchase the products at these contracted


                                     71

<PAGE>
<PAGE>

             prices. Alternatively, the Company may pre-authorize wholesalers
             to offer specified contract pricing to other indirect customers.
             Under either arrangement, the Company provides credit to the
             wholesaler for any difference between the contracted price with
             the indirect customer and the wholesaler's invoice price. This
             credit is called a chargeback. Provisions for estimated
             chargebacks are calculated primarily using historical chargeback
             experience, actual contract pricing and estimated and actual
             wholesaler inventory levels.

         |X| Generally, the Company provides credits to wholesale customers
             for decreases that are made to selling prices for the value of
             inventory that is owned by these customers at the date of the price
             reduction. These credits are customary in the industry and are
             intended to reduce a wholesale customer's inventory cost to better
             reflect current market prices. Since a reduction in the
             wholesaler's invoice price reduces the chargeback per unit, price
             reduction credits are typically included as part of the reserve for
             chargebacks because they act essentially as accelerated
             chargebacks. Although the Company contractually agreed to provide
             price adjustment credits to its major wholesale customers at the
             time they occur, the impact of any such price reductions not
             included in the reserve for chargebacks is immaterial to the amount
             of revenue recognized in any given period.

         Actual product returns, chargebacks and other sales allowances
         incurred are dependent upon future events and may be different than
         the Company's estimates. The Company continually monitors the
         factors that influence sales allowance estimates and makes
         adjustments to these provisions when management believes that
         actual product returns, chargebacks and other sales allowances may
         differ from established allowances.

         Accruals for sales provisions are presented in the Consolidated
         Financial Statements as reductions to net revenues and accounts
         receivable. Sales provisions totaled $154,368, $133,475 and
         $103,262 for the years ended March 31, 2006, 2005 and 2004,
         respectively. The reserve balances related to the sales provisions
         totaled $29,317 and $21,056 at March 31, 2006 and 2005,
         respectively, and are included in "Receivables, less allowance for
         doubtful accounts" in the accompanying consolidated balance sheets.

         CONCENTRATION OF CREDIT RISK
         ----------------------------

         The Company extends credit on an uncollateralized basis primarily
         to wholesale drug distributors and retail pharmacy chains
         throughout the United States. As a result, the Company is required
         to estimate the level of receivables which ultimately will not be
         paid. The Company calculates this estimate based on prior
         experience supplemented by a customer specific review when it is
         deemed necessary. On a periodic basis, the Company performs
         evaluations of the financial condition of all customers to further
         limit its credit risk exposure. Actual losses from uncollectible
         accounts have historically been insignificant.

         The Company's three largest customers accounted for approximately
         31%, 19% and 14%, and 23%, 18% and 16% of gross receivables at
         March 31, 2006 and 2005, respectively.

         For the year ended March 31, 2006, KV's three largest customers
         accounted for 27%, 16% and 13% of gross revenues. For the years
         ended March 31, 2005 and 2004, the Company's three largest
         customers accounted for gross revenues of 27%, 16% and 12% and 25%,
         16% and 13%, respectively.

         The Company maintains cash balances at certain financial
         institutions that are greater than the FDIC insurable limit.

         SHIPPING AND HANDLING COSTS
         ---------------------------

         The Company classifies shipping and handling costs in cost of
         sales. The Company does not derive revenue from shipping.

                                     72

<PAGE>
<PAGE>

         RESEARCH AND DEVELOPMENT
         ------------------------

         Research and development costs, including licensing fees for early
         stage development products, are expensed in the period incurred.

         The Company has licensed the exclusive rights to co-develop and
         market various products with other drug delivery companies. These
         collaborative agreements usually require the Company to pay
         up-front fees and ongoing milestone payments. When the Company
         makes an up-front or milestone payment, management evaluates the
         stage of the related product to determine the appropriate
         accounting treatment. If the product is considered to be beyond the
         early development stage but has not yet been approved by regulatory
         authorities, the Company will evaluate the facts and circumstances
         of each case to determine if a portion or all of the payment has
         future economic benefit and should be capitalized. Payments made to
         third parties subsequent to regulatory approval are capitalized
         with that cost generally amortized over the shorter of the patented
         life of the product or the term of the licensing agreement.

         The Company accrues estimated costs associated with clinical
         studies performed by contract research organizations based on the
         total of costs incurred through the balance sheet date. The Company
         monitors the progress of the trials and their related activities to
         the extent possible, and adjusts the accruals accordingly. These
         accrued costs are recorded as a component of research and
         development expense.

         ADVERTISING
         -----------

         Costs associated with advertising are expensed in the period in
         which the advertising is used and these costs are included in
         selling and administrative expense. Advertising expenses totaled
         $18,366, $10,885 and $7,264 for the years ended March 31, 2006,
         2005 and 2004, respectively. Advertising expense includes the cost
         of product samples given to physicians for marketing to their
         patients.

         LITIGATION
         ----------

         The Company is subject to litigation in the ordinary course of
         business and to certain other contingencies (see Note 12). Legal
         fees and other expenses related to litigation and contingencies are
         recorded as incurred. The Company, in consultation with its legal
         counsel, also assesses the need to record a liability for
         litigation and contingencies on a case-by-case basis. Accruals are
         recorded when the Company determines that a loss related to a
         matter is both probable and reasonably estimable.

         DEFERRED FINANCING COSTS
         ------------------------

         Deferred financing costs of $5,835 were incurred in connection with
         the issuance of the 2.5% Convertible Subordinated Notes due 2033.
         These costs are being amortized into interest expense on a
         straight-line basis over the five-year period that ends on the
         first date the debt can be put by the holders to the Company.
         Accumulated amortization totaled $3,307 and $2,143 at March 31,
         2006 and 2005, respectively. Deferred financing costs, net of
         accumulated amortization, are included in "Other Assets" in the
         accompanying consolidated balance sheets.

         EARNINGS PER SHARE
         ------------------

         Basic earnings per share is calculated by dividing net income
         available to common shareholders for the period by the weighted
         average number of common shares outstanding during the period.
         Diluted earnings per share is computed by dividing net income by
         the weighted average common shares and common share equivalents
         outstanding during the periods presented assuming the conversion of
         preferred shares and the

                                     73

<PAGE>
<PAGE>


         Convertible Subordinated Notes and the exercise of all in-the-money
         stock options based on the treasury stock method. Common share
         equivalents have been excluded from the computation of diluted
         earnings per share where their inclusion would be anti-dilutive.

         In June 2004, the Company adopted the guidance in Emerging Issues
         Task Force (EITF) Issue No. 03-06, "Participating Securities and
         the Two-Class Method under FASB Statement No. 128." The
         pronouncement required the use of the two-class method in the
         calculation and disclosure of basic earnings per share and provided
         guidance on the allocation of earnings and losses for purposes of
         calculating basic earnings per share. Accordingly, all periods
         presented have been retroactively adjusted to give effect to such
         guidance. For purposes of calculating basic earnings per share,
         undistributed earnings are allocated to each class of common stock
         based on the contractual participation rights of each class of
         security. Holders of Class A common stock are entitled to receive
         dividends per share equal to 120% of the dividends per share paid
         on the Class B common stock.

         In December 2004, the Company adopted the guidance in EITF 04-08,
         "The Effect of Contingently Convertible Debt on Diluted Earnings
         per Share." The EITF consensus required that the impact of
         contingently convertible debt instruments be included in diluted
         earnings per share computations (if dilutive) regardless of whether
         the market price trigger (or other contingent feature) had been
         met. Additionally, the EITF stated that prior period earnings per
         share amounts presented for comparative purposes should be restated
         to conform to this consensus.

         INCOME TAXES
         ------------

         Income taxes are accounted for under the asset and liability method
         where deferred tax assets and liabilities are recognized for the
         future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and
         liabilities and their respective tax bases. Deferred tax assets and
         liabilities are measured using enacted tax rates expected to apply
         to taxable income in the years in which those temporary differences
         are expected to be recovered or settled. The effect on deferred tax
         assets and liabilities of a change in tax rates is recognized in
         income in the period that includes the enactment date. A valuation
         allowance is established when it is more likely than not that some
         portion or all of the deferred tax assets will not be realized.

         STOCK-BASED COMPENSATION
         ------------------------

         The Company grants stock options for a fixed number of shares to
         employees with an exercise price greater than or equal to the fair
         value of the shares at the date of grant. As permissible under
         Statement of Financial Accounting Standards (SFAS) No. 123,
         "Accounting for Stock-Based Compensation," the Company elected to
         continue to account for stock option grants to employees in
         accordance with Accounting Principles Board (APB) Opinion No. 25,
         "Accounting for Stock Issued to Employees" and related
         interpretations. APB 25 requires that compensation cost related to
         fixed stock option plans be recognized only to the extent that the
         intrinsic value of the options at the grant date exceeds the
         exercise price. Accordingly, no compensation expense is recognized
         for stock option awards granted to employees with exercise prices
         at or above the market price at date of grant. The table that
         follows illustrates the effect on net income and earnings per share
         if the Company had determined stock-based compensation using the
         fair value method prescribed by SFAS 123. Certain revisions have
         been made to the expense amounts reported under the pro-forma
         disclosure provisions of SFAS 123 for fiscal 2005 and 2004. These
         revisions were not material and did not impact the consolidated
         financial statements. The table that follows reflects the Company's
         revised pro-forma results.

                                     74

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<TABLE>
<CAPTION>
                                                                                 YEARS ENDED MARCH 31,
                                                                      ------------------------------------------
                                                                        2006            2005              2004
                                                                        ----            ----              ----

<C>                                                                   <C>              <C>               <C>
           Net income, as reported........................            $15,787          $33,269           $45,848
           Stock-based employee
             compensation expense,
             net of related tax effects...................             (2,433)          (2,463)           (1,726)
                                                                      -------          -------           -------
           Pro forma net income...........................            $13,354          $30,806           $44,122
                                                                      =======          =======           =======

           Earnings per share:
              Basic Class A common - as reported..........            $  0.33          $  0.71           $  0.98
              Basic Class A common - pro forma............               0.28             0.66              0.94
              Basic Class B common - as reported..........               0.28             0.59              0.82
              Basic Class B common - pro forma............               0.23             0.55              0.79
              Diluted - as reported.......................               0.31             0.63              0.84
              Diluted - pro forma.........................               0.26             0.59              0.81
</TABLE>

         The weighted average fair value of the options has been estimated
         on the date of grant using the following weighted average
         assumptions for grants issued during the years ended March 31,
         2006, 2005 and 2004, respectively: no dividend yield; expected
         volatility of 46%, 50% and 52% for Class A common stock; expected
         volatility of 44%, 47% and 50% for Class B common stock; risk-free
         interest rate of 4.21%, 3.65% and 3.00% per annum; and expected
         option terms ranging from 3 to 10 years for all three periods.
         Weighted averages are used because of varying assumed exercise
         dates.

         COMPREHENSIVE INCOME
         --------------------

         Comprehensive income includes all changes in equity during a period
         except those that resulted from investments by or distributions to
         the Company's shareholders. Other comprehensive income refers to
         revenues, expenses, gains and losses that, under generally accepted
         accounting principles, are included in comprehensive income, but
         excluded from net income as these amounts are recorded directly as
         an adjustment to shareholders' equity. For the Company, other
         comprehensive income (loss) is comprised of the net changes in
         unrealized gains and losses on available-for-sale securities, net
         of applicable income taxes.

         FAIR VALUE OF FINANCIAL INSTRUMENTS
         -----------------------------------

         The fair values of the Company's cash and cash equivalents,
         receivables, accounts payable and accrued liabilities approximate
         their carrying values due to the relatively short maturity of these
         items. Except for the Convertible Subordinated Notes discussed
         below, the carrying amount of all long-term financial obligations
         approximates their fair value because their terms are similar to
         those which can be obtained for similar financial instruments in
         the current marketplace.

         The Company's $11,052 investment in the preferred stock of Strides
         Arcolab Limited had a fair value of $11,251 at March 31, 2006 based
         on an annual independent valuation analysis. Based on quoted market
         rates, the Company's $200,000 principal amount of Convertible
         Subordinated Notes had a fair value of $214,860 and $217,620 at
         March 31, 2006 and 2005, respectively.

