<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
                                   FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED MARCH 31, 2008

                                      OR

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

            FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 1-9601
--------------------------------------------------------------------------------
                          K-V PHARMACEUTICAL COMPANY
            (Exact name of registrant as specified in its charter)

                 DELAWARE                                    43-0618919
        (State or other jurisdiction of                   (I.R.S. Employer
        incorporation or organization)                    Identification No.)

               2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
         (Address of principal executive offices, including ZIP code)
      Registrant's telephone number, including area code: (314) 645-6600

          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 [ ] No [X]

Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

              Large accelerated filer [X] Accelerated filer [ ]
            Non-accelerated filer [ ] Smaller reporting company [ ]

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 28, 2007, the last
business day of the registrant's most recently completed second fiscal
quarter, was $887,560,274 and $37,278,549, respectively. As of June 6, 2008,
the registrant had outstanding 37,755,099 and 12,256,159 shares of Class A
Common Stock and Class B Common Stock, respectively. Documents incorporated by
reference: Portions of the Company's Definitive Proxy Statement for its 2008
Annual Meeting of Shareholders are incorporated by reference in Part III of
this Annual Report on Form 10-K.


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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 U.S. 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,"
"expects," "aims," "believes," "projects," "anticipates," "commits,"
"intends," "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, product launches, regulatory approvals, governmental and
regulatory actions and proceedings, market position, market share increases,
acquisitions, revenues, expenditures and other 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, competitive, political, regulatory and technological
factors which, among others, could cause 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 timing, and that any period of exclusivity may not be realized; (3)
acceptance and demand for new pharmaceutical products; (4) the impact of
competitive products and pricing, including as a result of so-called
authorized-generic drugs; (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 and/or products manufactured
for us under contract manufacturing arrangements with third parties; (8) the
regulatory environment, including regulatory agency and judicial actions and
changes in applicable law or regulations; (9) fluctuations in operating
results; (10) the difficulty of predicting international regulatory approval,
including 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) actions by the Securities and Exchange
Commission and the Internal Revenue Service with respect to our stock option
grants and accounting practices; (15) the impact of credit market disruptions
on the fair value of auction rate securities that we acquired as
short-term investments and have now become illiquid; (16) whether any recalled
products will have any material financial impact or result in litigation,
agency actions or material damages; and (17) the risks detailed from time to
time in our filings with the Securities and Exchange Commission.

This discussion is not 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 future 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 Founder and Chairman Emeritus, invented and obtained
         initial patents for early controlled release and enteric coating
         which became part of our core business in the 1950's to 1970's and a
         platform for later drug delivery emphasis in the 1980's to the
         present.

         Today, 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 developed and patented
         a wide variety of drug delivery and formulation technologies which
         are primarily focused in four principal areas: SITE RELEASE(R);
         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,
         non-branded 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 its own "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. Today, we believe we are a leading, vertically
         integrated specialty pharmaceutical marketer.

         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 2007, we acquired the U.S. marketing rights to Evamist(TM), a
         new estrogen replacement therapy product delivered with a patented
         metered-dose transdermal spray system, from VIVUS, Inc. Under the
         terms of the asset purchase agreement, we paid $10.0 million in cash
         at closing and agreed to make an additional cash payment of $141.5
         million upon final approval of the product by the U.S. Food and Drug
         Administration ("FDA"). The agreement also provides for two future
         payments upon achievement of certain net sales milestones. If
         Evamist(TM) achieves $100.0 million of net sales in a fiscal year, a
         one-time payment of $10.0 million will be made, and if net sales
         levels reach $200.0 million in a fiscal year, a one-time payment of
         up to $20.0 million will be made. Because the product had not
         obtained FDA approval when the initial payment was made at closing,
         we recorded the $10.0 million payment made during the first quarter
         of fiscal 2008 as in-process research and development expense. In
         July 2007, FDA approval for Evamist(TM) was received and a payment of
         $141.5 million was made to VIVUS, Inc. The preliminary purchase price
         allocation, which is subject to change based on the final fair value
         assessment, resulted in estimated identifiable intangible assets of
         $52.4 million to product rights; $15.2 million to trademark rights;
         $66.4 million to rights under a sublicense agreement; and, $7.5
         million to a covenant not to compete. This product was purchased
         using $91.5 million in cash and $50 million of our revolving line of
         credit. Upon FDA approval in July 2007, we began amortizing the
         product rights, trademark rights and rights under the sublicense
         agreement over 15 years and the covenant not to compete over nine
         years.

         In May 2007, we received FDA approval to market the 100 mg and 200 mg
         strengths of metoprolol succinate extended-release tablets, the
         generic version of Toprol-XL(R) (marketed by AstraZeneca). 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 these generic formulations. Since we were the
         first company to file with the FDA for generic approval of the 100 mg
         and 200 mg dosage strengths, we were accorded the opportunity for a
         180-day exclusivity period for marketing these two dosage strengths.
         The 180-day exclusivity period has allowed us to realize higher
         margins on these products compared to our other generic/non-branded
         products. We



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         began shipping these two products in July 2007, and along with the 25
         mg strength approved in March 2008, they generated net revenues in
         fiscal 2008 of $120.0 million.

         We received FDA approval to market the 25 mg and 50 mg strengths of
         metoprolol succinate extended-release tablets in March 2008 and May
         2008, respectively. As a result of the recent 50 mg approval, KV now
         offers the complete line of all four dosage strengths of metoprolol
         succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.
         As of March 31, 2008, KV had a 69.1% and 72.5% share of the generic
         market place according to IMS Inc. for the 200 mg and 100 mg
         strengths, respectively.

         In July 2007, we entered into an additional licensing arrangement to
         market Clindesse(R) in the People's Republic of China. We have
         previously entered into licensing arrangements for the right to
         market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
         Scandinavian markets and 18 Eastern European countries.

         In January 2008, we entered into a definitive asset purchase
         agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
         acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
         hydroxyprogesterone caproate). The New Drug Application ("NDA") for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. The proposed indication is for women with a history of at
         least one spontaneous preterm delivery (i.e., less than 37 weeks),
         who are pregnant with a single fetus. Under the terms of the asset
         purchase agreement, we agreed to pay $82.0 million for Gestiva(TM),
         $7.5 million of which was paid at closing. Because the product had
         not obtained FDA approval when the initial payment was made at
         closing, we recorded the $7.5 million payment as in-process research
         and development expense in the fourth quarter of fiscal 2008. The
         remainder of the purchase price is payable on the completion of two
         milestones: (1) $2.0 million on the earlier to occur of CYTYC's
         receipt of acknowledgement from the FDA that their response to the
         FDA's October 20, 2006 "approvable" letter is sufficient for the FDA
         to proceed with their review of the NDA or the receipt of FDA's
         approval of the Gestiva(TM) NDA and (2) $72.5 million on FDA approval
         of a Gestiva(TM) NDA, transfer of all rights in the NDA to us and
         receipt by us of defined launch quantities of finished Gestiva(TM)
         suitable for commercial sale.

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

         We operate principally in three industry segments, consisting of
         branded products marketing, specialty generics marketing and
         specialty raw materials marketing. We derive revenues primarily from
         directly marketing our own technologically distinguished brand-name
         and generic/non-branded products and products marketed under joint
         development agreement with other companies. 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 of the Notes to the Consolidated Financial Statements.

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

         OVERVIEW

         We are a fully integrated specialty pharmaceutical company that
         develops, manufactures, acquires 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 developed a diverse portfolio of drug delivery technologies
         which we leverage to create technologically distinguished brand name
         and specialty generic/non-branded products. We have patented 15 drug
         delivery and formulation technologies primarily in four principal
         areas: SITE RELEASE(R), 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

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         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 1999, Ther-Rx 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 ETHEX incorporate
         one or more of our drug delivery technologies.

         Our drug delivery technologies play a vital role in our ability to
         offer improved and differentiated products in our branded products
         portfolio and allow us to develop hard to replicate products that are
         marketed through our generic/non-branded products business. We
         believe that this differentiation provides substantial competitive
         advantages for our products, which has allowed us to establish a
         strong record of growth and profitability and a leadership position
         in certain segments of our industry. As a result, we have grown
         consolidated net revenues at a compounded annual growth rate of 19.4%
         over the five fiscal years in the period ended March 31, 2008 marking
         the Company's 13th consecutive year of record revenues. Ther-Rx has
         grown substantially since its inception in 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 generic/non-branded products.

         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 $188.7 million in fiscal 2007 to
         $214.9 million in fiscal 2008 and represented 35.7% of our fiscal
         2008 total net revenues.

         We established our women's healthcare franchise through our 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 six 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. Ther-Rx's second internally developed
         product, PremesisRx(R), 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 Conceive(R), 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 ONE(R), was launched
         in fiscal 2005 as a


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         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. During June 2008, a third party company introduced a product
         purporting to be a substitute for PrimaCare ONE(R), and we are
         currently engaged in litigation with this company with respect to
         patent and trademark infringement and other claims. See Note 12 of
         the Notes to Consolidated Financial Statements. The PrimaCare(R)
         franchise has grown to be the number one branded prenatal
         prescription vitamin in the U.S. Our sixth product line extension,
         PreCare Premier(R), provides a wide range of vitamins and minerals,
         plus a stool softener, in a small, easy-to-swallow, once-daily
         caplet. Sales of our branded prescription prenatal vitamins increased
         13.7% in fiscal 2008 to $82.5 million. In fiscal 2006, we expanded
         our prescription nutritional franchise when Ther-Rx introduced
         Encora(R), a twice-daily prescription nutritional supplement designed
         to meet the key nutritional and preventative health needs of women
         past their childbearing years. Sales of Encora(R) increased 45.0% in
         fiscal 2008 to $4.5 million.

         In 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), which we believe is the only
         clinically proven and FDA approved controlled release bioadhesive
         system. Sales of Gynazole-1(R) were $24.0 million in fiscal 2008. We
         have also 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 Scandinavia.

         In January 2005, Ther-Rx introduced its second NDA approved product,
         Clindesse(R), the first approved single-dose therapy for bacterial
         vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
         proprietary VagiSite(TM) bioadhesive drug delivery technology. Since
         its launch, Clindesse(R) has gained 28.0% of the intravaginal
         bacterial vaginosis market in the United States. Clindesse(R)
         generated a 27.4% increase in sales to $40.5 million in fiscal 2008.
         We have also entered into licensing agreements for the right to
         market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
         Scandinavian markets, 18 Eastern European countries and the People's
         Republic of China.