         DERIVATIVE FINANCIAL INSTRUMENTS
         --------------------------------

         The Company's derivative financial instruments consist of embedded
         derivatives related to the 2.5% Convertible Subordinated Notes due
         2033. These embedded derivatives include certain conversion
         features and a contingent interest feature. Although the conversion
         features represent embedded derivative financial


                                     75

<PAGE>
<PAGE>

         instruments, based on the de minimis value of these features at the
         time of issuance and at March 31, 2006, no value has been assigned
         to these embedded derivatives. The contingent interest feature
         provides unique tax treatment under the Internal Revenue Service's
         contingent debt regulations. In essence, interest accrues, for tax
         purposes, on the basis of the instrument's comparable yield (the
         yield at which the issuer would issue a fixed rate instrument with
         similar terms).

         NEW ACCOUNTING PRONOUNCEMENTS
         -----------------------------

         In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,
         an Amendment to ARB No. 43, Chapter 4" which requires that abnormal
         amounts of idle facility expense, freight, handling costs, and
         wasted material (spoilage) costs be recognized as current period
         charges. In addition, this statement requires that allocation of
         fixed production overheads to the costs of conversion be based on
         the normal capacity of the production facilities. This statement is
         effective for inventory costs incurred during fiscal years
         beginning after June 15, 2005. The Company is currently determining
         the impact, if any, the adoption of this statement will have on its
         financial condition and results of operations.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
         "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
         "Accounting for Stock-Based Compensation" ("SFAS 123"), and
         supersedes APB Opinion No. 25, "Accounting for Stock Issued to
         Employees." SFAS 123R requires all share-based payments to
         employees, including grants of employee stock options, to be
         recognized in the financial statements based on their fair values.
         The pro forma disclosures previously permitted under SFAS 123 no
         longer will be an alternative to financial statement recognition.
         Under SFAS 123R, the Company must determine the appropriate fair
         value model to be used for valuing share-based payments, the
         amortization method for compensation cost and the transition method
         to be used at date of adoption. The transition methods include
         modified prospective and modified retrospective adoption options.
         Under the modified retrospective option, prior periods may be
         restated either as of the beginning of the year of adoption or for
         all periods presented. The modified prospective method requires
         that compensation expense be recorded for all unvested stock
         options and restricted stock at the beginning of the first quarter
         of adoption of SFAS 123R, while the modified retrospective method
         would record compensation expense for all unvested stock options
         and restricted stock beginning with the first period restated.

         In April 2005, the Securities and Exchange Commission announced an
         amendment to Regulation S-X to amend the date for compliance with
         SFAS 123R. The amendment requires each registrant that is not a
         small business issuer to adopt SFAS 123R in the first fiscal year
         commencing after June 15, 2005. As a result, the Company adopted
         SFAS 123R beginning April 1, 2006 using the modified prospective
         method. Adoption of SFAS 123R will have a significant impact on the
         Company's consolidated financial statements, as it will be required
         to expense the fair value of employee stock option grants rather
         than disclose the pro forma impact on its consolidated net income
         within the footnotes to the Company's Consolidated Financial
         Statements.

         In March 2005, the SEC issued SEC Staff Accounting Bulletin No. 107
         ("SAB 107") which describes the SEC staff position on the
         application of SFAS 123R. SAB 107 contains interpretive and certain
         transitional guidance relating to the interaction between SFAS 123R
         and certain SEC rules and regulations including the SEC's views
         regarding the valuation of share-based payment arrangements
         including assumptions related to expected volatility and expected
         term, first time adoption of SFAS 123R in an interim period, the
         modification of certain terms of employee share options prior to
         the adoption of SFAS 123R and disclosures within Management's
         Discussion and Analysis subsequent to the adoption of SFAS 123R.
         The Company is currently evaluating SAB 107 and its guidance and
         will be adopting it as part of the adoption of SFAS 123R beginning
         April 1, 2006.

         In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
         Error Corrections" ("SFAS 154"), which replaces Accounting
         Principles Board ("APB") Opinion No. 20, "Accounting Changes"
         ("APB 20")


                                     76

<PAGE>
<PAGE>

         and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
         Statements" ("SFAS 3"). SFAS 154 applies to all voluntary changes
         in accounting principle and changes the requirements for the
         accounting for and reporting of a change in accounting principle.
         SFAS 154 also requires retrospective application to prior period
         financial statements involving changes in accounting principle
         unless it is impracticable to determine either the period-specific
         or cumulative effect of the change. This statement also requires
         that a change in the method of depreciation, amortization or
         depletion of long-lived assets be accounted for as a change in
         accounting estimate that is accounted for prospectively. SFAS 154
         also retains many provisions of APB 20 including those related to
         reporting a change in accounting estimate, a change in the
         reporting entity and a correction of an error and also carries
         forward provisions of SFAS 3 governing the reporting of accounting
         changes in interim financial statements. SFAS 154 is effective for
         accounting changes and corrections of errors made in fiscal years
         beginning after December 15, 2005. The Company believes that the
         adoption of SFAS 154 will not have a material effect on its
         Consolidated Financial Statements.

3.       ACQUISITIONS AND LICENSE AGREEMENT
         ----------------------------------

         In May 2005, the Company and FemmePharma, Inc. ("FemmePharma")
         mutually agreed to terminate the license agreement between them
         entered into in April 2002. As part of this transaction, the
         Company acquired all of the common stock of FemmePharma for $25,000
         after certain assets of the entity had been distributed to
         FemmePharma's other shareholders. Under a separate agreement, the
         Company had previously invested $5,000 in FemmePharma's convertible
         preferred stock. Included in the Company's acquisition of
         FemmePharma are the worldwide marketing rights to an endometriosis
         product that has successfully completed Phase II clinical trials.
         This product was originally part of the licensing arrangement with
         FemmePharma that provided the Company, among other things,
         marketing rights for the product principally in the United States.
         In accordance with the new agreement, the Company acquired
         worldwide licensing rights of the endometriosis product, no longer
         is responsible for milestone payments and royalties specified in
         the original licensing agreement, and secured exclusive worldwide
         rights for use of the FemmePharma technology for vaginal
         anti-infective products. For the year ended March 31, 2006, the
         Company recorded expense of $30,441 in connection with the
         FemmePharma acquisition that consisted of $29,570 for acquired
         in-process research and development and $871 in direct expenses
         related to the transaction. The acquired in-process research and
         development charge represented the estimated fair value of the
         endometriosis product being developed that, at the time of the
         acquisition, had no alternative future use and for which
         technological feasibility had not been established. The FemmePharma
         acquisition expense was determined by the Company to not be
         deductible for tax purposes. The Company also allocated $375 of the
         purchase price for a non-compete agreement and $300 of the purchase
         price for the royalty-free worldwide license to use FemmePharma's
         technology for vaginal anti-infective products acquired in the
         transaction.

         In May 2005, the Company entered into a long-term product
         development and marketing license agreement with Strides Arcolab
         Limited ("Strides"), an Indian generic pharmaceutical developer and
         manufacturer, for exclusive marketing rights in the United States
         and Canada for 10 new generic drugs. Under the agreement, Strides
         will be responsible for developing, submitting for regulatory
         approval and manufacturing the 10 products and the Company will be
         responsible for exclusively marketing the products in the
         territories covered by the agreement. Under a separate agreement,
         the Company invested $11,300 in Strides redeemable preferred stock.
         This investment is denominated in the Indian rupee and is subject
         to foreign currency transaction gains or losses resulting from
         exchange rate changes. As a result of a change in the exchange
         rate, the carrying value of this investment was $11,052 at March
         31, 2006. This investment has been accounted for using the cost
         method and is included in "Other assets" in the accompanying
         consolidated balance sheet at March 31, 2006.

                                     77

<PAGE>
<PAGE>

4.       MARKETABLE SECURITIES
         ---------------------

         The carrying amount of available-for-sale securities and their
         approximate fair values at March 31, 2006 and 2005 were as follows.

<TABLE>
<CAPTION>
                                                                                   MARCH 31, 2006
                                                    ----------------------------------------------------------------------------
                                                                             GROSS                GROSS
                                                                          UNREALIZED            UNREALIZED              FAIR
                                                       COST                  GAINS                LOSSES                VALUE
                                                       ----                  -----                ------                -----
<C>                                                 <C>                   <C>                   <C>                   <C>
              Auction rate securities.........      $   70,000            $        -            $        -            $   70,000
              Equity securities...............          37,082                     -                  (319)               36,763
                                                    ----------            ----------            -----------           ----------
                  Total.......................      $  107,082            $        -            $     (319)           $  106,763
                                                    ==========            ==========            ===========           ==========


<CAPTION>
                                                                                   MARCH 31, 2005
                                                    ----------------------------------------------------------------------------
                                                                             GROSS                GROSS
                                                                          UNREALIZED            UNREALIZED              FAIR
                                                       COST                  GAINS                LOSSES                VALUE
                                                       ----                  -----                ------                -----
<C>                                                 <C>                   <C>                   <C>                   <C>
              Auction rate securities.........      $   10,000            $        -            $        -            $   10,000
              Equity securities...............          35,895                     -                   (201)              35,694
                                                    ----------            ----------            -----------           ----------
                  Total.......................      $   45,895            $        -            $      (201)          $   45,694
                                                    ==========            ==========            ===========           ==========
</TABLE>


         The Company's marketable securities are classified as
         available-for-sale and are recorded at fair value based on quoted
         market prices using the specific identification method. These
         investments are classified as current assets as the Company has the
         ability to use them for current operating and investing purposes.
         There were no realized gains or losses for the years ended March
         31, 2006, 2005 and 2004. At March 31, 2006, the Company has
         determined that its unrealized losses are temporary based on the de
         minimis amount of losses compared to cost and the duration of the
         losses being less than 24 months. The Company expects that all
         losses will be recovered, and intends to hold these marketable
         securities to recovery. If market conditions deteriorate, we may
         incur future impairments.

         Included in the Company's marketable securities at March 31, 2006
         and 2005 are $70,000 and $10,000, respectively of auction rate
         securities. Auction rate securities are investments with an
         underlying component of long-term debt or an equity instrument.
         These auction rate securities trade or mature on a shorter term
         than the underlying instrument based on an auction bid that resets
         the interest rate of the security. The auction or reset dates occur
         at intervals that are typically less than three months providing
         high liquidity to otherwise longer term investments.

5.       INVENTORIES
         -----------

         Inventories as of March 31, consist of:
<TABLE>
<CAPTION>
                                                                        2006                2005
                                                                        ----                ----

<C>                                                                  <C>                 <C>
                  Finished goods.....................                $  28,977           $  30,521
                  Work-in-process....................                    7,969               5,773
                  Raw materials......................                   33,832              17,651
                                                                     ---------           ---------
                                                                     $  70,778           $  53,945
                                                                     =========           =========
</TABLE>

                                     78

<PAGE>
<PAGE>

6.       PROPERTY AND EQUIPMENT
         ----------------------

         Property and equipment as of March 31, consist of:
<TABLE>
<CAPTION>
                                                                                  2006                  2005
                                                                                  ----                  ----
<C>                                                                           <C>                   <C>
                  Land and improvements.................................      $    5,763            $    2,030
                  Building and building improvements....................         101,135                19,984
                  Machinery and equipment...............................          57,021                41,399
                  Office furniture and equipment........................          24,573                14,871
                  Leasehold improvements................................          21,044                 9,985
                  Construction-in-progress..............................          10,265                74,394
                                                                              ----------            ----------
                                                                                 219,801               162,663
                  Less accumulated depreciation.........................         (41,759)              (31,039)
                                                                              ----------            ----------
                     Net property and equipment.........................      $  178,042            $  131,624
                                                                              ==========            ==========
</TABLE>

         Capital additions to property and equipment were $58,334, $63,622
         and $30,592 for the years ended March 31, 2006, 2005 and 2004,
         respectively. Depreciation of property and equipment was $11,916,
         $7,775 and $6,718 for the years ended March 31, 2006, 2005 and
         2004, respectively.