         We established our hematinic product line by acquiring two leading
         hematinic brands, Chromagen(R) and Niferex(R), in 2003. We
         re-launched technology-improved versions of these products mid-way
         through fiscal 2004. In fiscal 2006, we introduced two new hematinic
         products -- Repliva 21/7(R) and Niferex Gold(R). We believe Repliva
         21/7(R) is a product offering that represents a revolutionary
         advancement in iron therapy. Repliva 21/7(R) has been uniquely
         formulated to promote maximum red blood cell regeneration while
         minimizing uncomfortable side effects that patients have typically
         endured with traditional iron supplements. With Repliva 21/7(R)
         becoming the number one branded oral iron product in the United
         States and Ther-Rx being the number one provider of branded
         prescription oral iron supplements in the United States, sales of our
         hematinic product line grew to $53.8 million in fiscal 2008, an 11.6%
         increase over fiscal 2007.

         In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
         to Evamist(TM), a unique transdermal estrogen therapy delivering a
         low dose of estradiol in a once-daily spray. Under terms of the asset
         purchase agreement, we paid $10.0 million in cash at closing and made
         an additional cash payment of $141.5 million upon final approval of
         the product by the FDA in July 2007. Evamist(TM) is indicated for the
         treatment of moderate-to-severe vasomotor symptoms due to menopause
         and targets the estrogen replacement market where physicians and
         patients are seeking an effective and safe, low-dose estrogen
         product. We believe Evamist(TM) will significantly augment the
         women's health offerings of our branded segment as we leverage the
         promotion of this product through our expanded branded sales force.
         We began shipping this product at the end of fiscal 2008.

         In January 2008, we entered into a definitive asset purchase
         agreement with CYTYC to acquire the U.S. and worldwide rights to
         Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
         of the asset purchase agreement, we agreed to pay $82.0 million for
         Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. The proposed indication is for women with a history of at
         least one spontaneous preterm delivery (i.e., less than 37 weeks),
         who are pregnant with a single fetus. The FDA issued an "approvable"
         letter for Gestiva(TM) in October 2006, and a final approval is
         anticipated in fiscal 2009. The FDA has granted an Orphan Drug
         Designation for Gestiva(TM). The acquisition of Gestiva(TM) is
         intended to allow Ther-


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         Rx to capitalize on the already strong relationships built over the
         past seven years between Ther-Rx's 330-member sales force and
         Obstetrician/Gynecologists.

         To capitalize on Ther-Rx's success in marketing women's health
         products, we continue to look for opportunities to expand our Ther-Rx
         product portfolio. 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 are now testing
         an alternative formula in a Phase II study to determine which
         alternative to take into Phase III clinicals. The Company expects to
         start Phase III clinicals in fiscal 2010.

         Based on the addition and development of new products and our
         expectation of continued growth in our branded business, Ther-Rx has
         expanded its branded sales force to approximately 330 specialty sales
         representatives. 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
         differentiate our products and reduce the rate of price erosion
         typically experienced in the generic market. ETHEX's net revenues
         increased 56.1% to $367.9 million for fiscal 2008, which represented
         61.1% of our total net revenues.

         In May 2007, we received FDA approval to market the 100 mg and 200 mg
         strengths of metoprolol succinate extended-release tablets, the
         generic version of Toprol-XL(R) (marketed by AstraZeneca). 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 these generic formulations. Since we were the
         first company to file with the FDA for generic approval of the 100 mg
         and 200 mg dosage strengths, we were accorded the opportunity for a
         180-day exclusivity period for marketing these two dosage strengths.
         The 180-day exclusivity period has allowed us to realize higher
         margins on these products compared to our other generic/non-branded
         products. We began shipping these two products in July 2007 and along
         with the 25 mg approved and launched in March 2008 generated net
         revenues in fiscal 2008 of $120.0 million.

         We have used our proprietary drug delivery technologies in many of
         our generic/non-branded pharmaceutical products. For example, we have
         used METER RELEASE(R), one of our proprietary controlled release
         technologies, in a variety of products including the only generic
         equivalent to Norpace(R) CR, an antiarrhythmic that is taken twice
         daily. Further, we have used KV/24(TM) once daily technology in the
         generic equivalent to IMDUR(R), a cardiovascular drug that is taken
         once per day, among others.

         To capitalize on ETHEX's unique product capabilities, we continue to
         expand our ETHEX product portfolio. In fiscal 2006, we launched a new
         InveAmp(R) line extension to our pain management business.
         InveAmp(R), a unique one unit dose ampoule, was designed to make
         dispensing of narcotic pain relievers more effective. In fiscal 2007,
         we received ANDA approval for six strengths of diltiazem
         hydrochloride extended-release capsules. As noted above, in fiscal
         2008, we received FDA approval to market the 100 mg and 200 mg
         strengths of metoprolol succinate extended-release tablets, the
         generic version of Toprol-XL(R). We also received in fiscal 2008 ANDA
         approval for ondansetron 4 mg and 8 mg orally disintegrating tablets,
         the 100 mg and 200 mg strengths of morphine sulfate extended-release
         tablets, the generic equivalent of MS Contin(R), and the 100 mg and
         200 mg strengths of benzonatate USP capsules, the generic equivalent
         to Tessalon(R). In addition, we received FDA approval to market the
         25 mg and 50 mg strengths of metoprolol succinate extended-release
         tablets in March 2008 and May 2008, respectively. As a result of the
         recent 50 mg approval, KV now offers the complete line of all four
         dosage strengths of metoprolol succinate extended-release tablets -
         200 mg, 100 mg, 50 mg and 25 mg.


                                      7

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         In addition to our internal product development efforts, we have
         entered into several long-term product development and marketing
         license agreements with various generic pharmaceutical developers and
         manufacturers. Under most of these arrangements, the other parties
         are responsible for developing, submitting for regulatory approval
         and manufacturing the products and we are responsible for exclusively
         marketing these products in the territories covered by the
         in-licensing agreements. We expect certain products under these
         agreements to be filed and/or approved beginning in fiscal 2009. With
         the majority of our internal generic/non-branded product development
         efforts primarily focused on building our pipeline with products that
         use one or more of our 15 drug delivery technologies, we believe
         these development agreements with existing parties will further
         provide an opportunity to grow our generic/non-branded business.
         These new product sources have increased the scope of our
         generic/non-branded product pipeline to more than 50 product
         opportunities.

         The Company seeks to pursue an approach of developing generic
         products that are more difficult to develop or manufacture and that
         will therefore have significant barriers to entry by other generic
         companies, such as metoprolol succinate extended-release tablets. The
         Company has a rich generic pipeline. In fiscal year 2008, between the
         Company's own internal development activities and its external
         development partners, the Company filed 16 ANDAs and received 5
         generic product approvals from the FDA. In fiscal year 2009, the
         Company anticipates that, between its external development partners
         and its own internal development activities, it will file
         approximately 16 generic ANDA filings and receive six product
         approvals from the FDA.

         On February 14, 2006, the Company announced it had entered into an
         agreement with Gedeon Richter under which the Company had acquired
         exclusive rights to market a group of generic products in the United
         States. However, due to changes in the generic drug marketplace, the
         Company and Gedeon Richter have agreed the current portfolio of
         products covered by the agreement, which has now been terminated, no
         longer represent market opportunities that are worth pursuing. The
         two companies remain committed partners in other endeavors and are
         keeping options open to explore other more meaningful joint
         opportunities.

         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 70 products in its
         cardiovascular line, including products to treat angina, arrhythmia
         and hypertension, as well as for potassium supplementation. The
         cardiovascular line accounted for $237.2 million, or 64.5%, of
         ETHEX's net revenues in fiscal 2008.

         PAIN MANAGEMENT. ETHEX currently markets over 30 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 $45.7 million, or 12.4%, of ETHEX's
         net revenues in fiscal 2008.

         RESPIRATORY. During most of fiscal 2008, ETHEX marketed approximately
         30 products in its respiratory line, which consisted primarily of
         cough/cold products. The cough/cold line accounted for $38.5 million,
         or 10.5% of ETHEX's net revenues in fiscal 2008. In March 2008,
         representatives of the Missouri Department of Health and Senior
         Services and the FDA notified us of a hold on our inventory of
         certain unapproved products. Previously, we had received notices that
         required us to cease the manufacture and sale of unapproved products
         containing timed-release guaifenesin. As a result of these notices,
         we are currently marketing one cough/cold product. We will
         discontinue manufacturing and marketing all unapproved cough/cold
         products subject to the hold. See Part I, Item 1A "Risk Factors" for
         additional information. The regulatory status of certain of our
         generic products may make them subject to increased competition or to
         regulatory decisions that may require market withdrawal of one or
         more of our unapproved products.

         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 $14.1 million, or
         3.8%, of ETHEX's net revenues in fiscal 2008.

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         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. These
         categories accounted for $32.2 million, or 8.8%, of ETHEX's net
         revenues in fiscal 2008.

         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, 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 demand at the wholesale level.

         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 Ther-Rx and ETHEX. Net revenues for
         PDI were $18.0 million in fiscal 2008, up 3.3% over net revenues of
         $17.4 for fiscal 2007, which represented 3.0% of our total net
         revenues.

         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. 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, possibly,
         new therapeutic areas. We believe we have in place a strong pipeline
         of potential new products.

         CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek acquisition
         opportunities for both Ther-Rx and ETHEX. In May 2007, we completed
         the acquisition of the U.S. marketing rights to Evamist(TM), a new
         low-dose estrogen transdermal spray, from VIVUS, Inc. The NDA for
         this product was approved by the FDA in July 2007 and we began
         shipping Evamist(TM) during the fourth quarter of fiscal 2008.

         In January 2008, we entered into a definitive purchase agreement that
         gives us full U.S. and worldwide rights to Gestiva(TM) (17-alpha
         hydroxyprogesterone caproate) upon approval of the pending
         Gestiva(TM) NDA by FDA. Gestiva(TM) is seeking an indication for use
         in the prevention of preterm birth in certain categories of pregnant
         women. The FDA issued an "approvable" letter for Gestiva(TM) in
         October 2006, and a final approval is anticipated in late 2008. The
         FDA has granted an Orphan Drug Designation for Gestiva(TM).

         Ther-Rx is also continually looking for platform acquisition
         opportunities similar to PreCare(R) around which it 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 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;


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         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;

         o    products which are predominantly prescribed by physician
              specialists, which can be cost-effectively marketed by a 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 specialist 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 and
         development of new products and our expectation of continued growth
         in our branded business, Ther-Rx has expanded its branded sales force
         to approximately 330 specialty sales representatives. We plan to
         continue to build our sales force over time 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. 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. Almost two-thirds of ETHEX'S
         generic/non-branded products use the Company's proprietary drug
         delivery technologies, and approximately 80% rank either first or
         second in their respective generic categories by volume.

         In May 2007, we received FDA approval to market the 100 mg and 200 mg
         strengths of metoprolol succinate extended-release tablets, the
         generic version of Toprol-XL(R) (marketed by AstraZeneca). 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 these generic formulations. Since we were the
         first company to file with the FDA for generic approval of the 100 mg
         and 200 mg dosage strengths, we were accorded the opportunity for a
         180-day exclusivity period for marketing these two dosage strengths.
         The 180-day exclusivity period has allowed us to realize higher
         margins on these products compared to our other generic/non-branded
         products. We began shipping these two products in July 2007 and with
         the approval and launch in March 2008 of the 25 mg strength they
         generated net revenues in fiscal 2008 of $120.0 million. We received
         FDA approval to market the 25 mg and 50 mg strengths of metoprolol
         succinate extended-release tablets in March 2008 and May 2008,
         respectively. As a result of the recent 50 mg approval, KV now offers
         the complete line of all four dosage strengths of metoprolol
         succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.

         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(R),
         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 are actively advancing our existing portfolio of drug delivery
         technologies and developing or acquiring exciting new technologies
         with substantial growth potential. In May 2007, we completed the
         acquisition of the U.S. marketing rights to Evamist(TM), a new
         low-dose estrogen transdermal spray, from VIVUS, Inc. The product was
         formulated with a patented metered-dose transdermal spray system
         which is designed to provide an easy, once-daily dose of estrodial
         via the skin. Evamist(TM) is the first transdermal spray estrogen
         replacement therapy


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         product approved for use in the U.S. The NDA for this product was
         approved by the FDA in July 2007 and we began shipping Evamist(TM)
         during the fourth quarter of fiscal 2008.

         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 or acquisition
         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.

         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
         diltiazem extended-release capsules (an AB rated generic equivalent
         to Tiazac(R)) and metoprolol succinate extended-release tablets (an
         AB rated generic equivalent to Toprol-XL(R)).

         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.

         ORAL 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.
         Our unique quick dissolving tablet can be taken without water. Its
         durability avoids the need for special packaging and it supports the
         incorporation of our tastemasking technologies. Our oral dissolving
         tablet technology is commercialized in our hyoscyamine sulfate orally
         disintegrating tablets, as well as the ondansetron orally
         disintegrating tablets approved by the FDA in fiscal 2008.

         SALES AND MARKETING

         Ther-Rx has a national sales and marketing infrastructure which
         includes approximately 330 sales representatives dedicated to
         promoting and marketing our branded pharmaceutical products to
         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.


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         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 six additional line extensions to address
         unmet needs, including the launch of PreCare(R) Chewables, Premesis
         Rx(R), PreCare Conceive(R), PrimaCare(R), PrimaCare ONE(R) and
         PreCare Premier(R). 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(R), the first approved
         single-dose therapy for bacterial vaginosis. In fiscal 2006, we
         introduced Encora(R), a new prescription nutritional supplement
         product, and two new hematinic products, Repliva 21/7(R) and Niferex
         Gold(R). In May 2007, we completed the acquisition of the U.S.
         marketing rights to Evamist(TM), a new low-dose estrogen transdermal
         spray, from VIVUS, Inc. The NDA for this product was approved by the
         FDA in July 2007 and we began shipping Evamist(TM) during March 2008.
         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 primarily calls on independent
         pharmacies to create demand 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.

         During fiscal 2008, our three largest customers accounted for 24.6%,
         23.9% and 9.8% of gross revenues. These customers were Cardinal
         Health, McKesson Drug Company and Amerisource Corporation,
         respectively. In fiscal 2007 and 2006, these customers accounted for
         gross revenues of 21.1%, 25.7% and 14.4%, and 15.7%, 26.9% and 12.7%,
         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 19.5% over the past
         five fiscal years, reflects our continued commitment to develop new
         products and/or technologies through our internal development
         programs, and with our external strategic partners.

         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
         2008, 2007 and 2006, total research and development expenses were
         $46.6 million, $31.5 million and $28.9 million, respectively,
         excluding acquired in-process research and development.

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         All applications for FDA approval must contain information relating
         to product formulation, raw material suppliers, stability,
         manufacturing processes, packaging, labeling and quality control.
         Information to support the bioequivalence of generic drug products or
         the safety and effectiveness of new drug products for their intended
         use is also required to be submitted. There are generally two types
         of applications used for obtaining FDA approval of new products:


              o   New Drug Application ("NDA"). An NDA is filed when approval
                  is sought to market a drug with active ingredients that have
                  not been previously approved by the FDA. NDAs are filed for
                  newly developed brand products and, in certain instances,
                  for a new dosage form, a new delivery system or a new
                  indication for previously approved drugs.
              o   Abbreviated New Drug Application ("ANDA"). An ANDA is filed
                  when approval is sought to market a generic equivalent of a
                  drug product previously approved under an NDA and listed in
                  the FDA's "Orange Book" or for a new dosage strength or a
                  new delivery system for a drug previously approved under an
                  ANDA.


         One requirement for FDA approval of NDAs and ANDAs is that our
         manufacturing procedures and operations conform to FDA requirements
         and guidelines, generally referred to as current Good Manufacturing
         Practices ("cGMP"). The requirements for FDA approval encompass all
         aspects of the production process, including validation and
         recordkeeping, and involve changing and evolving standards.

         BRANDED PRODUCT DEVELOPMENT. The process required by the FDA before a
         pharmaceutical product, with active ingredients that have not been
         previously approved, may be marketed in the United States generally
         involves the following:

              o   laboratory and preclinical tests;
              o   submission of an Investigational New Drug ("IND")
                  application, which must become effective before clinical
                  studies may begin;
              o   adequate and well-controlled human clinical studies to
                  establish the safety and efficacy of the proposed product
                  for its intended use;
              o   submission of an NDA containing the results of the
                  preclinical tests and clinical studies establishing the
                  safety and efficacy of the proposed product for its intended
                  use, as well as extensive data addressing matters such as
                  manufacturing and quality assurance;
              o   scale-up to commercial manufacturing; and
              o   FDA approval of an NDA.


         Preclinical tests include laboratory evaluation of the product, its
         chemistry, formulation and stability, as well as toxicology and
         pharmacology studies to help define the pharmacological profile of
         the drug and assess the potential safety and efficacy of the product.
         The results of these studies are submitted to the FDA as part of the
         IND. They must demonstrate that the product delivers sufficient
         quantities of the drug to the bloodstream or intended site of action
         to produce the desired therapeutic results before human clinical
         trials may begin. These studies must also provide the appropriate
         supportive safety information necessary for the FDA to determine
         whether the clinical studies proposed to be conducted under the IND
         can safely proceed. The IND automatically becomes effective 30 days
         after receipt by the FDA unless the FDA, during that 30-day period,
         raises concerns or questions about the conduct of the proposed trials
         as outlined in the IND. In such cases, the IND sponsor and the FDA
         must resolve any outstanding concerns before clinical trials may
         begin. In addition, an independent institutional review board must
         review and approve any clinical study prior to initiation.



         Human clinical studies are typically conducted in three sequential
         phases, which may overlap:

              o   Phase I: The drug is initially introduced into a relatively
                  small number of healthy human subjects or patients and is
                  tested for safety, dosage tolerance, mechanism of action,
                  absorption, metabolism, distribution and excretion.

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              o   Phase II: Studies are performed with a limited patient
                  population to identify possible adverse effects and safety
                  risks, to assess the efficacy of the product for specific
                  targeted diseases or conditions, and to determine dosage
                  tolerance and optimal dosage.
              o   Phase III: When Phase II evaluations demonstrate that a
                  dosage range of the product is effective and has an
                  acceptable safety profile, Phase III trials are undertaken
                  to evaluate further dosage and clinical efficacy and to test
                  further for safety in an expanded patient population at
                  geographically dispersed clinical study sites.


         The results of the product development, preclinical studies and
         clinical studies are then submitted to the FDA as part of the NDA.
         The NDA drug development and approval process could take from three
         to more than 10 years.

         In fiscal 2005, we introduced our second NDA approved product,
         Clindesse(R), the first approved single-dose therapy for bacterial
         vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
         proprietary VagiSite(TM) bioadhesive drug delivery technology. In
         fiscal 2006, we introduced Encora(R), a new prescription nutritional
         supplement product, and two new hematinic products, Niferex Gold(R)
         and Repliva 21/7(R). 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 are now testing an alternative formula
         in a Phase II study to determine which alternative to take into Phase
         III clinicals. The Company expects to start Phase III clinicals in
         fiscal 2010.

         In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
         to Evamist(TM), a unique transdermal estrogen therapy delivering a
         low dose of estradiol in a once-daily spray. Under terms of the asset
         purchase agreement, we paid $10.0 million in cash at closing and made
         an additional cash payment of $141.5 million upon final approval of
         the product by the FDA in July 2007. Evamist(TM) is indicated for the
         treatment of moderate-to-severe vasomotor symptoms due to menopause
         and targets the estrogen replacement market where physicians and
         patients are seeking an effective and safe, low-dose estrogen
         product. We began shipping this product at the end of fiscal 2008.

         In January 2008, we entered into a definitive asset purchase
         agreement with CYTYC to acquire the U.S. and worldwide rights to
         Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
         of the asset purchase agreement, we agreed to pay $82.0 million for
         Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. The proposed indication is for women with a history of at
         least one spontaneous preterm delivery (i.e., less than 37 weeks),
         who are pregnant with a single fetus. The FDA issued an "approvable"
         letter for Gestiva(TM) in October 2006, and a final approval is
         anticipated in fiscal 2009. The FDA has granted an Orphan Drug
         Designation for Gestiva(TM).

         GENERIC/NON-BRANDED PRODUCT DEVELOPMENT. FDA approval of an ANDA is
         required before marketing a generic equivalent of a drug approved
         under an NDA in the United States or for a previously unapproved
         dosage strength or delivery system for a drug approved under an ANDA.
         The ANDA development process is generally less time consuming and
         complex than the NDA development process. It typically does not
         require new preclinical and clinical studies because it relies on the
         studies establishing safety and efficacy conducted for the drug
         previously approved through the NDA process. The ANDA process,
         however, does require one or more bioequivalency studies to show that
         the ANDA drug is bioequivalent to the previously approved drug.
         Bioequivalence compares the bioavailability of one drug product with
         that of another formulation containing the same active ingredient.
         When established, bioequivalence confirms that the rate of absorption
         and levels of concentration in the bloodstream of a formulation of
         the previously approved drug and the generic drug are equivalent.
         Bioavailability indicates the rate and extent of absorption and
         levels of concentration of a drug product in the bloodstream needed
         to produce the same therapeutic effect.