         Property and equipment projects classified as
         construction-in-progress at March 31, 2006 are projected to be
         completed during the next 12 months at an estimated cost of $5,301.

         During the years ended March 31, 2006, 2005 and 2004, the Company
         recorded capitalized interest on qualifying construction projects
         of $940, $1,511 and $577, respectively.

7.       INTANGIBLE ASSETS AND GOODWILL
         ------------------------------

         Intangible assets and goodwill as of March 31, consist of:

<TABLE>
<CAPTION>
                                                                   2006                                        2005
                                                    ----------------------------------           --------------------------------
                                                      GROSS                                       GROSS
                                                     CARRYING             ACCUMULATED            CARRYING            ACCUMULATED
                                                      AMOUNT              AMORTIZATION            AMOUNT             AMORTIZATION
                                                      ------              ------------            ------             ------------

<C>                                                 <C>                    <C>                   <C>                  <C>
              Product rights - Micro-K(R).......    $   36,140             $ (12,708)            $  36,140            $(10,904)
              Product rights - PreCare(R).......         8,433                (2,811)                8,433              (2,389)
              Trademarks acquired:
                 Niferex(R).....................        14,834                (2,225)               14,834              (1,484)
                 Chromagen(R)/StrongStart(R)....        27,642                (4,147)               27,642              (2,764)
              License agreements................         4,400                  (300)                4,168                (120)
              Covenant not to compete...........           375                   (34)                   -                    -
              Trademarks and patents............         3,403                  (604)                2,814                (497)
                                                    ----------             ---------             ---------            --------
                  Total intangible assets.......        95,227               (22,829)               94,031             (18,158)
              Goodwill..........................           557                     -                   557                   -
                                                    ----------             ---------             ---------            --------
                                                    $   95,784             $ (22,829)            $  94,588            $(18,158)
                                                    ==========             =========             =========            ========
</TABLE>

         As of March 31, 2006, the Company's intangible assets have a
         weighted average useful life of approximately 19 years.
         Amortization of intangible assets was $4,784, $4,653 and $4,459 for
         the years ended March 31, 2006, 2005 and 2004, respectively.

         Assuming no additions, disposals or adjustments are made to the
         carrying values and/or useful lives of the

                                     79

<PAGE>
<PAGE>


         intangible assets, annual amortization expense on product rights,
         trademarks acquired and other intangible assets is estimated to be
         approximately $4,788 in each of the five succeeding fiscal years.

8.       OTHER ASSETS
         ------------

         Other assets as of March 31, consist of:
<TABLE>
<CAPTION>
                                                                                 2006               2005
                                                                                 ----               ----

<C>                                                                           <C>                <C>
                  Cash surrender value of life insurance...............       $   3,416          $   2,822
                  Preferred stock investments..........................          11,052              5,000
                  Accrued dividends on preferred stock ................             509                  -
                  Deferred financing costs, net........................           2,879              3,852
                  Deposits.............................................           1,170              1,407
                                                                              ---------          ---------

                                                                              $  19,026          $  13,081
                                                                              =========          =========
</TABLE>

9.       ACCRUED LIABILITIES
         -------------------

         Accrued liabilities as of March 31, consist of:
<TABLE>
<CAPTION>
                                                                                 2006               2005
                                                                                 ----               ----

<C>                                                                           <C>                <C>
                  Salaries, wages, incentives and benefits.......             $  11,312          $  10,383
                  Income taxes - current.........................                   584                 --
                  Promotion expenses.............................                   344                131
                  Accrued interest payable.......................                 1,875              1,875
                  Other..........................................                 2,985              3,344
                                                                              ---------          ---------
                                                                              $  17,100          $  15,733
                                                                              =========          =========
</TABLE>

10.      LONG-TERM DEBT
         --------------

         Long-term debt as of March 31, consists of:
<TABLE>
<CAPTION>
                                                                                 2006               2005
                                                                                 ----               ----

<C>                                                                           <C>                <C>
                  Building mortgages.............................             $  43,000          $  10,740
                  Convertible notes..............................               200,000            200,000
                                                                              ---------          ---------
                                                                                243,000            210,740
                  Less current portion...........................                (1,681)              (973)
                                                                              ---------          ---------
                                                                              $ 241,319          $ 209,767
                                                                              =========          =========
</TABLE>

         As of March 31, 2006, the Company has credit agreements with two
         banks that provide revolving lines of credit for borrowing up to
         $140,000. The credit agreements provide for $80,000 in revolving
         lines of credit along with supplemental credit lines of $60,000
         that are available for financing acquisitions. These credit
         facilities expire in October 2006 and June 2006, respectively. The
         revolving and supplemental credit lines are unsecured and interest
         is charged at the lower of the prime rate or the one-month LIBOR
         rate plus 175 basis points. At March 31, 2006, the Company had
         $3,900 in an open letter of credit issued under the revolving
         credit line and no cash borrowings under either credit facility.
         The credit agreements contain financial covenants that impose
         minimum levels of earnings before interest, taxes, depreciation and
         amortization, a maximum funded debt ratio, a limit on capital
         expenditures and dividend payments, a minimum fixed charge coverage
         ratio and a maximum senior leverage ratio.

                                     80

<PAGE>
<PAGE>

         In March 2006, the Company entered into a $43,000 mortgage loan
         agreement with one of its primary lenders, in part, to refinance
         $9,859 of existing mortgages. The $32,764 of net proceeds the
         Company received from the new mortgage loan will be used for
         working capital and general corporate purposes. The new mortgage
         loan, which is secured by three of the Company's buildings, bears
         interest at a rate of 5.91% and matures on April 1, 2021.

         On May 16, 2003, the Company issued $200,000 principal amount of
         Convertible Subordinated Notes (the "Notes") that are convertible,
         under certain circumstances, into shares of Class A common stock at
         an initial conversion price of $23.01 per share. The Notes, which
         are due May 16, 2033, bear interest that is payable on May 16 and
         November 16 of each year at a rate of 2.50% per annum. The Company
         also is obligated to pay contingent interest at a rate equal to
         0.5% per annum during any six-month period from May 16 to November
         15 and from November 16 to May 15, with the initial six-month
         period commencing May 16, 2006, if the average trading price of the
         Notes per $1,000 principal amount for the five trading day period
         ending on the third trading day immediately preceding the first day
         of the applicable six-month period equals $1,200 or more. 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. At the time of issuance
         and at March 31, 2006, management determined that the fair value of
         this contingent interest embedded derivative was de minimis and,
         accordingly, no value has been assigned to this embedded
         derivative.

         The Company may redeem some or all of the Notes at any time on or
         after May 21, 2006, at a redemption price, payable in cash, of 100%
         of the principal amount of the Notes, plus accrued and unpaid
         interest, including contingent interest, if any. Holders may
         require the Company to repurchase all or a portion of their Notes
         on May 16, 2008, 2013, 2018, 2023 and 2028 or upon a change in
         control, as defined in the indenture governing the Notes, at a
         purchase price, payable in cash, of 100% of the principal amount of
         the Notes, plus accrued and unpaid interest, including contingent
         interest, if any.

         The Notes are subordinate to all of our existing and future senior
         obligations. The net proceeds to the Company were approximately
         $194,200, after deducting underwriting discounts, commissions and
         offering expenses. The Notes are convertible, at the holders'
         option, into shares of the Company's Class A common stock prior to
         the maturity date under the following circumstances:

                   o   during any quarter commencing after June 30, 2003,
                       if the closing sale price of the Company's Class A
                       common stock over a specified number of trading days
                       during the previous quarter is more than 120% of the
                       conversion price of the Notes on the last trading
                       day of the previous quarter. The Notes are initially
                       convertible at a conversion price of $23.01 per
                       share, which is equal to a conversion rate of
                       approximately 43.4594 shares per $1,000 principal
                       amount of Notes;
                   o   if the Company has called the Notes for redemption;
                   o   during the five trading day period immediately
                       following any nine consecutive day trading
                       period in which the trading price of the Notes
                       per $1,000 principal amount for each day of such
                       period was less than 95% of the product of the
                       closing sale price of our Class A common stock
                       on that day multiplied by the number of shares
                       of our Class A common stock issuable upon
                       conversion of $1,000 principal amount of the
                       Notes; or
                   o   upon the occurrence of specified corporate transactions.

         The Company has reserved 8,691,880 shares of Class A common stock
         for issuance in the event the Notes are converted into the
         Company's common shares.

         The Notes, which are unsecured, do not contain any restrictions on
         the payment of dividends, the incurrence of additional indebtedness
         or the repurchase of the Company's securities, and do not contain
         any financial covenants.

                                     81

<PAGE>
<PAGE>

         The aggregate maturities of long-term debt as of March 31, 2006 are
         as follows:

                  Due in one year...............     $   1,681
                  Due in two years..............         1,940
                  Due in three years............         2,058
                  Due in four years.............         2,182
                  Due in five years.............         2,315
                  Thereafter....................       232,824
                                                     ---------
                                                     $ 243,000
                                                     =========

         The Company paid interest, net of capitalized interest, of $4,692
         and $4,156 during the years ended March 31, 2006 and 2005,
         respectively. For the year ended March 31, 2004, the Company paid
         interest of $3,215.

11.      TAXABLE INDUSTRIAL REVENUE BONDS
         --------------------------------

         In December 2005, the Company entered into a financing arrangement
         with St. Louis County, Missouri related to expansion of its
         operations in St. Louis County. Up to $135,500 of industrial
         revenue bonds may be issued to the Company by St. Louis County
         relative to capital improvements made through December 31, 2009.
         This agreement provides that 50% of the real and personal property
         taxes on up to $135,500 of capital improvements will be abated for
         a period of 10 years subsequent to the property being placed in
         service. Industrial revenue bonds totaling $73,000 were outstanding
         at March 31, 2006. The industrial revenue bonds are issued by St.
         Louis County to the Company upon its payment of qualifying costs of
         capital improvements, which are then leased by the Company for a
         period ending December 1, 2019, unless earlier terminated. The
         Company has the option at any time to discontinue the arrangement
         and regain full title to the abated property. The industrial
         revenue bonds bear interest at 4.25% per annum and are payable as
         to principal and interest concurrently with payments due under the
         terms of the lease. The Company has classified the leased assets as
         property and equipment and has established a capital lease
         obligation equal to the outstanding principal balance of the
         industrial revenue bonds. Lease payments may be made by tendering
         an equivalent portion of the industrial revenue bonds. As the
         capital lease payments to St. Louis County may be satisfied by
         tendering industrial revenue bonds (which is the Company's
         intention), the capital lease obligation, industrial revenue bonds
         and related interest expense and interest income, respectively,
         have been offset for presentation purposes in the Consolidated
         Financial Statements.

12.      COMMITMENTS AND CONTINGENCIES
         -----------------------------

         LEASES

         The Company leases manufacturing, office and warehouse facilities,
         equipment and automobiles under operating leases expiring through
         fiscal 2013. Total rent expense for the years ended March 31, 2006,
         2005 and 2004 was $3,819, $5,734 and $5,246, respectively.

         Future minimum lease commitments under non-cancelable leases are as
         follows:

                  2007..........................      $  1,186
                  2008..........................           430
                  2009..........................            72
                  2010..........................             5

         A purchase option on a building leased by the Company on March 31,
         2006 was exercised by the Company in accordance with the lease
         agreement and is scheduled to be acquired for $4,900 in June 2006.
         The future


                                     82

<PAGE>
<PAGE>

         minimum lease payments under this lease were only included above
         through the date of the scheduled purchase. Payments that would
         have been due under this lease were $535 per year through June
         2011.

         CONTINGENCIES

         The Company is currently subject to legal proceedings and claims
         that have arisen in the ordinary course of business. While the
         Company is not presently able to determine the potential liability,
         if any, related to such matters, the Company believes none of the
         matters it currently faces, individually or in the aggregate, will
         have a material adverse effect on its financial position or
         operations except for the specific cases described in "Litigation"
         below.

         The Company has licensed the exclusive rights to co-develop and
         market various generic equivalent products with other drug delivery
         companies. These collaboration agreements require the Company to
         make up-front and ongoing payments as development milestones are
         attained. If all milestones remaining under these agreements were
         reached, payments by the Company could total up to $42,138.

         LITIGATION

         The Company and ETHEX are named as defendants in a case brought by
         CIMA LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc.
         et. al. v. KV Pharmaceutical Company et. al. filed in Federal
         District Court in Minnesota. It is alleged that the Company and
         ETHEX infringed on a CIMA patent in connection with the manufacture
         and sale of Hyoscyamine Sulfate Orally Dissolvable Tablets, 0.125
         mg. The court has entered a stay pending the outcome of the Patent
         and Trademark Offices' reexamination of the patent in suit. ETHEX
         will continue to market the product during the stay. The Company
         intends to vigorously defend its interests when the stay is lifted;
         however, it cannot give any assurance it will prevail.

         The Company and ETHEX are named as defendants in a case brought by
         Solvay Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals,
         Inc. v. ETHEX Corporation, filed in Federal District Court in
         Minnesota. In general, Solvay alleges that ETHEX's comparative
         promotion of its Pangestyme(TM) CN 10 and Pangestyme(TM) CN 20
         products to Solvay's Creon(R) 10 and Creon(R) 20 products resulted
         in false advertising and misleading statements under various
         federal and state laws, and constituted unfair and deceptive trade
         practices. Discovery has concluded. The Case is expected to be
         tried in 2006, but no trial date has been set. The Company intends
         to vigorously defend its interests; however, it cannot give any
         assurance it will prevail.

         KV previously distributed several pharmaceutical products that
         contained phenylpropanolamine, or PPA, and that were discontinued
         in 2000 and 2001. The Company is presently named a defendant in a
         product liability lawsuit in Federal District Court in Mississippi
         involving PPA. The suit originated out of a case, Virginia Madison,
         et al. v. Bayer Corporation, et al. The original suit was filed in
         December 2002, but was not served on KV until February 2003. The
         case was originally filed in the Circuit Court of Hinds County,
         Mississippi, and was removed to the Federal District Court for the
         Southern District of Mississippi by then co-defendant Bayer
         Corporation. The case has been transferred to a Judicial Panel on
         Multi-District Litigation for PPA claims sitting in the Western
         District of Washington. The claims against the Company have been
         segregated into a lawsuit brought by Johnny Fulcher individually
         and on behalf of the wrongful death beneficiaries of Linda Fulcher,
         deceased, against the Company. It alleges bodily injury, wrongful
         death, economic injury, punitive damages, loss of consortium and/or
         loss of services from the use of the Company's distributed
         pharmaceuticals containing PPA that have since been discontinued
         and/or reformulated to exclude PPA. In May 2004, the case was
         dismissed with prejudice by the Federal District Court for the
         Western District of Washington for a failure to timely file an
         individual complaint as required by certain court orders. The
         plaintiff filed a request for reconsideration which was opposed and
         subsequently denied by the Court in June 2004. In July 2004, the
         plaintiff filed a notice of appeal of the dismissal. The Company
         has opposed this appeal. The Company intends to vigorously defend
         its interests; however, it cannot give any assurance it will
         prevail.

                                     83

<PAGE>
<PAGE>

         The Company has also been advised that one of its former
         distributor customers is being sued in Florida state court in a
         case captioned Darrian Kelly v. K-Mart et. al. for personal injury
         allegedly caused by ingestion of K-Mart diet caplets that are
         alleged to have been manufactured by the Company and to contain
         PPA. The distributor has tendered defense of the case to the
         Company and has asserted a right to indemnification for any
         financial judgment it must pay. The Company previously notified its
         product liability insurer of this claim in 1999, and the Company
         has demanded that the insurer assume the Company's defense. The
         insurer has stated that it has retained counsel to secure
         additional factual information and will defer its coverage decision
         until that information is received. The Company intends to
         vigorously defend its interests; however, it cannot give any
         assurance that it will not be impleaded into the action, or that,
         if it is impleaded, that it would prevail.

         KV's product liability coverage for PPA claims expired for claims
         made after June 15, 2002. Although the Company renewed its product
         liability coverage for coverage after June 15, 2002, that policy
         excludes future PPA claims in accordance with the standard industry
         exclusion. Consequently, as of June 15, 2002, the Company will
         provide for legal defense costs and indemnity payments involving
         PPA claims on a going forward basis as incurred, including the
         Madison/Fulcher lawsuit that was filed after June 15, 2002.
         Moreover, the Company may not be able to obtain product liability
         insurance in the future for PPA claims with adequate coverage
         limits at commercially reasonable prices for subsequent periods.
         From time to time in the future, KV may be subject to further
         litigation resulting from products containing PPA that it formerly
         distributed. The Company intends to vigorously defend its
         interests; however, it cannot give any assurance it will prevail.

         After the Company filed ANDAs with the FDA seeking permission to
         market a generic version of the 25 mg, 50 mg, 100 mg, and 200 mg
         strengths of Toprol-XL(R) in extended release capsule form,
         AstraZeneca filed lawsuits against KV for patent infringement under
         the provisions of the Hatch-Waxman Act. In the Company's Paragraph
         IV certification, KV contended that its proposed generic versions
         do not infringe AstraZeneca's patents. Pursuant to the Hatch-Waxman
         Act, the filing date of the suit against the Company instituted an
         automatic stay of FDA approval of the Company's ANDA until the
         earlier of a judgment, or 30 months from the date of the suit. The
         Company filed motions for summary judgment with the Federal
         District Court in Missouri alleging, among other things, that
         AstraZeneca's patent is invalid and unenforceable. These motions
         have been granted. AstraZeneca has appealed. The Company intends to
         vigorously defend its interests; however, it cannot give any
         assurance it will prevail.

         The Company and/or ETHEX have been named as defendants in certain
         multi-defendant cases alleging that the defendants reported
         improper or fraudulent pharmaceutical pricing information, i.e.,
         Average Wholesale Price, or AWP, and/or Wholesale Acquisition Cost,
         or WAC, information, which caused the governmental plaintiffs to
         incur excessive costs for pharmaceutical products under the
         Medicaid program. Cases of this type have been filed against the
         Company and/or ETHEX and other pharmaceutical manufacturer
         defendants by the State of Massachusetts, the State of Alabama, the
         State of Mississippi, New York City, and approximately 40 counties
         in New York State. The New York City case and all New York County
         cases have been transferred to the Federal District Court for the
         District of Massachusetts for coordinated or consolidated pretrial
         proceedings under the Average Wholesale Price Multidistrict
         Litigation (MDL No. 1456). One of the counties, Erie County,
         challenged the transfer and the Erie County Case has been remanded
         to state court. Each of these actions is in the early stages, with
         fact discovery at beginning phases in the Alabama, Massachusetts
         and Mississippi cases, but has not yet commenced in the New York
         City/Counties or the Erie County case. The Company intends to
         vigorously defend its interests in the actions described above;
         however, it cannot give any assurance it will prevail.

         The Company believes that various other governmental entities have
         commenced investigations into the generic and branded
         pharmaceutical industry at large regarding pricing and price
         reporting practices. Although the Company believes its pricing and
         reporting practices have complied in all material respects with its
         legal obligations, it cannot give any assurance that it would
         prevail if legal actions are instituted by these governmental
         entities.

                                     84

<PAGE>
<PAGE>

         The Company and ETHEX are named as defendants in a case brought by
         the Estate of Bertie Helen Dye and styled Hope Campbell and Charles
         Lee Dye, Co-administrators of the Estate of Bertie Helen Dye filed
         in Federal District court in Virginia. It is alleged that the
         Company and ETHEX caused Ms. Dye's death in connection with their
         manufacture and sale of Ethezyme 830, a topical wound debridement
         ointment. The claims are for negligence, breach of warranty, fraud
         and punitive damages. Discovery has begun and the trial is set for
         October 16, 2006. The Company intends to vigorously defend its
         interests; however; it cannot give any assurance it will prevail.

         The Company and ETHEX are named as co-defendants in a suit in the
         U.S. District Court for the Southern District of Florida filed by
         the personal representative of the estate of Joyce Hoyle and her
         children in connection with Ms. Hoyle's death in 2003, allegedly
         from oxycodone toxicity styled Thomas Hoyle v. Purdue Pharma et al.
         The suit alleges that between June 2001 and May 2003 Ms. Hoyle was
         prescribed and took three different opiate pain medications
         manufactured and sold by the defendants, including one product,
         oxycodone, that was manufactured by the Company and marketed by
         ETHEX, and that such medications were promoted without sufficient
         warnings about the side effect of addiction. The causes of action
         are strict liability for an inherently dangerous product,
         negligence, breach of express and implied warranty and breach of
         implied warranty of fitness for a particular purpose. The discovery
         process has not yet begun, and the court has set the trial to
         commence on July 16, 2007. The Company intends to vigorously defend
         its interests; however, it cannot give any assurance that it will
         prevail.

         On May 20, 2005, the Company was notified by the SEC that a
         non-public formal investigation was initiated that appears to
         relate to the Form 8-K disclosures the Company made on July 13,
         2004. The Company believes the matter will be satisfactorily
         resolved.

         From time to time, the Company is involved in various other legal
         proceedings in the ordinary course of its business. While it is not
         feasible to predict the ultimate outcome of such other proceedings,
         the Company believes that the ultimate outcome of such other
         proceedings will not have a material adverse effect on its results
         of operations or financial position.

         There are uncertainties and risks associated with all litigation
         and there can be no assurance that the Company will prevail in any
         particular litigation.

13.      EMPLOYMENT AGREEMENTS
         ---------------------

         The Company has employment agreements with certain officers and key
         employees which extend for one to five years. These agreements
         provide for base levels of compensation and, in certain instances,
         also provide for incentive bonuses and separation benefits. Also,
         the agreement with the Chief Executive Officer ("CEO") contains
         provisions for partial salary continuation under certain
         conditions, contingent upon noncompete restrictions and providing
         consulting services to the Company as specified in the agreement.
         In addition, the CEO is entitled to receive retirement compensation
         paid in the form of a single annuity equal to 30% of the CEO's
         final average compensation payable each year beginning at
         retirement and continuing for the longer of 10 years or the life of
         the CEO. In accordance with this agreement, the Company recognized
         retirement expense of $965, $1,355 and $209 for the years ended
         March 31, 2006, 2005 and 2004, respectively.

14.      GAIN FROM LEGAL SETTLEMENT
         --------------------------

         In September 2003, the Company received a payment from a branded
         pharmaceutical company in the amount of $4,000. The payment
         received by the Company was made in response to the Company's claim
         that the branded company violated federal antitrust laws and
         interfered with the Company's right to a timely introduction of a
         generic pharmaceutical product in a previous fiscal year. The
         payment was reflected by the Company in the "Litigation" line item
         of operating income and was recorded net of approximately $500 of
         attorney-related fees.