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         Supplemental ANDAs are required for approval of various types of
         changes to an approved application, and these supplements may be
         under review for six months or more. In addition, certain types of
         changes may be approved only once new bioequivalence studies are
         conducted or other requirements are satisfied.

         PATENTS AND OTHER PROPRIETARY RIGHTS

         When appropriate and available, we actively seek 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 2023 relating to our
         controlled-release, site-specific, quick dissolve and taste-masking
         technologies. We have been granted 42 U.S. patents and have 37 U.S.
         patent applications pending. In addition, we have 71 foreign issued
         patents and a total of 204 patent applications pending primarily in
         Canada, Europe, Australia, Japan, South America, Mexico and South
         Korea (see Part I, Item 1A "Risk Factors for additional information).
         We depend on our patents and other proprietary rights and cannot be
         certain of their confidentiality and protection.

         We currently own more than 224 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 research, manufacturing, distribution and
         administrative facilities are an important factor in achieving our
         long-term growth objectives. All facilities at March 31, 2008,
         aggregating approximately 1.3 million square feet, are located in the
         St. Louis, Missouri metropolitan area. We own facilities with
         approximately 1.1 million square feet, with the balance under various
         leases at pre-determined annual rates under agreements expiring from
         fiscal 2009 through fiscal 2021, subject in most cases to renewal at
         our option.

         We manufacture drug products in liquid, cream, 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 2008, 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.



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         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. Many of these competitors 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. (See "-Research and Development").

         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.

         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


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         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. We are involved in various
         lawsuits resulting from ANDA filings. See Note 12 of the Notes to
         Consolidated Financial Statements.

         In addition to marketing drugs which are subject to FDA review and
         approval, we market certain drug products in the U.S. 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 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 action seeking an
         injunction or hold 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 objections to the
         marketing without NDA or ANDA approval of a 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 affected 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 this regard, in June 2006, May 2007 and September 2007, the FDA
         issued Notices to the pharmaceutical industry stating that
         manufacture of all unapproved drug products containing carbinoxamine,
         carbinoxamine labeled for children under two, timed-released
         guaifenesin, hydrocodone labeled for children under six and all other
         unapproved products containing hydrocodone, respectively, cease by
         September 6, 2006, July 9, 2006, August 26, 2007, October 31, 2007,
         and December 31, 2007, respectively. These Notices affect the
         continued manufacture and sale of ETHEX's Hydro-Tussin(TM) CBX Syrup,
         Tri-Vent(TM) HC Liquid, Guaifenex(R) DM ER Tablets, Guaifenex(R) PSE
         60 ER Tablets, PhenaVent(TM) D Capsules, Guaifenex(R) PSE 80 ER
         Tablets, Pseudovent(TM) DM Tablets, Histinex(R) PV Syrup, Hydrocodone
         Bitartrate & Guaifenesin Liquid, Hydro-Tussin(TM) HC Syrup,
         Histinex(R) HC Syrup and Hydro-Tussin(TM) Syrup.

         In March 2008, representatives of the Missouri Department of Health
         and Senior Services, accompanied by representatives of the FDA,
         notified us of a hold on our inventory of certain unapproved drug
         products, restricting our ability to remove or dispose of those
         inventories without permission.

         The hold relates to a misinterpretation about the intended scope of
         recent FDA notices setting limits on the marketing of unapproved
         guaifenesin products. In response to notices issued by the FDA in
         2002 and 2003 with respect to single-entity timed-release guaifenesin
         products, and a further notice issued in 2007 with respect to
         combination timed-released guaifenesin products, we timely
         discontinued a number of our guaifenesin products and believed that,
         by doing so, had complied with those notices. The recent action to
         place a hold on certain of our products indicates that additional
         guaifenesin products should also have been discontinued. In addition,
         the FDA expanded the hold to include other products that did not
         contain guaifenesin but were being marketed without FDA approval
         under certain "grandfather clauses" and statutory and regulatory
         exceptions to the pre-market approval requirement for "new drugs"
         under the FDCA. FDA policies permit the agency to initiate broad
         action against the marketing of additional categories of our
         unapproved products, if the FDA deems approval necessary, even if the
         agency has not instituted similar actions against the marketing of
         such products by other


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         parties. Pursuant to discussions with the Missouri Department of
         Health and Senior Services and with the FDA, the affected Morphine
         and Oxycodone products have been released from the hold. We will
         discontinue manufacturing and marketing all of the other unapproved
         products subject to the hold.

         The FDA has not proposed, nor do we expect them to propose, that the
         products subject to the hold be recalled from the distribution
         channel. We have written-off the value of the products subject to the
         hold in our inventory as of March 31, 2008. We also evaluated the
         active pharmaceutical ingredients and excipients used in the
         manufacture of the hold products and determined that they should also
         be written-off since we will be discontinuing further manufacturing
         and many of them cannot be returned or sold to other manufacturers.
         The write-off included in the results of operations for the fourth
         quarter of fiscal 2008 totaled $5.5 million.

         In October 2007, the FDA issued a Notice extending the period during
         which the FDA will exercise its enforcement discretion not to
         challenge continued marketing and distribution of pancreatic enzyme
         products, such as ETHEX's Pangestyme(TM) product. Under the
         extension, FDA will continue to exercise its enforcement discretion
         with respect to unapproved pancreatic enzyme products that have an
         active Investigational New Drug Application ("IND") on active status
         on or before April 28, 2008 and have submitted an NDA on or before
         April 28, 2009. We have timely filed an IND for such products.

         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, 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, if 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 U.S. 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 less
         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 are 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


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         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.

         EMPLOYEES

         As of March 31, 2008, we employed a total of 1,590 employees. We were
         a party to a collective bargaining agreement with the Teamsters Union
         covering 133 employees that would have expired on December 31, 2009.
         However, in January 2008, the employee members of the union voted to
         decertify their union representation. The decertification became
         effective in February 2008.

         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. 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 Standards of Business Ethics for all Directors and
         employees are available on our Internet website, and available in
         print to any shareholder 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 registrants 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

         THE MATTERS RELATING TO THE INVESTIGATION BY THE SPECIAL COMMITTEE OF
         THE BOARD OF DIRECTORS AND THE RESTATEMENT IN PRIOR PERIODS OF THE
         COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS MAY RESULT IN ADDITIONAL
         LITIGATION AND GOVERNMENT ENFORCEMENT ACTIONS.

         In October 2006, the Board of Directors formed a Special Committee of
         independent directors to conduct an investigation, with the
         assistance of independent legal counsel and forensic accounting
         experts, of our past stock option grant practices over the period
         January 1, 1995 through October 31, 2006. The investigation concluded
         that no employee, officer or director of the Company engaged in any
         intentional wrongdoing or was aware that the Company's policies and
         procedures for granting and accounting for stock options were
         materially noncompliant with GAAP. The investigation also concluded
         that there was no intentional violation of law or accounting rules
         with respect to the Company's historical stock option grant
         practices. The Special Committee concluded, and based on its internal
         review, management agreed, that incorrect measurement dates were used
         for financial accounting purposes for stock option grants made in
         certain prior periods. Therefore, we recorded


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         additional non-cash stock-based compensation expense, and related tax
         effects, with regard to certain past stock option grants, and we
         restated certain previously filed financial statements included in
         our Form 10-K for fiscal 2007.

         The independent investigation and management's internal review and
         related activities required us to incur substantial expenses for
         legal, accounting, tax and other professional services, diverted some
         of our management's attention from the Company's business, and could
         have a material adverse effect on our business, financial condition,
         results of operations and cash flows.

         While we believe we have made appropriate judgments in determining
         the correct measurement dates for our stock option grants, based upon
         the Special Committee's findings and in consultation with outside
         experts and our independent registered public accounting firm, the
         SEC may disagree with the manner in which we have accounted for and
         reported the financial impact in our consolidated financial
         statements. Accordingly, there is a risk we may have to further
         restate our prior financial statements, amend prior filings with the
         SEC, or take other actions not currently contemplated by us.

         Our past stock option grant practices and the restatement of prior
         financial statements have exposed the Company to risks associated
         with litigation, regulatory proceedings and government enforcement
         actions. As described in Note 12 of the Notes to the Consolidated
         Financial Statements, "Commitments and Contingencies," derivative
         lawsuits were filed in state and federal courts against certain
         current and former directors and executive officers pertaining to
         allegations relating to stock option grants. The parties recently
         agreed to settle these derivative lawsuits, subject to court
         approval. Also, the Company was notified by the SEC in December 2007
         that it had issued a formal order of investigation with respect to
         the Company's stock option plans, grants, exercises and accounting
         practices. If the Company is subject to adverse findings in
         litigation, regulatory proceedings or government enforcement actions,
         we could be required to pay damages or penalties or have other
         remedies imposed, all of which could have a material adverse effect
         on our financial condition, results of operations or cash flows. The
         resolution of these matters could continue to be time-consuming,
         expensive, and a distraction to some of our management from the
         conduct of the Company's business.

         WE HAVE A MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
         REPORTING AND CANNOT ASSURE YOU THAT ADDITIONAL MATERIAL WEAKNESSES
         WILL NOT BE IDENTIFIED IN THE FUTURE. IF WE FAIL TO MAINTAIN AN
         EFFECTIVE SYSTEM OF INTERNAL CONTROLS OR DISCOVER MATERIAL WEAKNESSES
         IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE
         TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TIMELY OR DETECT FRAUD,
         WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

         Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate
         the effectiveness of our internal control over financial reporting as
         of the end of each year, and to include a management report assessing
         the effectiveness of our internal control over financial reporting in
         each Annual Report on Form 10-K. Section 404 also requires our
         independent registered public accounting firm to attest to, and
         report on, the effectiveness of our internal control over financial
         reporting.

         Management concluded that there was a material weakness, as defined
         in the Public Company Accounting Oversight Board's Auditing Standard
         No. 5, in our internal control over financial reporting as of March
         31, 2008. Management is implementing steps to remediate this material
         weakness, however, we cannot assure you that such remediation will be
         effective.

         Management also concluded there were material weaknesses, as defined
         in the Public Company Accounting Oversight Board's Auditing Standard
         No. 2, in our internal control over financial reporting as of March
         31, 2007. Management implemented steps to remediate these material
         weaknesses as of March 31, 2008. See the discussion included in Part
         I, Item 9A of this report for additional information regarding our
         internal control over financial reporting.

         Our internal control over financial reporting may not prevent all
         errors and all fraud. A control system, no matter how well designed
         and operated, can provide only reasonable, not absolute, assurance
         that the control system's


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         objectives will be met. Further, the design of a control system must
         reflect the fact that there are resource constraints, and the
         benefits of controls must be considered relative to their costs.
         Controls can be circumvented by the individual acts of some persons,
         by collusion of two or more people, or by management override of the
         controls. Over time, controls may become inadequate because changes
         in conditions or deterioration in the degree of compliance with
         policies or procedures may occur. Because of the inherent limitations
         in a cost-effective control system, misstatements due to error or
         fraud may occur and not be detected.


         As a result, significant deficiencies or material weaknesses in our
         internal control over financial reporting may be identified in the
         future. Any failure to maintain or implement required new or improved
         controls, or any difficulties we encounter in their implementation,
         could result in significant deficiencies or material weaknesses,
         cause us to fail to timely meet our periodic reporting obligations,
         or result in material misstatements in our financial statements. Any
         such failure could also adversely affect the results of periodic
         management evaluations and annual auditor attestation reports
         regarding the effectiveness of our internal control over financial
         reporting required under Section 404 of the Sarbanes-Oxley Act of
         2002 and the rules promulgated there under. If our internal control
         over financial reporting or disclosure controls and procedures are
         not effective, there may be errors in our financial statements that
         could require a restatement or our filings may not be timely and
         investors may lose confidence in our reported financial information,
         which could lead to a decline in our stock price.

         OUR FUTURE GROWTH WILL LARGELY DEPEND 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 may not be successful in pursuing this
         strategy.

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

         Certain products we develop or acquire 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 or at all.

         OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

         We intend to continue to pursue our efforts 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 and other types of pharmaceutical
         companies for products and product line acquisitions. Many of these
         competitors 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 U.S. 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

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         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
         U.S. 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 U.S. or abroad.
         Consequently, our pending or future patent applications may not
         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. For example, a third party company has recently
         filed a declaratory judgment complaint in federal court challenging
         patents pertaining to Ther-Rx's PrimaCare ONE(R). See 12 of the Notes
         to Consolidated Financial Statements. Patent applications in the U.S.
         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 U.S.
         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 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
         U.S. For example, methods of treating humans are not patentable in
         many countries outside of the U.S.

         These and other issues may prevent us from obtaining patent
         protection outside of the U.S. 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.

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         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 U.S. 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. We
         are involved in defending various patent lawsuits resulting from ANDA
         filings by ETHEX or an effort by a third party company to invalidate
         certain of our patents. See Note 12 of the Notes to Consolidated
         Financial Statements. 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 U.S. 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 five patent
         infringement lawsuits pending against us and one declaratory judgment
         lawsuit by a third party seeking to invalidate certain of our
         patents. They could have a material adverse effect on our future
         business, financial condition, results of operations or cash flows.

         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 posed, and is
         expected to continue to pose, significant challenges for our
         management, 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. If we are unable to manage our growth
         effectively, our business, financial condition, results of operations
         or cash flows could be materially adversely affected.

         OUR DEPENDENCE ON KEY EXECUTIVES AND SCIENTISTS COULD IMPACT THE
         DEVELOPMENT AND MANAGEMENT OF OUR BUSINESS.

         We are highly dependent upon our ability to attract and retain
         qualified scientific, technical and managerial personnel. There is
         intense competition for qualified personnel in the pharmaceutical and
         biotechnology industries, and we cannot be sure that we will be able
         to continue to attract and retain qualified personnel necessary for
         the development and management of our business. Although we do not
         believe the loss of one individual would materially harm our
         business, our business might be harmed by the loss of services of
         multiple existing personnel, as well as the failure to recruit
         additional key scientific, technical and managerial personnel in a
         timely manner. Much of the know-how we have developed resides in our
         scientific and technical personnel and is not readily transferable to
         other personnel. While we have employment agreements with our key
         executives, we do not ordinarily enter into employment agreements
         with our other scientific, technical and managerial employees.

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         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 U.S. 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, 2008, our
         three largest customers, which are wholesale distributors, accounted
         for 24.6%, 23.9% and 9.8% of our gross sales, respectively. The loss
         of any of these customers could materially and adversely affect our
         business, financial condition, results of operations or cash flows.

         THE REGULATORY STATUS OF CERTAIN OF OUR GENERIC PRODUCTS MAY MAKE
         THEM SUBJECT TO INCREASED COMPETITION OR TO REGULATORY DECISIONS TO
         REQUIRE MARKET WITHDRAWAL OF ONE OR MORE OF OUR UNAPPROVED PRODUCTS.

         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. For example, during June 2008, a third party
         company introduced a product purporting to be substitutable for our
         PrimaCare ONE(R), for which no FDA approval is required. We are
         currently in litigation with this company with respect to patent and
         trademark infringement and other claims. See Note 12 of the Notes to
         Consolidated Financial Statements.

         In other cases, we sell unapproved products that may become subject
         to FDA orders to the pharmaceutical industry to remove one or more
         types of such products from the marketplace. During the past year,
         such FDA orders have required manufacturers and distributors of
         certain unapproved products containing guaifenesin and hydrocodone to
         cease manufacture or distribution, including certain ETHEX products.
         In the future, FDA may issue similar orders affecting other of our
         products. In addition, in the event that FDA concludes that we have
         failed to comply with a notice setting deadlines for discontinuation
         of the manufacture and sale of unapproved products, or decides to
         take enforcement action against us on other grounds, such as for
         alleged violations of current good manufacturing practice
         requirements or for failure to obtain product approvals that FDA
         deems to be necessary, FDA policies permit the agency to initiate
         broad action against the marketing of additional categories of our
         unapproved drug products, even if the agency has not instituted
         similar actions against the marketing of such products by other
         parties.

         In March 2008, representatives of the Missouri Department of Health
         and Senior Services, accompanied by representatives of the FDA,
         notified us of a hold on our inventory of certain unapproved drug
         products restricting our ability to remove or dispose of those
         inventories without permission.

         The hold relates to a misinterpretation about the intended scope of
         recent FDA notices setting limits on the marketing of unapproved
         guaifenesin products. In response to notices issued by the FDA in
         2002 and 2003 with respect to single-entity timed-release guaifenesin
         products, and a further notice issued in 2007 with respect to
         combination timed-released guaifenesin products, we timely
         discontinued a number of our guaifenesin products and believed that,
         by doing so, had complied with those notices. The recent action to
         place a hold on certain of our products indicates that additional
         guaifenesin products should also have been discontinued. In addition,
         the FDA expanded the hold to include other products that did not
         contain guaifenesin but were being marketed without FDA approval
         under certain "grandfather clauses" and statutory and regulatory
         exceptions to the pre-market approval requirement for "new drugs"
         under the FDCA. FDA policies permit the agency to initiate broad
         action against the marketing of additional categories of our
         unapproved products, if the FDA deems approval necessary, even if the
         agency has not instituted similar actions against the marketing of
         such products by other parties. Pursuant to discussions with the
         Missouri Department of Health and Senior Services and with the FDA,
         the affected Morphine and Oxycodone products have been released from
         the hold. We will discontinue


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         manufacturing and marketing all of the other unapproved products
         subject to the hold with the exception of most of our Hyoscyamine
         products. Discussions are continuing with respect to those products.

         The FDA has not proposed, nor do we expect them to propose, that the
         products subject to the hold be recalled from the distribution
         channel. We have written-off the value of the products subject to the
         hold in our inventory as of March 31, 2008. We also evaluated the
         active pharmaceutical ingredients and excipients used in the
         manufacture of the hold products and determined that they should also
         be written-off since we will be discontinuing further manufacturing
         and many of them cannot be returned or sold to other manufacturers.
         The write-off included in the results of operations for the fourth
         quarter of fiscal 2008 totaled $5.5 million.

         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. We may not ultimately prevail in these litigations,
         we may not receive final FDA approval of our ANDAs, and we may not
         achieve our expectation of a period of generic exclusivity for
         certain of these products 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 exclusivity has been the subject of
         controversy, court decisions, changes to FDA regulations and
         guidelines, and other changes in FDA interpretation. In addition, in
         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 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, 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


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         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 (1) outside legal advice, (2) the status of a
         pending lawsuit, (3) interim court decisions, (4) status and timing
         of a trial, (5) legal decisions affecting other competitors for the
         same product, (6) market factors, (7) liability sharing agreements,
         (8) internal capacity issues, (9) expiration dates of patents, (10)
         strength of lower court decisions and (11) 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, financial condition, results of operations or
         cash flows.

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

         We have 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 phenylpropanolamine, or 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
         again in 2004, and we demanded that the insurer assume our 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 may be impleaded into the action, and, if
         we are impleaded, we may not 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. 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 may not 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 through license agreements. 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.

         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.



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         WE EXPEND A SIGNIFICANT AMOUNT OF RESOURCES ON RESEARCH AND
         DEVELOPMENT EFFORTS THAT MAY NOT LEAD TO SUCCESSFUL PRODUCT
         INTRODUCTIONS.

         We conduct research and development primarily to enable us to
         manufacture and market FDA-approved pharmaceuticals in accordance
         with FDA regulations. Typically, research costs related to the
         development of innovative compounds and the filing of NDAs are
         significantly greater than those expenses associated with ANDA
         filings. As such, our investment in research and development, which
         increased at a compounded annual growth rate of 19.5% over the five
         fiscal year period ended March 31, 2008, reflects our ongoing
         commitment to develop new products and/or technologies through our
         internal development programs, and with our external strategic
         partners. Because of the inherent risk associated with research and
         development efforts in our industry, particularly with respect to new
         drugs, our research and development expenditures may not result in
         the successful introduction of FDA approved new pharmaceutical
         products. Also, after we submit an ANDA, the FDA may request that we
         conduct additional studies and as a result, we may be unable to
         reasonably determine the total research and development costs to
         develop a particular product. Finally, we cannot be certain that any
         investment made in developing products will be recovered, even if we
         are successful in commercialization. To the extent that we expend
         significant resources on research and development efforts and are not
         able, ultimately, to introduce successful new products as a result of
         those efforts, our business, financial condition, results of
         operations or cash flows may be materially adversely affected.

         ANY SIGNIFICANT INTERRUPTION IN THE SUPPLY OF RAW MATERIALS OR
         FINISHED PRODUCT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
         BUSINESS.

         We typically purchase the active pharmaceutical ingredient (i.e., the
         chemical compounds that produce the desired therapeutic effect in our
         products) and other materials and supplies that we use in our
         manufacturing operations, as well as certain finished products
         (including Evamist(TM) and, once approved, Gestiva(TM)), from many
         different domestic and foreign suppliers.