                                     85

<PAGE>
<PAGE>

15.      INCOME TAXES
         ------------

         The income tax provisions for the years ended March 31, 2006, 2005
         and 2004 are based on estimated Federal and state taxable income
         using the applicable statutory rates. The current and deferred
         Federal and state income tax provisions for the years ended March
         31, 2006, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                                             2006              2005             2004
                                                                             ----              ----             ----
                  PROVISION
<C>                                                                        <C>               <C>              <C>
                     Current
                        Federal...............................             $  15,034         $  2,982         $  14,184
                        State.................................                 1,382              195             1,275
                                                                           ---------         --------         ---------
                                                                              16,416            3,177            15,459
                                                                           ---------         --------         ---------
                     Deferred
                        Federal...............................                 6,320           12,473             7,792
                        State.................................                   387            1,109               899
                                                                           ---------         --------         ---------
                                                                               6,707           13,582             8,691
                                                                           ---------         --------         ---------
                                                                           $  23,123         $ 16,759         $  24,150
                                                                           =========         ========         =========
</TABLE>

         The reasons for the differences between the provision for income
         taxes and the expected Federal income taxes at the statutory rate
         are as follows:

<TABLE>
<CAPTION>
                                                                              2006             2005              2004
                                                                              ----             ----              ----

<C>                                                                        <C>               <C>              <C>
                  Expected income tax expense.................             $  13,618         $ 17,510         $  24,499
                  Purchased in-process research
                     and development..........................                10,654                -                 -
                  State income taxes, less
                     Federal income tax benefit...............                 1,150              847             1,413
                  Business credits............................                  (831)          (1,080)           (1,240)
                  Other ......................................                (1,468)            (518)             (522)
                                                                           ---------         --------         ---------
                                                                           $  23,123         $ 16,759         $  24,150
                                                                           =========         ========         =========
</TABLE>

         As of March 31, 2006 and 2005, the tax effect of temporary
         differences between the tax basis of assets and liabilities and
         their financial reporting amounts are as follows:

<TABLE>
<CAPTION>
                                                                2006                                   2005
                                                     --------------------------             --------------------------
                                                     CURRENT        NON-CURRENT             CURRENT        NON-CURRENT
                                                     -------        -----------             -------        -----------
<C>                                                  <C>             <C>                    <C>             <C>
         Fixed asset basis differences........       $     -         $  (8,701)             $     -         $  (6,658)
         Reserves for inventory and
            receivables.......................         7,547                 -                5,510                 -
         Vacation pay reserve.................           378                 -                  249                 -
         Deferred compensation................             -             1,973                    -             1,620
         Amortization.........................             -            (2,652)                   -            (2,121)
         Convertible notes interest...........             -           (15,699)                   -            (9,495)
         Other................................           109              (142)                  68                 -
                                                     -------         ---------              -------         ---------
            Net deferred tax asset (liability)       $ 8,034         $ (25,221)             $ 5,827         $ (16,654)
                                                     =======         =========              =======         =========
</TABLE>

         The Company paid income taxes of $15,482, $8,769, and $22,201
         during the years ended March 31, 2006, 2005 and 2004, respectively.

                                     86

<PAGE>
<PAGE>

         Included in "Prepaid and other assets" at March 31, 2005 in the
         accompanying consolidated balance sheet was income tax refunds
         receivable of $2,518.

16.      EMPLOYEE BENEFITS
         -----------------

         STOCK OPTION PLAN AND AGREEMENTS

         On August 30, 2002, the Company's shareholders approved KV's 2001
         Incentive Stock Option Plan (the "2001 Plan"), which allows for the
         issuance of up to 4,500,000 shares of common stock. Prior to the
         approval of the 2001 Plan, the Company operated under the 1991
         Incentive Stock Option Plan, as amended, which still allows for the
         issuance of up to 1,125,000 shares of common stock. Under the
         Company's stock option plans, options to acquire shares of common
         stock have been made available for grant to certain employees. Each
         option granted has an exercise price of not less than 100% of the
         market value of the common stock on the date of grant. The
         contractual life of each option is generally 10 years. The
         exercisability of the grants varies according to the individual
         options granted. In addition to these plans, the Company has issued
         stock options periodically to executives with employment agreements
         and to non-employee directors. At March 31, 2006, options to
         purchase 34,875 shares of stock were outstanding pursuant to
         employment agreements and grants to non-employee directors.

         The following summary shows the transactions for the years ended
         March 31, 2006, 2005 and 2004 under option arrangements:

<TABLE>
<CAPTION>
                                                       OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                                                       -------------------                        -------------------
                                                                        AVERAGE                                    AVERAGE
                                                    NO. OF             PRICE PER            NO. OF                PRICE PER
                                                    SHARES               SHARE              SHARES                  SHARE
                                                    ------               -----              ------                  -----

<C>                                               <C>                   <C>                <C>                     <C>
         Balance, March 31, 2003...........       3,503,033             $ 8.81             1,790,839               $ 8.00
         Options granted...................         677,313              19.56                     -                 -
         Options becoming exercisable......               -               -                  541,924                12.17
         Options exercised.................        (966,036)              7.80              (966,036)                7.80
         Options canceled..................        (437,502)             11.72              (132,869)               10.37
                                                  ---------                                ---------
         Balance March 31, 2004............       2,776,808              11.33             1,233,858                 9.71
         Options granted...................         676,250              22.19                     -                 -
         Options becoming exercisable......               -               -                  431,164                14.42
         Options exercised.................        (220,743)              6.44              (220,743)                6.44
         Options canceled..................        (129,517)             16.30               (34,285)               13.35
                                                  ---------                                ---------
         Balance March 31, 2005............       3,102,798              13.84             1,409,994                11.58
         Options granted...................         964,706              18.80                     -                 -
         Options becoming exercisable......               -               -                  416,898                13.75
         Options exercised.................        (198,730)              5.28              (198,730)                5.28
         Options canceled..................        (349,618)             14.74              (143,513)               13.09
                                                  ---------                                ---------
         Balance March 31, 2006............       3,519,156             $15.55             1,484,649               $12.82
                                                  =========                                =========
</TABLE>

         The weighted average fair value of options granted at market price
         on the date of grant was $6.25, $7.26, and $7.34 per share for the
         years ended March 31, 2006, 2005 and 2004, respectively. The
         weighted average fair value of options granted with an exercise
         price exceeding market price on the date of grant was $5.84 and
         $4.15 per share for the years ended March 31, 2005 and 2004,
         respectively. During the year ended March 31, 2006, there were no
         options granted with an exercise price exceeding market price on
         the date of grant.

                                     87

<PAGE>
<PAGE>

         The following table summarizes information about stock options
         outstanding at March 31, 2006:

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING                                   OPTIONS EXERCISABLE
                         ------------------------------------------------------------     -----------------------------------
       RANGE OF              NUMBER          WEIGHTED AVERAGE           WEIGHTED              NUMBER            WEIGHTED
       EXERCISE            OUTSTANDING             LIFE                  AVERAGE            EXERCISABLE          AVERAGE
        PRICES             AT 3/31/06            REMAINING           EXERCISE PRICE         AT 3/31/06       EXERCISE PRICE
        ------             ----------            ---------           --------------         ----------       --------------
   <C>                     <C>                    <C>                    <C>                  <C>                <C>
   $ 0.82 -  $ 5.00          239,735              1 Year                 $ 3.26               236,518            $ 3.22
   $ 5.01 -  $ 9.00          514,174              3 Years                $ 7.09               289,307            $ 7.12
   $ 9.01 -  $14.00          617,764              4 Years                $11.61               364,576            $11.83
   $14.01 -  $20.00        1,204,963              8 Years                $17.18               351,319            $17.77
   $20.01 -  $27.50          942,520              8 Years                $23.63               242,929            $24.05
</TABLE>

         PROFIT SHARING PLAN

         The Company has a qualified trustee profit sharing plan (the
         "Plan") covering substantially all non-union employees. The
         Company's annual contribution to the Plan, as determined by the
         Board of Directors, is discretionary and was $400, $300 and $400
         for the years ended March 31, 2006, 2005 and 2004, respectively.
         The Plan includes features as described under Section 401(k) of the
         Internal Revenue Code.

         The Company's contributions to the 401(k) investment funds are 50%
         of the first 7% of the salary contributed by each participant.
         Contributions of $1,877, $1,547 and $1,286 were made to the 401(k)
         investment funds during the years ended March 31, 2006, 2005 and
         2004, respectively.

         Contributions are also made to multi-employer defined benefit plans
         administered by labor unions for certain union employees. Amounts
         charged to pension expense and contributed to these plans were
         $180, $200 and $202 for the years ended March 31, 2006, 2005 and
         2004, respectively.

         HEALTH AND MEDICAL INSURANCE PLAN

         The Company contributes to health and medical insurance programs
         for its non-union and union employees. For non-union employees, the
         Company self-insures the first $150,000 of each employee's covered
         medical claims. Included in accrued liabilities in the consolidated
         balance sheets as of March 31, 2006 and 2005 were $292 and $20 of
         accrued health insurance reserves, respectively, for claims
         incurred but not reported. In fiscal 2005, the Company established
         a Voluntary Employees' Beneficiary Association for its non-union
         employees to fund payments made by the Company for covered medical
         claims. As a result of funding this plan, the Company's liability
         for claims incurred but not reported was reduced by $850 and $680
         at March 31, 2006 and 2005, respectively. For union employees, the
         Company participates in a fully funded insurance plan sponsored by
         the union. Total health and medical insurance expense for the two
         plans was $9,662, $9,431, and $7,331 for the years ended March 31,
         2006, 2005 and 2004, respectively.

17.      RELATED PARTY TRANSACTIONS
         --------------------------

         The Company currently leases certain real property from an
         affiliated partnership of an officer and director of the Company.
         Lease payments made for this property for the years ended March 31,
         2006, 2005 and 2004 totaled $284, $277, and $271, respectively.

                                     88

<PAGE>
<PAGE>

18.      EQUITY TRANSACTIONS
         -------------------

         As of March 31, 2006 and 2005, the Company had 40,000 shares of 7%
         Cumulative Convertible Preferred Stock (par value $.01 per share)
         outstanding at a stated value of $25 per share. The preferred stock
         is non-voting with dividends payable quarterly. The preferred stock
         is redeemable by the Company at its stated value. Each share of
         preferred stock is convertible into Class A common stock at a
         conversion price of $2.96 per share. The preferred stock has a
         liquidation preference of $25 per share plus all accrued but unpaid
         dividends prior to any liquidation distributions to holders of
         Class A or Class B common stock. No dividends may be paid on Class
         A or Class B common stock unless all dividends on the Cumulative
         Convertible Preferred Stock have been declared and paid. There were
         no undeclared and unaccrued cumulative preferred dividends at March
         31, 2006 and 2005. Also, under the terms of its credit agreement,
         the Company may not pay cash dividends in excess of 25% of the
         prior fiscal year's consolidated net income.

         The Company has reserved 750,000 shares of Class A common stock for
         issuance under KV's 2002 Consultants Plan. These shares may be
         issued from time to time in consideration for consulting and other
         services provided to the Company by independent consultants. Since
         inception of this plan, the Company has issued 47,732 Class A
         shares as payment for certain milestones under product development
         agreements.

         Holders of Class A common stock are entitled to receive dividends
         per share equal to 120% of the dividends per share paid on the
         Class B common stock and have one-twentieth vote per share in the
         election of directors and on other matters.

         Under the terms of the Company's current loan agreement (see Note
         10), the Company has limitations on paying dividends, except in
         stock, on its Class A and Class B common stock. Payment of
         dividends may also be restricted under Delaware corporation law.

         On September 8, 2003, the Company's Board of Directors declared a
         three-for-two stock split in the form of a 50% stock dividend of
         its common stock to shareholders of record on September 18, 2003,
         payable on September 29, 2003. Common stock was credited and
         retained earnings was charged for the aggregate par value of the
         shares issued. The stated par value of each share was not changed
         from $0.01.

         All per share data in this report has been restated to reflect the
         aforementioned three-for-two stock split in the form of a 50% stock
         dividend.

         In May 2003, the Company used $50,000 of the net proceeds from the
         Convertible Subordinated Notes issuance (see Note 10) to fund the
         repurchase of 2,000,000 shares of the Company's Class A common
         stock.