         Additionally, we maintain safety stocks in our raw materials
         inventory, and in certain cases where we have listed only one
         supplier in our applications with the FDA, have received FDA approval
         to use alternative suppliers should the need arise. However, there is
         no guarantee that we will always have timely and sufficient access to
         a critical raw material or finished product. A prolonged interruption
         in the supply of a single-sourced raw material, including the active
         ingredient, or finished product could cause our business, financial
         condition, results of operations or cash flows to be materially
         adversely affected. In addition, our manufacturing capabilities could
         be impacted by quality deficiencies in the products which our
         suppliers provide, which could have a material adverse effect on our
         business.

         We utilize controlled substances in certain of our current products
         and products in development and therefore must meet the requirements
         of the Controlled Substances Act of 1970 and the related regulations
         administered by the DEA. These regulations relate to the manufacture,
         shipment, storage, sale and use of controlled substances. The DEA
         limits the availability of the active ingredients used in certain of
         our current products and products in development and, as a result,
         our procurement quota of these active ingredients may not be
         sufficient to meet commercial demand or complete clinical trials. We
         must annually apply to the DEA for procurement quota in order to
         obtain these substances. Any delay or refusal by the DEA in
         establishing our procurement quota for controlled substances could
         delay or stop our clinical trials or product launches, or could cause
         trade inventory disruptions for those products that have already been
         launched, which could have a material adverse effect on our business,
         financial condition, results of operations or cash flows.

         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


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         comparable products. As a result, we could 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, our allowances may not be adequate or our actual
         product returns, allowances and chargebacks may 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 asserted that reporting of inflated AWP's have led to excessive
         payments for prescription drugs.

         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
         States of Massachusetts, Alabama, Mississippi, Utah and Iowa, New
         York City, and approximately 45 counties in New York State. The State
         of Mississippi effectively voluntarily dismissed the Company and
         ETHEX without prejudice in October 2006, by virtue of the State's
         filing an Amended Complaint on such date that does not name either
         the Company or ETHEX as a defendant. In the remaining cases, only
         ETHEX is a named defendant. In August 2007, ETHEX settled the
         Massachusetts lawsuit for $0.6 million in cash and agreed to supply
         $0.2 million in free pharmaceutical products over the next two years
         and received a general release with no admission of liability. The
         New York City case and all New York county cases (other than the
         Erie, Oswego and Schenectady County cases) have been transferred to
         the U.S. District Court for the District of Massachusetts for
         coordinated or consolidated pretrial proceedings under the Average
         Wholesale Price Multidistrict Litigation (MDL No. 1456). The cases
         pertaining to the State of Alabama, Erie County, Oswego County, and
         Schenectady County were removed to federal court by a co-defendant in
         October 2006, but all of these cases have since been remanded to the
         state courts in which they originally were filed. Each of these
         actions is in the early stages, with fact discovery commencing or
         ongoing. In October 2007, ETHEX was served with a complaint naming
         ETHEX and nine other pharmaceutical companies as defendants in a
         pricing suit filed in state court in Utah by the State of Utah. The
         State of Utah filed an amended complaint in November 2007. This suit
         has been removed to federal court, where the State of Utah is seeking
         a remand to the state courts. A decision is pending before the court.
         The time to file an answer or other response in the Utah suit has not
         yet run. In October 2007, the State of Iowa filed a complaint naming
         ETHEX and 77 other pharmaceutical companies as defendants in a
         pricing suit in federal court in the State of Iowa. ETHEX and the
         other defendants have moved to dismiss the Iowa complaint. The
         Company intends to vigorously defend its interests in the actions
         described above; however, we may not prevail in one or more of such
         cases and the outcome may have a material adverse effect on our
         future business, financial condition, results of operations or cash
         flows.

         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 may not 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 business, financial condition, results of
         operations or cash flows.

         OUR REVENUES, GROSS PROFIT AND OPERATING RESULTS 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 (the proportion of total sales
         between branded products and generic/non-branded products). Our sales
         of branded products generate higher gross margins than our sales of
         generic/non-branded products. In addition, the introduction of new
         generic products at any given time can involve significant initial
         quantities being purchased by our wholesaler customers, as they
         supply initial quantities to pharmacies and purchase product for
         their own wholesaler inventories. As a result, our sales mix will
         significantly impact our gross profit from period to period. During
         fiscal 2008, sales of our branded products and generic/non-branded
         products accounted for 35.7% and 61.1%, respectively, of our net
         revenues. During that year, branded products and generic/non-branded
         products contributed gross margins of 89.7% and 63.1%, respectively,
         to our consolidated gross profit margin of 69.0% in fiscal 2008.
         Factors that may cause our sales mix to vary include:

         o    the amount and timing of new product introductions;
         o    marketing exclusivity on products, if any, which may be
              obtained;
         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 buying patterns of our three largest wholesaler customers;
         o    the scope and outcome of governmental regulatory action that may
              involve us;
         o    periodic dependence on a relatively small number of products for
              a significant portion of net revenue or income; and
         o    legal actions brought by our competitors.

         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. If our revenues and gross profit
         decline or do not grow as anticipated, we may not be able to
         correspondingly reduce our operating expenses.

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

         At March 31, 2008, we had $269.5 million of outstanding debt,
         consisting of $200.0 million principal amount of Contingent
         Convertible Subordinated Notes due 2033 (the "Notes"), the remaining
         principal balance of a $43.0 million mortgage loan entered into in
         March 2006, and $30.0 million of borrowings outstanding under our
         credit facility. We have a credit agreement with ten banks that
         provides for a revolving line of credit for borrowing up to $320.0
         million. This credit facility also includes a provision for
         increasing the revolving commitment, at the lenders' sole discretion,
         by up to an additional $50.0 million. The credit agreement is
         unsecured unless we, under certain specified circumstances, utilize
         the facility to redeem part or all of our outstanding Notes. The
         credit facility has a five-year term expiring in June 2011. 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 increases
                  in interest rates; and

                                      29

<PAGE>
<PAGE>

              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.

         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, and/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, additional funds may not 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. Even though no holders required
         us to repurchase all or a portion of their Notes on May 16, 2008, we
         classified the Notes as a current liability as of March 31, 2008 due
         to the right the holders had to require us to repurchase the Notes on
         May 16, 2008. Since the holders did not elect to cause us to
         repurchase any of the Notes, the Notes will be reclassified as
         long-term liabilities beginning with our consolidated balance sheet
         as of June 30, 2008. 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 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. We may raise additional capital 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. Additional funding may not be accessible or
         available to us on favorable terms or at all. 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 BE ADVERSELY IMPACTED BY ECONOMIC FACTORS BEYOND OUR CONTROL
         AND MAY INCUR IMPAIRMENT CHARGES TO OUR INVESTMENT PORTFOLIO.

         We have funds invested in auction rate securities ("ARS"). Consistent
         with our investment policy guidelines, the ARS held by us are AAA
         rated securities with long-term nominal maturities secured by student
         loans which are guaranteed by the U.S. Government. The interest rates
         on these securities are reset through an auction process at
         pre-determined intervals, up to 35 days. There may be liquidity
         issues which arise in the credit and capital


                                      30

<PAGE>
<PAGE>

         markets and the ARS held by us may experience failed auctions as the
         amount of securities submitted for sale may exceed the amount of
         purchase orders. As a result, we may not be able to liquidate some or
         all of our ARS prior to their maturities at prices approximating
         their face amounts.

         During the fourth quarter of fiscal 2008, disruption in the credit
         and capital markets adversely affected the auction market for the
         type of securities we own and the ARS held by us experienced failed
         auctions as the amount of securities submitted for sale exceeded the
         amount of purchase orders. If uncertainties in these credit and
         capital markets continue or these markets deteriorate further we may
         incur other-than-temporary impairments to our investments in ARS,
         which could negatively affect our financial condition, cash flow and
         reported earnings. (See Note 4 of the Notes to Consolidated Financial
         Statements for further discussion of the Company's investment in
         ARS.) We believe that as of March 31, 2008, based on our current
         cash, cash equivalents and marketable securities balances of $126.9
         million (exclusive of auction rate securities) and our current
         borrowing capacity of $290.0 million under our credit facility, the
         current lack of liquidity in the auction rate market will not have a
         material impact on our ability to fund our operations or interfere
         with our external growth plans, although, we cannot assure you that
         this will continue to be the case.

         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 statements of income over the estimated economic
         useful life of the related asset. The factors that affect 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 and the impact of promotional efforts, among many others. We
         consider all of these factors in initially estimating the economic
         useful lives of our products, and we also continuously monitor these
         factors for indications of decline in carrying value.

         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.

         Because circumstances after an acquisition can change, the value of
         intangible assets we record 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 might not recover our
         recorded value of associated intangible assets.

         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 CONDITION AND RESULTS
         OF OPERATIONS.

         The consolidated financial statements that we file with the SEC are
         prepared in accordance with GAAP. The preparation of financial
         statements in accordance with 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 GAAP include, but are not limited to, those
         related to revenue recognition and reductions to gross revenues,
         inventory valuation, intangible


                                      31

<PAGE>
<PAGE>

         assets, stock-based compensation, income taxes and loss contingencies
         related to legal proceedings. 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.

                         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 health maintenance
         organizations ("HMO's") and managed care organizations ("MCO's").
         Insurance companies, HMOs, MCOs, Medicaid and Medicare administrators
         and others regularly challenge the pricing of pharmaceutical products
         and review 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 U.S.;

              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
         or of unapproved products may be uncertain. Reimbursement policies
         may not include some of our products or government agencies or third
         parties may assert that certain of our products are not eligible for
         Medicaid, Medicare or other reimbursement and were not so eligible in
         the past, possibly resulting in demands for damages or refunds. 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 business, financial condition,
         results of operations or cash flows.

                                      32

<PAGE>
<PAGE>

         EXTENSIVE INDUSTRY REGULATION HAS HAD, AND WILL CONTINUE TO HAVE, A
         SIGNIFICANT IMPACT ON OUR INDUSTRY AND 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 or holds, recall
         or seizure of products and total or partial suspension of production,
         as well as other regulatory actions against our products and us.

         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 Company received a subpoena from the Office of Inspector General
         of the Department of Health and Human Services, seeking documents
         with respect to two of ETHEX's nitroglycerin products. Both are
         unapproved products, that is, they have not received FDA approval.
         (FDA approval is not necessarily required for all drugs to be sold in
         the marketplace, such as pre-1938 "grandfathered" products or certain
         drugs reviewed under the so-called DESI process. The Company believes
         that its two products come within these exceptions.) The subpoena
         states that it is in connection with an investigation into potential
         false claims under Title 42 of the U.S. Code, and appears to pertain
         to whether these products are eligible for reimbursement under
         federal health care programs, such as Medicaid and VA programs.

         On June 6, 2008, ETHEX initiated a voluntary recall of a single lot
         of morphine sulfate 60 mg extended release tablets due to a report
         that a tablet with as much as double the appropriate thickness was
         identified and therefore the possibility that other oversized tablets
         could have been commercially released in the affected lot. On June
         13, 2008, the recall was expanded to include additional specific lots
         of morphine sulfate 60 mg extended release tablets and specific lots
         of morphine sulfate 30 mg extended release tablets. We accrued a
         liability of $0.9 million in the fourth quarter of fiscal 2008 for
         the anticipated cost of the recall. No oversized tablets have been
         identified in any additional distributed lots of these products and
         based on our investigation, there are likely to be few, if any,
         oversized tablets in the recall lots. In addition, under ordinary
         pharmacy dispensing procedures, any significantly oversized tablets
         would likely be identified at the time of dispensing. However, the
         decision to recall the additional lots has been taken as a
         responsible precaution because of the possibility that there may be
         oversized tablets in the recalled lots.

                                      33

<PAGE>
<PAGE>

         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.

                       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:
         developments regarding litigation and actual or potential
         investigations regarding our former stock option grant practices, our
         reporting of prices used by government agencies or third parties in
         setting reimbursement rates, the introduction by other companies of
         generic or competing products, or the eligibility of our products for
         Medicaid, Medicare or other reimbursement; announcements by us or our
         competitors of technological innovations or new commercial products;
         delays in the development or approval of products; regulatory
         withdrawals of our products from the market; 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
         U.S. 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, 2008, an aggregate of 3,697,049 shares of our Class A
         Common Stock and 236,415 shares of our Class B Common Stock were
         issuable upon exercise of outstanding stock options under our stock
         option plans, and an additional 96,405 shares of our Class A Common
         Stock and 1,212,500 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, 2008, 8,691,880 shares of Class A Common
         Stock were reserved for issuance upon conversion of $200.0 million
         principal amount of 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.

         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.

         MANAGEMENT SHAREHOLDERS CONTROL OUR COMPANY.

         At March 31, 2008, our directors and executive officers beneficially
         own approximately 16.4% of our Class A Common Stock and approximately
         89.3% of our Class B Common Stock. As a result, these persons control
         approximately 57.3% 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 determine the outcome of any matter being
         voted on by our shareholders, including the election of directors and
         any merger, sale of assets or other change in control of our Company.

         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


                                      34

<PAGE>
<PAGE>

         one-twentieth of one vote on all matters to be voted upon by
         shareholders, while each share of Class B Common Stock entitles the
         holder to one full vote on each matter considered by the
         shareholders. 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 shareholders. 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 shareholder" (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.



                                      35

<PAGE>
<PAGE>

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

         Our corporate headquarters is located at 2503 South Hanley Road in
         St. Louis County, Missouri, and contains approximately 35,000 square
         feet of floor space. We have a lease on the building for a period of
         five years expiring December 31, 2011, with one 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, Missouri
         metropolitan area.

<TABLE>
<CAPTION>
                   SQUARE                                                           LEASE              RENEWAL
                   FOOTAGE     USAGE                                                EXPIRES            OPTIONS
              --------------------------------------------------------------------------------------------------------------
              <C>                                                                   <C>                <C>
              Leased Facilities
                   30,150      PDI Mfg./Whse.                                       11/30/12           5 Years(1)
                   10,000      PDI/KV Lab/Whse.                                     11/30/08           None
                   15,000      KV/PDI Office                                        02/29/10           2 Years
                   23,000      KV Office/R&D/Mfg.                                   12/31/11           5 Years(1)
                   41,316      KV Warehouse                                         11/30/16           None
                   33,860      Pharmaceutical Division Offices                      05/01/13           5 Years
                   ------
                  153,326

               Owned Facilities
                    126,168    KV Office/Mfg
                    121,472    KV Office/Whse./Lab(2)
                     87,250    KV Mfg.
                     88,850    KV Lab
                    302,940    KV Mfg/Whse/ETHEX/Ther-Rx Office (2)
                    259,990    ETHEX/Ther-Rx/PDI Distribution(2)
                     96,360    KV Warehouse
                     ------
                  1,083,030

<FN>
         ----------------------------------------
         (1)  Two five-year options.

         (2)  In March 2006, we entered into a $43.0 million mortgage loan
              agreement with one of our primary lenders secured, in part, by
              these properties. 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 - of the Notes to Consolidated Financial Statements
         included in Part I, Item 8 of this report is incorporated in this
         Item 3 by reference.

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, 2008.



                                      36

<PAGE>
<PAGE>

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>
Michael S. Anderson         59      Corporate Vice President, Industry Presence and Development since February 2006; Chief
                                    Executive Officer, Ther-Rx Corporation from February 2000 to February 2006.

Gregory S. Bentley          58      Senior Vice President and General Counsel since April 2006; Executive Vice President, General
                                    Counsel and Corporate Compliance Officer, AAI Pharma, Inc. from 1999 to April 2006.

Rita E. Bleser              52      President, Pharmaceutical Manufacturing Division since April 2007; Vice President,
                                    Technology, Tyco Healthcare from September 2001 to April 2007.

Paul T. Brady               45      Corporate Vice President, Business Development Administration, KV Pharmaceutical since 2007;
                                    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.

Richard H. Chibnall         52      Vice President, Finance and Chief Accounting Officer since June 2005; Vice President, Finance
                                    from February 2000 to June 2005.

Raymond F. Chiostri         74      Corporate Vice President, KV Pharmaceutical since September 2006; Chairman and Chief Executive
                                    Officer of Particle Dynamics, Inc. from 1999 to September 2006.

Gregory J. Divis, Jr.       41      President, Ther-Rx Corporation since July 2007; Vice President, Business Development and Life
                                    Cycle Management, Sanofi-aventis U.S. from February 2006 to July 2007; Vice President Sales,
                                    Respiratory East, Sanofi-aventis U.S. from June 2004 to February 2006; Executive Director,
                                    Sales and Marketing National Accounts, Reliant Pharmaceuticals from December 2003 to June
                                    2004; Vice President and Country Manager United Kingdom and Ireland, Schering-Plough from May
                                    2002 to December 2003; Vice President, Field Operations Oncology-Biotech Division,
                                    Schering-Plough from October 2000 to April 2002.

Marc S. Hermelin(1)         66      Chairman of the Board and Chief Executive Officer since August 2006; Vice Chairman and Chief
                                    Executive Officer from 1975 to August 2006; Vice Chairman of the Board from 1974 to 1975.

Ronald J. Kanterman         53      Vice President, Chief Financial Officer, Treasurer and Assistant Secretary since March 2008;
                                    Vice President, Strategic Financial Management, Treasurer, and Assistant Secretary from
                                    March 2006 to February 2008; Vice President, Treasury from January 2004 to March 2006; Partner,
                                    Brown Smith Wallace, LLP from 1993 to January 2004; Partner, Arthur Andersen & Co., from 1987
                                    to 1993.

Patricia K. McCullough      56      Chief Executive Officer, ETHEX Corporation since January 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.

David A. Van Vliet          53      Chief Administration Officer since September 2006; Director from August 2004 to September
                                    2006; President and Chief Operating Officer of Angelica Corporation from June 2005 to
                                    September 2006; President and Chief Executive Officer of Growing Family, Inc. from 1998 to
                                    June 2005.



Executive officers of the Company serve at the pleasure of the Board of
Directors.

<FN>
-------------------------------
(1) Marc S. Hermelin is the father of David S. Hermelin, Vice President,
Corporate Strategy & Operation Analysis, a member of the Board of Directors
since 2004.
</TABLE>



                                      37

<PAGE>
<PAGE>

                                    PART II

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

    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 March 31, 2008, was 893 and 313, respectively (not separately
         counting shareholders whose shares are held in "nominee" or "street"
         names, which are estimated to represent approximately 5,000
         additional holders of Class A Common Stock and Class B Common Stock
         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 2008 and 2007, as reported
         on the New York Stock Exchange were as follows:

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

                                            FISCAL 2008                                       FISCAL 2007
                                            -----------                                       -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------
         <C>                         <C>               <C>                           <C>                <C>
         First...................... $28.35            $24.58                        $24.31             $17.50
         Second.....................  28.80             26.09                         23.94              16.90
         Third......................  31.34             27.16                         24.91              21.74
         Fourth.....................  28.20             24.71                         26.28              22.83

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

                                            FISCAL 2008                                       FISCAL 2007
                                            -----------                                       -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------
         <C>                         <C>               <C>                           <C>                <C>
         First...................... $28.40            $24.61                        $24.27             $17.48
         Second.....................  28.90             25.96                         23.92              16.92
         Third......................  31.25             27.30                         24.86              21.78
         Fourth.....................  28.09             24.63                         26.21              22.71
</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 each of
         fiscal 2008 and 2007 on 40,000 shares of outstanding Cumulative
         Convertible Preferred Stock. There were no undeclared and unaccrued
         cumulative preferred dividends at March 31, 2008.



                                      38

<PAGE>
<PAGE>



         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 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
         the Notes to Consolidated Financial Statements for information
         relating to our equity compensation plans.

<TABLE>
----------------------------------------------------------------------------------------------------------------------
                                        ISSUER PURCHASES OF EQUITY SECURITIES

---------------------------------------------------------------------------------------------------------------------
<CAPTION>
         PERIOD              TOTAL NUMBER OF            WEIGHTED            TOTAL NUMBER OF       MAXIMUM NUMBER OF
                            SHARES PURCHASED       AVERAGE PRICE PAID     SHARES PURCHASED AS     SHARES (OR UNITS)
                                   (a)                 PER SHARE            PART OF PUBLICLY       THAT MAY YET BE
                                                                           ANNOUNCED PLANS OR    PURCHASED UNDER THE
                                                                               PROGRAMS           PLANS OR PROGRAMS
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<C>                       <C>                    <C>                     <C>                    <C>
1/1/08 - 1/31/08                    104                  $27.61                    -                      -
---------------------------------------------------------------------------------------------------------------------
2/1/08 - 2/29/08                     37                  $27.51                    -                      -
---------------------------------------------------------------------------------------------------------------------
3/1/08 - 3/31/08                  1,247                  $25.46                    -                      -
---------------------------------------------------------------------------------------------------------------------
Total                             1,388                  $25.67                    -                      -
---------------------------------------------------------------------------------------------------------------------

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



                                      39

<PAGE>
<PAGE>

         EQUITY COMPENSATION PLAN INFORMATION

         The following information regarding compensation plans of the Company
         is furnished as of March 31, 2008, 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
                                 NUMBER OF SECURITIES TO BE                                  FUTURE ISSUANCE UNDER
                                  ISSUED UPON EXERCISE OF     WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                    OUTSTANDING OPTIONS,         PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    WARRANTS AND RIGHTS      OPTIONS, WARRANTS AND RIGHTS   REFLECTED IN COLUMN (a))
                                    -------------------      ----------------------------   ------------------------
         PLAN CATEGORY                      (a)                          (b)                          (c)
<C>                                     <C>                            <C>                          <C>
Equity compensation plans
approved by security holders (1)        3,697,049                      $19.09                       96,405

Equity compensation plans not
approved by security holders                   --                          --                           --
                                        ---------                      ------                       ------
             Total                      3,697,049                      $19.09                       96,405
                                        =========                                                   ======
<FN>
-------------------------------

(1)      Consists of the Company's 1991 and 2001 Incentive Stock Option Plans.  See Note 16 of the Notes to Consolidated
         Financial Statements.