                                     89

<PAGE>
<PAGE>


19.      EARNINGS PER SHARE
         ------------------

         The following table sets forth the computation of basic and diluted
         earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                              2006             2005              2004
                                                                              ----             ----              ----
<C>                                                                        <C>               <C>              <C>
                  Undistributed earnings:
                     Net income .......................................    $  15,787         $ 33,269         $  45,848
                     Less - preferred stock dividends..................          (70)             (70)             (436)
                                                                           ---------         --------         ---------
                     Undistributed earnings - basic EPS................       15,717           33,199            45,412
                     Add - preferred stock dividends...................           70               70               436
                     Add - interest expense on convertible
                        notes, net of tax..............................            -            4,099             3,507
                                                                           ---------         --------         ---------
                     Net income - diluted EPS..........................    $  15,787         $ 37,368         $  49,355
                                                                           =========         ========         =========
                  Allocation of undistributed earnings:
                     Class A common stock..............................    $  12,089         $ 24,316         $  32,391
                     Class B common stock..............................        3,628            8,883            13,021
                                                                           ---------         --------         ---------
                        Total allocated earnings - basic EPS...........    $  15,717         $ 33,199         $  45,412
                                                                           =========         ========         =========
                  Weighted average shares outstanding - basic:
                     Class A common stock..............................       36,277           34,228            33,046
                     Class B common stock..............................       13,065           15,005            15,941
                                                                           ---------         --------         ---------
                        Total weighted average shares
                           outstanding - basic.........................       49,342           49,233            48,987
                                                                           ---------         --------         ---------
                  Effect of dilutive securities:
                     Employee stock options............................        1,049            1,205             1,760
                     Convertible preferred stock.......................          338              338               338
                     Convertible notes.................................            -            8,692             7,623
                                                                           ---------         --------         ---------
                        Dilutive potential common shares...............        1,387           10,235             9,721
                                                                           ---------         --------         ---------
                        Total weighted average shares
                           outstanding - diluted.......................       50,729           59,468            58,708
                                                                           =========         ========         =========
                  Basic earnings per share:
                     Class A common stock..............................    $    0.33         $   0.71         $    0.98
                     Class B common stock..............................         0.28             0.59              0.82
                  Diluted earnings per share(1) (2)....................         0.31             0.63              0.84
                                                                           =========         ========         =========
<FN>
-----------------------

(1)  Excluded from the computation of diluted earnings per share were
     outstanding stock options whose exercise prices were greater than
     the average market price of the common shares for the period
     reported. For the years ended March 31, 2006, 2005 and 2004,
     excluded from the computation were options to purchase 942, 713 and
     207 of Class A and Class B common shares, respectively.

(2)  For the year ended March 31, 2006, $200,000 principal amount of
     Convertible Subordinated Notes convertible into 8,692 shares of
     Class A common stock were excluded from the computation of diluted
     earnings per share because their effect would have been
     anti-dilutive.
</TABLE>

                                     90

<PAGE>
<PAGE>

20.      QUARTERLY FINANCIAL RESULTS (UNAUDITED)
         ---------------------------------------

<TABLE>
<CAPTION>
                                                    1ST               2ND              3RD               4TH
                                                  QUARTER           QUARTER          QUARTER           QUARTER            YEAR
                                                  -------           -------          -------           -------            ----
<C>                                              <C>                <C>              <C>               <C>              <C>
YEAR ENDED MARCH 31, 2006
-------------------------
Net revenues...............................      $ 85,475           $96,321          $98,392           $87,430          $367,618
Gross profit...............................        59,273            62,277           64,651            57,523           243,724
Pretax income (loss).......................       (17,664)           17,316           20,923            18,335            38,910
Net income (loss)..........................       (21,944)           11,515           14,414            11,802            15,787
Basic earnings (loss) per share:
   Class A common stock....................         (0.45)             0.24             0.31              0.25              0.33
   Class B common stock....................         (0.45)             0.20             0.25              0.21              0.28
Diluted earnings (loss) per share..........         (0.45)             0.21             0.26              0.21              0.31

YEAR ENDED MARCH 31, 2005
-------------------------
Net revenues...............................      $ 66,087           $79,322          $86,857           $71,227          $303,493
Gross profit...............................        42,353            52,466           56,922            44,070           195,811
Pretax income (loss).......................        11,543            19,591           20,062            (1,168)           50,028
Net income (loss)..........................         7,561            12,676           13,552              (520)           33,269
Basic earnings (loss) per share:
   Class A common stock....................          0.16              0.27             0.29             (0.01)             0.71
   Class B common stock....................          0.14              0.23             0.24             (0.01)             0.59
Diluted earnings (loss) per share..........          0.14              0.23             0.25             (0.01)             0.63
</TABLE>

                                     91

<PAGE>
<PAGE>

21.      SEGMENT REPORTING
         -----------------

         The reportable operating segments of the Company are branded
         products, specialty generics and specialty materials. The Company
         has aggregated its branded product lines in a single segment
         because of similarities in regulatory environment, manufacturing
         processes, methods of distribution and types of customer. This
         segment includes patent-protected products and certain trademarked
         off-patent products that the Company sells and markets as brand
         pharmaceutical products. The specialty generics business segment
         includes off-patent pharmaceutical products that are
         therapeutically equivalent to proprietary products. The Company
         sells its brand and generic products primarily to pharmaceutical
         wholesalers, drug distributors and chain drug stores. The specialty
         materials segment is distinguished as a single segment because of
         differences in products, marketing and regulatory approval when
         compared to the other segments.

         Accounting policies of the segments are the same as the Company's
         consolidated accounting policies. Segment profits are measured
         based on income before taxes and are determined based on each
         segment's direct revenues and expenses. The majority of research
         and development expense, corporate general and administrative
         expenses, amortization and interest expense, as well as interest
         and other income, are not allocated to segments, but included in
         the "all other" classification. Identifiable assets for the three
         reportable operating segments primarily include receivables,
         inventory, and property and equipment. For the "all other"
         classification, identifiable assets consist of cash and cash
         equivalents, corporate property and equipment, intangible and other
         assets and all income tax related assets.

         The following represents information for the Company's reportable
         operating segments for fiscal 2006, 2005 and 2004.


<TABLE>
<CAPTION>
                               FISCAL YEAR
                                  ENDED       BRANDED     SPECIALTY    SPECIALTY      ALL
                                MARCH 31,     PRODUCTS     GENERICS    MATERIALS     OTHER   ELIMINATIONS     CONSOLIDATED
                                ---------     --------     --------    ---------     -----   ------------     ------------
   ------------------------------------------------------------------------------------------------------------------------
<C>                               <C>         <C>          <C>          <C>       <C>           <C>            <C>
   NET REVENUES
                                  2006        $145,435     $203,833     $16,988   $   1,362     $     -        $367,618
                                  2005          90,085      193,402      18,345       1,661           -         303,493
                                  2004          82,868      182,825      16,550       1,698           -         283,941
   -----------------------------------------------------------------------------------------------------------------------
   SEGMENT PROFIT (LOSS)
                                  2006          58,648      100,806       1,082    (121,626)          -          38,910
                                  2005          24,307      104,469       3,043     (81,521)          -          50,028
                                  2004          31,661      102,533       1,365     (65,561)          -          69,998
   -----------------------------------------------------------------------------------------------------------------------
   IDENTIFIABLE ASSETS
                                  2006          23,891       63,431       7,353     524,496      (1,158)        618,013
                                  2005          25,015       67,209       8,001     459,250      (1,158)        558,317
                                  2004          24,585       70,966       8,343     425,702      (1,158)        528,438
   -----------------------------------------------------------------------------------------------------------------------
   PROPERTY AND EQUIPMENT ADDITIONS
                                  2006             540        1,097         269      56,428           -          58,334
                                  2005           2,463            -         318      60,841           -          63,622
                                  2004             420        1,685          71      28,416           -          30,592
   -----------------------------------------------------------------------------------------------------------------------
   DEPRECIATION AND AMORTIZATION
                                  2006             587          317         173      16,925           -          18,002
                                  2005             217          235         140      13,312           -          13,904
                                  2004             332          123         141      12,067           -          12,663
   -----------------------------------------------------------------------------------------------------------------------
</TABLE>

         Consolidated revenues are principally derived from customers in North
         America and substantially all property and equipment is located in St.
         Louis, Missouri.

                                     92

<PAGE>
<PAGE>

22.      SUBSEQUENT EVENT
         ----------------

         On June 9, 2006, the Company replaced its $140,000 credit line by
         entering into a new credit agreement with ten banks that provides
         for a revolving line of credit for borrowing up to $320,000. The
         new credit agreement also includes a provision for increasing the
         revolving commitment, at the lenders' sole discretion, by up to an
         additional $50,000. The new credit facility is unsecured unless the
         Company, under certain specified circumstances, utilizes the
         facility to redeem part or all of its outstanding Convertible
         Subordinated Notes. Interest is charged under the facility at the
         lower of the prime rate or one-month LIBOR plus 62.5 to 150 basis
         points depending on the ratio of senior debt to EBITDA. The new
         credit agreement contains financial covenants that impose limits on
         dividend payments, require minimum equity, a maximum senior
         leverage ratio and minimum fixed charge coverage ratio. The new
         credit facility has a five-year term expiring in June 2011.

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

         There have been no disagreements with accountants on accounting or
         financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES
         -----------------------

         EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         The Company maintains disclosure controls and procedures that are
         designed to ensure that information required to be disclosed in its
         Exchange Act reports is recorded, processed, summarized and
         reported within the time periods specified in the SEC's rules and
         forms, and that such information is accumulated and communicated to
         the Company's management, including its principal executive officer
         and principal financial officer, as appropriate, to allow timely
         decisions regarding required disclosure. In designing and
         evaluating the disclosure controls and procedures, management
         recognized that any controls and procedures, no matter how well
         designed and operated, can provide only reasonable assurance of
         achieving the desired control objectives, and management
         necessarily was required to apply its judgment in evaluating the
         cost-benefit relationship of possible controls and procedures.

         As of the end of the period covered by this report, the Company
         carried out an evaluation, under the supervision and with the
         participation of its management, including its principal executive
         officer and principal financial officer, of the effectiveness of
         the design and operation of its disclosure controls and procedures.
         Based on the foregoing, the Company's principal executive officer
         and principal financial officer concluded that the Company's
         disclosure controls and procedures were effective as of the end of
         the period covered by this report.

         MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Management of the Company is responsible for establishing and
         maintaining adequate internal control over financial reporting. The
         Company's internal control over financial reporting is designed 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.

         The Company's internal control over financial reporting includes
         those policies and procedures that (i) pertain to the maintenance
         of records that, in reasonable detail, accurately and fairly
         reflect the transactions and dispositions of the assets of the
         Company; (ii) 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 (iii) provide reasonable assurance regarding the
         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 its inherent limitations, internal control over
         financial reporting may not prevent or detect misstatements. Also,
         projections of any evaluation of effectiveness to future periods
         are subject to the risk that controls may become inadequate because
         of changes in conditions, or that the degree of compliance with the
         policies or procedures may deteriorate.

         Management performed an assessment of the effectiveness of the
         Company's internal control over financial reporting as of March 31,
         2006. Management used the criteria set forth by the Committee of
         Sponsoring Organizations of the Treadway Commission (COSO) in
         Internal Control - Integrated Framework. As a result of


                                     93

<PAGE>
<PAGE>

         this assessment and based on the criteria set forth in the COSO
         framework, management has concluded that, as of March 31, 2006, the
         Company's internal control over financial reporting was effective.

         Management's assessment of the effectiveness of the Company's
         internal control over financial reporting as of March 31, 2006 has
         been audited by KPMG LLP, an independent registered public
         accounting firm, as stated in their report appearing herein.

         CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         There have been no changes in the Company's internal control over
         financial reporting, during the fiscal quarter ended March 31,
         2006, that have materially affected, or are reasonably likely to
         materially affect, the Company's internal control over financial
         reporting.


                                     94

<PAGE>
<PAGE>

           Report of Independent Registered Public Accounting Firm
           -------------------------------------------------------

The Board of Directors and Shareholders
K-V Pharmaceutical Company:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that K-V
Pharmaceutical Company maintained effective internal control over financial
reporting as of March 31, 2006, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). 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 opinion.

A company's internal control over financial reporting is a process designed
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 its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
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 K-V Pharmaceutical Company
maintained effective internal control over financial reporting as of March
31, 2006, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by COSO. Also,
in our opinion, K-V Pharmaceutical Company maintained, in all material
respects, effective internal control over financial reporting as of March
31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of K-V Pharmaceutical Company and subsidiaries as of March 31, 2006 and
2005, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for the years then ended, and
our report dated June 14, 2006 expressed an unqualified opinion on those
consolidated financial statements.

/S/ KPMG LLP
St. Louis, Missouri
June 14, 2006


                                     95

<PAGE>
<PAGE>

ITEM 9B. OTHER INFORMATION
         -----------------

ETHEX Corporation and Patricia McCullough entered into an Employment and
Confidential Information Agreement dated as of January 30, 2006. Under the
terms of the agreement, Ms. McCullough will serve as ETHEX's Chief Executive
Officer. Ms. McCullough will receive a base annual salary of $285,000 and
relocation and fringe benefits normally provided to other employees in
comparable positions, subject to normal compensation review. Ms. McCullough
will be eligible for an incentive bonus and will be granted options to
purchase 50,000 shares of KV Class A common stock. The term of the agreement
is through April 1, 2007, subject to successive automatic renewals of one
year unless earlier terminated. Either party may terminate the agreement
upon 120 days advance written notice to the other, provided ETHEX may
terminate the agreement at any time for what it believes to be cause. For
the 36 month period following termination of the agreement, Ms. McCullough
will be subject to certain non-competition and non-solicitation covenants.
Ms. McCullough also agrees to maintain the confidentiality of all
confidential information of ETHEX and its affiliates.

Effective February 20, 2006, the Company and Michael Anderson entered into
an amendment to Mr. Anderson's Employment and Confidential Information
Agreement. Under the amendment, Mr. Anderson's title is changed to Corporate
Vice President, Industry Presence and Development, and his base salary is
changed to $332,000. The term of the agreement is extended until March 31,
2011, subject to successive automatic renewals of one year unless earlier
terminated. The amendment also permits Mr. Anderson to terminate the
agreement upon six months notice due to health problems confirmed by a
physician.

Ther-Rx Corporation and Jerald J. Wenker entered into an Employment and
Confidential Information Agreement dated as of April 8, 2004. Under the
terms of the agreement, Mr. Wenker will serve as Ther-Rx's President. Mr.
Wenker will receive a base annual salary of $350,000 and relocation and
fringe benefits normally provided to other employees in comparable
positions, subject to normal compensation review. Mr. Wenker will be
eligible for an incentive bonus and will be granted options to purchase
shares of KV Class A common stock. The term of the agreement is through
March 31, 2005, subject to successive automatic renewals of one year unless
earlier terminated. Mr. Wenker may terminate the agreement upon 120 days
advance written notice to the Ther-Rx. Ther-Rx may terminate the agreement
upon 30 days advance written notice to the Mr. Wenker, provided Ther-Rx may
terminate the agreement at any time for what it believes to be cause. For
the 36 month period following termination of the agreement, Mr. Wenker will
be subject to certain non-competition and non-solicitation covenants. Mr.
Wenker also agrees to maintain the confidentiality of all confidential
information of Ther-Rx and its affiliates.

On June 9, 2006, the Company replaced its $140 million credit line by
entering into a credit agreement with LaSalle Bank National Association,
Citibank, F.S.B and the other lenders thereto. This new credit agreement
with ten banks provides the Company with a revolving line of credit for
borrowing up to $320 million. The new credit agreement also includes a
provision for increasing the revolving commitment, at the lenders' sole
discretion, by up to an additional $50 million. The credit facility is
unsecured unless the Company, under certain specified circumstances,
utilizes the facility to redeem part or all of its outstanding Convertible
Subordinated Notes. Interest is charged under the facility at the lower of
the prime rate or one-month LIBOR plus 62.5 to 150 basis points depending on
the ratio of the Company's senior debt to EBITDA. The new credit agreement
contains financial covenants that impose limits on dividend payments,
require minimum equity, a maximum senior leverage ratio and minimum fixed
charge coverage ratio. The new credit facility has a five-year term expiring
in June 2011.

                                  PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
         --------------------------------------------------

         The information contained under the caption "INFORMATION CONCERNING
         NOMINEES AND DIRECTORS CONTINUING IN OFFICE" in the Company's
         definitive proxy statement to be filed pursuant to Regulation 14(a)
         for its 2006 Annual Meeting of Shareholders, which involves the
         election of directors, is incorporated herein by this reference.
         Also see Item 4(a) of Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION
         ----------------------

         The information contained under the captions "EXECUTIVE
         COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the
         Company's definitive proxy statement to be filed pursuant to
         Regulation 14(a) for its 2006 Annual Meeting of Shareholders is
         incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

         The information contained under the captions "SECURITY OWNERSHIP OF
         CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT"
         in the Company's definitive proxy statement to be filed pursuant to
         Regulation 14(a) for its 2006 Annual Meeting of Shareholders is
         incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

         The information contained under the caption "TRANSACTIONS WITH
         DIRECTORS AND EXECUTIVE OFFICERS" in the Company's definitive proxy
         statement to be filed pursuant to Regulation 14(a) for its 2006
         Annual Meeting of Shareholders is incorporated herein by this
         reference.
                                     96

<PAGE>
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
         --------------------------------------

         The information contained under the caption "FEES PAID TO
         INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS" in the Company's
         definitive proxy statement to be filed pursuant to Regulation 14(a)
         for its 2006 Annual Meeting of Shareholders is incorporated herein
         by this reference.



                                     97

<PAGE>
<PAGE>

                                   PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
         ---------------------------------------

(a)      1. Financial Statements:                                           Page

         The following consolidated financial statements of the Company
         are included in Part II, Item 8:

         Report of Independent Registered Public Accounting Firm..........    62

         Report of Independent Registered Public Accounting Firm..........    63

         Consolidated Balance Sheets as of March 31, 2006 and 2005........    64

         Consolidated Statements of Income for the Years Ended March 31,
         2006, 2005 and 2004..............................................    65

         Consolidated Statements of Comprehensive Income for the Years
         Ended March 31, 2006, 2005 and 2004..............................    66

         Consolidated Statements of Shareholders' Equity for the Years
         Ended March 31, 2006, 2005 and 2004..............................    67

         Consolidated Statements of Cash Flows for the Years Ended
         March 31, 2006, 2005 and 2004....................................    68

         Notes to Financial Statements.................................... 69-93

         Controls and Procedures..........................................    93

         Evaluation of Disclosure Controls and Procedures.................    93

         Management's Report on Internal Control over Financial
         Reporting........................................................ 93-94

         Changes in Internal Control over Financial Reporting.............    94

         Report of Independent Registered Public Accounting Firm..........    95

         2. Financial Statement Schedules:

         Report of Independent Registered Public Accounting Firm regarding
         Financial Statement Schedule.....................................   100

         Schedule II - Valuation and Qualifying Accounts..................   101

                                     98

<PAGE>
<PAGE>

(b)      Exhibits. See Exhibit Index on pages 104 through 108 of this Report.
         Management contracts and compensatory plans are designated on the
         Exhibit Index.

(c)      Financial Statement Schedules.



                                     99

<PAGE>
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Stockholders and Board of Directors
K-V Pharmaceutical Company


The audit referred to in our report dated June 4, 2004, relating to the
consolidated financial statements of K-V Pharmaceutical Company, which are
included in Item 8 of this Form 10-K, included the audit of the accompanying
financial statement schedule for the year ended March 31, 2004. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based upon our audit. In our opinion, the 2004 financial
statement schedule presents fairly, in all material respects, the
information set forth therein.

                                                      /s/ BDO SEIDMAN, LLP


Chicago, Illinois
June 4, 2004



                                    100

<PAGE>
<PAGE>

<TABLE>
                                                   SCHEDULE II
                                       VALUATION AND QUALIFYING ACCOUNTS

<CAPTION>
                                                                   ADDITIONS
                                                BALANCE AT        CHARGED TO         AMOUNTS           BALANCE
                                                 BEGINNING         COSTS AND       CHARGED TO          AT END
                                                  OF YEAR          EXPENSES         RESERVES           OF YEAR
                                                  -------          --------         --------           -------
                                                                     (in thousands)
<C>                                             <C>                <C>              <C>                <C>
Year Ended March 31, 2004:
Allowance for doubtful accounts............     $     422          $     (20)       $       -          $    402
Reserves for sales allowances..............        29,658            103,262          112,272            20,648
Inventory obsolescence.....................         1,003              2,442            2,443             1,002
                                                ---------          ---------        ---------          --------
                                                $  31,083          $ 105,684        $ 114,715          $ 22,052
                                                =========          =========        =========          ========

Year Ended March 31, 2005:
Allowance for doubtful accounts............     $     402          $     235        $     176          $    461
Reserves for sales allowances..............        20,648            133,475          133,067            21,056
Inventory obsolescence.....................         1,002              3,182            2,891             1,293
                                                ---------          ---------        ---------          --------
                                                $  22,052          $ 136,892        $ 136,134          $ 22,810
                                                =========          =========        =========          ========

Year Ended March 31, 2006:
Allowance for doubtful accounts............     $     461          $     (49)       $      15          $    397
Reserves for sales allowances..............        21,056            154,368          146,107            29,317
Inventory obsolescence.....................         1,293              4,215            3,808             1,700
                                                ---------          ---------        ---------          --------
                                                $  22,810          $ 158,534        $ 149,930          $ 31,414
                                                =========          =========        =========          ========
</TABLE>

Financial statements of K-V Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included
in the financial statements are wholly-owned and are not materially indebted
to any person other than through the ordinary course of business.


                                    101

<PAGE>
<PAGE>

                                 SIGNATURES


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

                                        K-V PHARMACEUTICAL COMPANY


Date:      June 14, 2006                By /s/  Marc S. Hermelin
       -----------------                  ------------------------------------
                                           Vice Chairman of the Board and
                                           Chief Executive Officer
                                          (Principal Executive Officer)


Date:      June 14, 2006                By /s/  Gerald R. Mitchell
       -----------------                  ------------------------------------
                                          Vice President and Chief Financial
                                            Officer
                                          (Principal Financial Officer)


Date:      June 14, 2006                By  /s/ Richard H. Chibnall
       -----------------                   -----------------------------------
                                           Vice President, Finance
                                           (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the dates indicated by the following persons
on behalf of the Company and in their capacities as members of the Board of
Directors of the Company:

Date:      June 14, 2006                By  /s/  Marc S. Hermelin
       -----------------                   -----------------------------------
                                           Marc S. Hermelin


Date:      June 14, 2006                By  /s/  Victor M. Hermelin
       -----------------                   -----------------------------------
                                           Victor M. Hermelin


Date:      June 14, 2006                By  /s/  Norman D. Schellenger
       -----------------                   -----------------------------------
                                           Norman D. Schellenger


Date:      June 14, 2006                By  /s/  Gerald R. Mitchell
       -----------------                   -----------------------------------
                                           Gerald R. Mitchell


Date:      June 14, 2006                By  /s/  Kevin S. Carlie
       -----------------                   -----------------------------------
                                           Kevin S. Carlie


Date:      June 14, 2006                By  /s/  David A. Van Vliet
       -----------------                   -----------------------------------
                                           David A. Van Vliet


Date:      June 14, 2006                By  /s/  Jean M. Bellin
       -----------------                   -----------------------------------
                                           Jean M. Bellin



                                    102

<PAGE>
<PAGE>

Date:      June 14, 2006                By  /s/  Terry B. Hatfield
       -----------------                   -----------------------------------
                                           Terry B. Hatfield


Date:      June 14, 2006                By  /s/  David S. Hermelin
       -----------------                   -----------------------------------
                                           David S. Hermelin



                                    103

<PAGE>
<PAGE>

                                EXHIBIT INDEX

Exhibit No.                             Description
-----------                             -----------

     3(a)         The Company's Certificate of Incorporation, which was
                  filed as Exhibit 3(a) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 1981, is
                  incorporated herein by this reference.

     3(b)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective March 7, 1983, which was filed
                  as Exhibit 3(c) to the Company's Annual Report on Form
                  10-K for the year ended March 31, 1983, is incorporated
                  herein by this reference.

     3(c)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective June 9, 1987, which was filed as
                  Exhibit 3(d) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 1988, is incorporated herein
                  by this reference.

     3(d)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective September 24, 1987, which was
                  filed as Exhibit 3(f) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 1988, is
                  incorporated herein by this reference.

     3(e)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective July 17, 1986, which was filed
                  as Exhibit 3(e) to the Company's Annual Report on Form
                  10-K for the year ended March 31, 1996, is incorporated
                  herein by this reference.

     3(f)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective December 23, 1991, which was
                  filed as Exhibit 3(f) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 1996, is
                  incorporated herein by this reference.

     3(g)         Certificate of Amendment to Certificate of Incorporation
                  of the Company, effective September 3, 1998, which was
                  filed as Exhibit 4(g) to the Company's Registration
                  Statement on Form S-3 (Registration Statement No.
                  333-87402), filed May 1, 2002, is incorporated herein by
                  this reference.

     3(h)         Bylaws of the Company, as amended through November 18,
                  1982, which was filed as Exhibit 3(e) to the Company's
                  Annual Report on Form 10-K for the year ended March 31,
                  1993, is incorporated herein by this reference.

     3(i)         Amendment to Bylaws of the Company, effective July 2,
                  1984, which was filed as Exhibit 4(i) to the Company's
                  Registration Statement on Form S-3 (Registration Statement
                  No. 333-87402), filed May 1, 2002, is incorporated herein
                  by this reference.

     3(j)         Amendment to Bylaws of the Company, effective December 4,
                  1986, which was filed as Exhibit 4(j) to the Company's
                  Registration Statement on Form S-3 (Registration Statement
                  No. 333-87402), filed May 1, 2002, is incorporated herein
                  by this reference.

     3(k)         Amendment to Bylaws of the Company effective March 17,
                  1992, which was filed as Exhibit 4(k) to the Company's
                  Registration Statement on Form S-3 (Registration Statement
                  No. 333-87402), filed May 1, 2002, is incorporated herein
                  by this reference.

     3(l)         Amendment to Bylaws of the Company effective November 18,
                  1992, which was filed as Exhibit 4(l) to the Company's
                  Registration Statement on Form S-3 (Registration Statement
                  No. 333-87402), filed May 1, 2002, is incorporated herein
                  by this reference.

                                    104

<PAGE>
<PAGE>

     3(m)         Amendment to Bylaws of the Company, effective December 30,
                  1993, which was filed as Exhibit 3(h) to the Company's
                  Annual Report on Form 10-K for the year ended March 31,
                  1996, is incorporated herein by this reference.

     3(n)         Amendment to Bylaws of the Company, effective September
                  24, 2002, which was filed as Exhibit 4(n) to the Company's
                  Registration Statement on Form S-3 (Registration Statement
                  No. 333-106294), filed June 19, 2003, is incorporated
                  herein by this reference.

      3(o)        Amendment to Bylaws of the Company, effective June 28,
                  2004, which increased the size of the board of directors
                  from seven to ten, filed herewith.

      3(p)        Amendment to Bylaws of the Company, effective September 9,
                  2004, which decreased the size of the board of directors
                  from ten to nine, filed herewith.

     4(a)         Certificate of Designation of Rights and Preferences of 7%
                  Cumulative Convertible preferred stock of the Company,
                  effective June 9, 1987, and related Certificate of
                  Correction, dated June 17, 1987, which was filed as
                  Exhibit 4(f) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 1987, is incorporated herein
                  by this reference.

     4(b)         Indenture dated as of May 16, 2003, by and between the
                  Company and Deutsche Bank Trust Company Americas, filed on
                  May 21, 2003, as Exhibit 4.1 to the Company's Current
                  Report on Form 8-K, is incorporated herein by this
                  reference.

     4(c)         Registration Rights Agreement dated as of May 16, 2003, by
                  and between the Company and Deutsche Bank Securities,
                  Inc., as representative of the several Purchasers, filed
                  on May 21, 2003 as Exhibit 4.2 to the Company's Current
                  Report on Form 8-K, is incorporated herein by this
                  reference.

     4(d)         Amended and Restated Loan Agreement, dated December 31,
                  2004 between the Company and its subsidiaries, LaSalle
                  National Bank Association and Citibank, F.S.B., filed on
                  January 18, 2005, as Exhibit 10.2 to the Company's Current
                  Report on Form 8-K, is incorporated herein by this
                  reference.

     4(e)         Promissory Note, dated March 23, 2006 between MECW, LLC
                  and LaSalle National Bank Association, filed on March 29,
                  2006, as exhibit 99 to the Company's Current Report on
                  Form 8-K, is incorporated herein by this reference.

     4(f)         Second Amendment to Amended and Restated Loan Agreement,
                  dated March 20, 2006 between the Company and its
                  subsidiaries, LaSalle National Bank Association and
                  Citibank, F.S.B., filed herewith.

     4(g)         Credit Agreement, dated as of June 9, 2006, among the
                  Company and its subsidiaries, LaSalle Bank National
                  Association, Citibank, F.S.B. and the other lenders thereto,
                  filed herewith.

     10(a)*       Restated and Amended Employment Agreement between the
                  Company and Gerald R. Mitchell, Vice President, Finance,
                  dated as of March 31, 1994, is incorporated herein by this
                  reference.

     10(b)*       Employment Agreement between the Company and Raymond F.
                  Chiostri, Corporate Vice-President and
                  President-Pharmaceutical Division, which was filed as
                  Exhibit 10(l) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 1992, is incorporated herein
                  by this reference.

     10(c)        Lease of the Company's facility at 2503 South Hanley Road,
                  St. Louis, Missouri, and amendment thereto, between the
                  Company as Lessee and Marc S. Hermelin as Lessor, which
                  was filed as Exhibit 10(n) to the Company's Annual Report
                  on Form 10-K for the year ended March 31, 1983, is
                  incorporated herein by this reference.

                                    105

<PAGE>
<PAGE>

     10(d)        Amendment to the Lease for the facility located at 2503
                  South Hanley Road, St. Louis, Missouri, between the
                  Company as Lessee and Marc S. Hermelin as Lessor, which
                  was filed as Exhibit 10(p) to the Company's Annual Report
                  on Form 10-K for the year ended March 31, 1992, is
                  incorporated herein by this reference.

     10(e)*       KV Pharmaceutical Company Fourth Restated Profit Sharing
                  Plan and Trust Agreement dated September 18, 1990, which
                  was filed as Exhibit 4.1 to the Company's Registration
                  Statement on Form S-8 No. 33-36400, is incorporated herein
                  by this reference.

     10(f)*       First Amendment to the KV Pharmaceutical Company Fourth
                  Restated Profit Sharing Plan and Trust dated September 18,
                  1990, is incorporated herein by this reference.

     10(g)*       Fourth Amendment to and Restatement, dated as of January
                  2, 1997, of the KV Pharmaceutical Company 1991 Incentive
                  Stock Option Plan, which was filed as Exhibit 10(y) to the
                  Company's Annual Report on Form 10-K for the year ended
                  March 31, 1997, is incorporated herein by this reference.

     10(h)*       Agreement between the Company and Marc S. Hermelin, Vice
                  Chairman, dated December 16, 1996, with supplemental
                  letter attached, which was filed as Exhibit 10(z) to the
                  Company's Annual Report on Form 10-K for the year ended
                  March 31, 1997, is incorporated herein by this reference.

     10(i)        Amendment to Lease dated February 17, 1997, for the
                  facility located at 2503 South Hanley Road, St. Louis,
                  Missouri, between the Company as Lessee and Marc S.
                  Hermelin as Lessor, which was filed as Exhibit 10(aa) to
                  the Company's Annual Report on Form 10-K for the year
                  ended March 31, 1997, is incorporated herein by this
                  reference.

     10(j)*       Amendment, dated as of October 30, 1998, to Employment
                  Agreement between the Company and Marc S. Hermelin, which
                  was filed as Exhibit 10(ee) to the Company's Annual Report
                  on Form 10-K for the year ended March 31, 1999, is
                  incorporated herein by this reference.

     10(k)        Exclusive License Agreement, dated as of April 1, 1999
                  between Victor M. Hermelin as licenser and the Company as
                  licensee, which was filed as Exhibit 10(ff) to the
                  Company's Annual Report on Form 10-K for the year ended
                  March 31, 1999 is incorporated herein by this reference.

     10(l)*       Amendment, dated December 2, 1999, to Employment Agreement
                  between the Company and Marc S. Hermelin, Vice-Chairman,
                  which was filed as Exhibit 10(ii) to the Company's Annual
                  Report on Form 10-K for the year ended March 31, 2000, is
                  incorporated by this reference.

     10(n)*       Consulting Agreement, dated as of May 1, 1999, between the
                  Company and Victor M. Hermelin, Chairman, which was filed
                  as Exhibit 10(kk) to the Company's Annual Report on Form
                  10-K for the year ended March 31, 2000, is incorporated by
                  this reference.

     10(o)*       Stock Option Agreement dated as of April 9, 2001, granting
                  a stock option to Kevin S. Carlie, which was filed as
                  Exhibit 10(ii) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 2002, is incorporated herein
                  by this reference.

     10(p)*       Stock Option Agreement dated as of July 26, 2002, granting
                  a stock option to Marc S. Hermelin, which was filed as
                  Exhibit 10(rr) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 2003, is incorporated herein
                  by this reference.


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<PAGE>

     10(q)        License Agreement by and between the Company and
                  FemmePharma, Inc., dated as of April 18, 2002, which was
                  filed as Exhibit 10(tt) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 2003, is
                  incorporated herein by this reference.

     10(r)        Stock Purchase Agreement by and between the Company and
                  FemmePharma, Inc., dated as of April 18, 2002, which was
                  filed as Exhibit 10(uu) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 2003, is
                  incorporated herein by this reference.

     10(s)        Product Acquisition Agreement by and between the Company
                  and Schwarz Pharma dated as of March 31, 2003, which was
                  filed as Exhibit 10(vv) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 2003, is
                  incorporated herein by this reference.

     10(t)        Product Acquisition Agreement by and between the Company
                  and Altana Inc. dated as of March 31, 2003, which was
                  filed as Exhibit 10(ww) to the Company's Annual Report on
                  Form 10-K for the year ended March 31, 2003, is
                  incorporated herein by this reference.

     10(u)        Stock Option Agreement dated as of May 30, 2003, granting
                  a stock option to Marc S. Hermelin, which was filed as
                  Exhibit 10(yy) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 2004, is incorporated herein
                  by this reference.

     10(v)*       Amendment, dated November 5, 2004, to Employment Agreement
                  between the Company and Marc S. Hermelin, Vice-Chairman,
                  which was filed as Exhibit 10(a) to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 2004, is incorporated herein by this
                  reference.

     10(w)        Agreement and Plan of Merger by and among K-V
                  Pharmaceutical Company, Kestrel-Falcon Acquisition
                  Corporation, FP1096, Inc., and FemmePharma Holding
                  Company, Inc., dated as of May 4, 2005, which was filed as
                  Exhibit 10(ww) to the Company's Annual Report on Form 10-K
                  for the year ended March 31, 2005, is incorporated herein
                  by this reference.

     10(x)*       K-V Pharmaceutical 2001 Incentive Stock Option Plan, which
                  was filed as Exibit 10.1 to the Company's Current report
                  on Form 8-K filed November 22, 2005, is incorporated by
                  this reference.

     10(y)*       Form of 2001 Incentive Stock Option Plan Award Agreement
                  for Employees, which was filed as Exhibit 10.2 to the
                  Company's Current Report on Form 8-K filed November 22,
                  2005, is incorporated by this reference.

     10(z)*       Form of 2001 Incentive Stock Option Plan Award Agreement
                  for Directors, which was filed as Exhibit 10.3 to the
                  Company's Current Report on Form 8-K filed November 22,
                  2005, is incorporated by this reference.

     10(aa)*      Employment Agreement between ETHEX and Patricia McCullough,
                  Chief Executive Officer of ETHEX, dated January 30, 2006,
                  filed herewith.

     10(bb)*      Employment Agreement between the Company and Michael S.
                  Anderson, Corporate Vice President, Industry Presence and
                  Development, dated May 23, 1994, and amendments thereto,
                  filed herewith.

     10(cc)*      Employment Agreement between Ther-Rx and Jerald J. Wenker,
                  President of Ther-Rx, dated April 8, 2004, filed herewith.

     21           List of Subsidiaries, filed herewith.

     23.1         Consent of KPMG LLP, filed herewith.

     23.2         Consent of BDO Seidman, LLP, filed herewith.

     31.1         Certification of Chief Executive Officer pursuant to Rule
                  13a-14(a) or Rule 15d-14(a), as adopted pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002, is filed
                  herewith.

     31.2         Certification of Chief Financial Officer pursuant to Rule
                  13a-14(a) or Rule 15d-14(a), as adopted pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002, is filed
                  herewith.

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     32.1         Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                  filed herewith.

     32.2         Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                  filed herewith.

<FN>
*Management contract or compensation plan.


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