<CAPTION>
                                         EQUITY COMPENSATION PLAN INFORMATION
                                            REGARDING CLASS B COMMON STOCK
----------------------------------------------------------------------------------------------------------------------
                                                                                              NUMBER OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                 NUMBER OF SECURITIES TO BE                                  FUTURE ISSUANCE UNDER
                                  ISSUED UPON EXERCISE OF     WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                    OUTSTANDING OPTIONS,         PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    WARRANTS AND RIGHTS      OPTIONS, WARRANTS AND RIGHTS   REFLECTED IN COLUMN (a))
                                    -------------------      ----------------------------   ------------------------
         PLAN CATEGORY                      (a)                          (b)                          (c)
<C>                                       <C>                          <C>                         <C>
Equity compensation plans
approved by security holders (1)          236,415                      $14.85                      1,212,500

Equity compensation plans not
approved by security holders                   --                          --                             --
                                          -------                      ------                      ---------
             Total                        236,415                      $14.85                      1,212,500
                                          =======                                                  =========
<FN>
-------------------------------

(1)      Consists of the Company's 1991 and 2001 Incentive Stock Option Plans.
         See Note 16 of the Notes to Consolidated Financial Statements.
</TABLE>



                                      40

<PAGE>
<PAGE>

         STOCK PRICE PERFORMANCE GRAPH

         Set forth below is a line-graph presentation comparing cumulative
         shareholder returns for the last five fiscal years on an indexed
         basis with the NYSE Composite Index and the S&P Pharmaceuticals
         Index, a nationally recognized industry standard index. The graph
         assumes the investment of $100 in Company Class A Common Stock and
         $100 in Class B Common Stock, the NYSE Composite Index, and the S&P
         Pharmaceuticals Index on March 31, 2003, and reinvestment of all
         dividends. The Company's stock performance may not continue into the
         future with the same or similar trends depicted in the graph below.

              [COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN GRAPH]

<TABLE>
                                                                   YEARS ENDED MARCH 31,
                                                                   ---------------------
<CAPTION>
                                               2004          2005          2006          2007          2008
                                               ----          ----          ----          ----          ----
<C>                                           <C>           <C>           <C>           <C>           <C>
K-V PHARMACEUTICAL COMPANY                    210.92        200.13        201.57        202.83        203.75
NYSE COMPOSITE                                142.52        158.13        185.71        213.48        207.39
S&P PHARMACEUTICALS                           105.12        100.38        101.53        113.21        104.33
</TABLE>


                                      41

<PAGE>
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
        -----------------------

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes thereto
in Part II, Item 8 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of this report. The
selected consolidated financial data presented below under the captions
"BALANCE SHEET DATA" and "INCOME STATEMENT DATA" as of and for each of the
years in the five-year period ended March 31, 2008 is derived, with respect to
the years ended March 31, 2008, 2007 and 2006, from our audited consolidated
financial statements, and, with respect to the years ended March 31, 2005 and
2004, from the selected financial data of the Company included in our Form
10-K for the year ended March 31, 2007. The consolidated financial statements
as of March 31, 2008 and 2007, and for each of the years in the three-year
period ended March 31, 2008, which have been audited by KPMG LLP, our
independent registered public accounting firm, are included in Part II, Item 8
of this report.

<TABLE>
BALANCE SHEET DATA
<CAPTION>
(in thousands)                                                                       MARCH 31,
                                                 -------------------------------------------------------------------------------
                                                   2008              2007              2006              2005             2004
                                                 --------          --------          --------          --------         --------
<C>                                              <C>               <C>               <C>               <C>              <C>
Cash, cash equivalents and
     marketable securities                       $126,893          $240,386          $207,469          $205,519         $226,911
Working capital                                    88,764           372,291           304,958           296,240          301,604
Property and equipment, net                       196,200           186,900           178,042           131,624           75,777
Total assets                                      869,027           707,783           619,313           558,952          527,679
Current liabilities                               280,655            59,179            44,332            41,577           55,745
Long-term debt                                     67,432           239,451           241,319           209,767          210,741
Shareholders' equity                              459,282           364,827           302,999           286,477          252,721
</TABLE>

<TABLE>
INCOME STATEMENT DATA
<CAPTION>
(in thousands, except per share data)                                          YEARS ENDED MARCH 31,
                                                --------------------------------------------------------------------------------
                                                   2008              2007              2006              2005             2004
                                                ---------         ---------         ---------         ---------        ---------
<C>                                             <C>               <C>               <C>               <C>              <C>
Net revenues                                    $ 601,896         $ 443,627         $ 367,640         $ 304,656        $ 282,994
Operating income (a)(b)                           130,370            88,156            36,157            51,684           70,600
Net income (a)(b)                                  88,354            58,090            11,416            31,217           41,700
Earnings per share:
    Diluted - Class A common                    $    1.57         $    1.05         $    0.23         $    0.60        $    0.78
    Diluted - Class B common                         1.35              0.91              0.20              0.52             0.68
Shares used in per share calculation:
    Diluted - Class A common                       59,144            58,953            49,997            58,633           57,792
    Diluted - Class B common                       12,281            12,489            13,113            15,072           16,175
Preferred stock dividends                       $      70         $      70         $      70         $      70        $     436

<FN>
----------------------
(a)      Operating income in fiscal 2008 included purchased in-process
         research and development expenses of $10.0 million and $7.5 million
         recorded in connection with the Evamist(TM) and Gestiva(TM)
         acquisitions, respectively (see Note 3 of the Notes to the
         Consolidated Financial Statements). The impact of these items was to
         decrease net income on an after-tax basis by $11.7 million in fiscal
         2008.

(b)      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 of the Notes to Consolidated Financial
         Statements). The impact of this item, which is not deductible for tax
         purposes, was to decrease net income by $30.4 million in fiscal 2006.
</TABLE>

                                      42

<PAGE>
<PAGE>

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

         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, manufactures, acquires 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 diverse 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), 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

         Net revenues for fiscal 2008 increased $158.3 million, or 35.7%, as
         we experienced sales growth of 56.1% in our specialty
         generics/non-branded products segment. The increase in specialty
         generic net revenues resulted primarily from the launch in July 2007
         of the 100 mg and 200 mg strengths of metoprolol succinate
         extended-release tablets, which along with the 25 mg approved and
         launched in March 2008, generated net revenues of $120.0 million in
         fiscal 2008. The resulting $119.0 million increase in gross profit
         was offset in part by a $76.8 million increase in operating expenses.
         The increase in operating expenses was primarily due to increases in
         personnel costs, branded marketing and promotions expense, legal
         fees, research and development expense, and amortization of
         intangibles. Operating expenses for fiscal 2008 also included
         purchased in-process research and development expenses of $10.0
         million and $7.5 million recorded in connection with the Evamist(TM)
         and Gestiva(TM) acquisitions, respectively (see Note 3 of the Notes
         to the Consolidated Financial Statements). As a result, net income
         for fiscal 2008 increased $30.3 million, or 52.1%, to $88.4 million.



                                      43

<PAGE>
<PAGE>



         FISCAL 2008 COMPARED TO FISCAL 2007

<TABLE>
         NET REVENUES BY SEGMENT
         -----------------------

<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                      CHANGE
                                                                                -------------------
    ($ IN THOUSANDS):                               2008          2007               $          %
                                               -------------  ------------      ----------    -----
<C>                                            <C>            <C>               <C>           <C>
Branded products                               $     214,863  $    188,681      $   26,182     13.9%
   as % of net revenues                                 35.7%         42.5%
Specialty generics/non-branded                       367,862       235,594         132,268     56.1%
   as % of net revenues                                 61.1%         53.1%
Specialty materials                                   18,020        17,436             584      3.3%
   as % of net revenues                                  3.0%          3.9%
Other                                                  1,151         1,916            (765)   (39.9)%
                                               -------------  ------------      ----------
   Total net revenues                          $     601,896  $    443,627      $  158,269     35.7%
</TABLE>

         The increase in branded product sales was due primarily to continued
         sales growth of our anti-infective brand, Clindesse(R), coupled with
         increased sales from our prescription prenatal and hematinic product
         lines. Sales of Clindesse(R) increased 27.4% to $40.5 million during
         fiscal 2008 due to an increase in prescription volume of 27.4%
         coupled with the impact of price increases over the past year. Sales
         from our PreCare(R) product line increased 13.7% to $82.5 million
         during fiscal 2008. This increase was primarily due to sales growth
         experienced by PrimaCare ONE(R) and PreCare Premier(R), coupled with
         product line price increases. Specifically sales of PrimaCare ONE(R)
         increased $13.3 million, or 30.3%, to $57.0 million in fiscal 2008.
         This increase reflected the impact of price increases over the past
         12 months coupled with continued market share gains as PrimaCare
         ONE(R)'s share of the prescription prenatal vitamin market improved
         to 27.2% at the end of the fiscal 2008, up from 23.1% at the end of
         fiscal 2007. During June 2008, a third party company has introduced a
         product that purports to be substitutable for PrimaCare ONE(R), and
         we are currently in litigation with this company with respect to
         patent and trademark infringement and other claims. See Note 12 of
         the Notes to Consolidated Financial Statements. Sales of our
         hematinic products increased 11.6% to $53.8 million in fiscal 2008,
         which primarily reflected sales growth of our newest hematinic
         product, Repliva 21/7(R). Sales of Gynazole-1(R), our vaginal
         antifungal cream product, declined 2.7% to $24.0 million during
         fiscal 2008. The fluctuation in Gynazole-1(R) sales reflected the
         impact of a decline in market share, offset in part by price
         increases that occurred in the first and fourth quarters of fiscal
         2008. Branded product sales were also impacted by the introduction of
         Evamist(TM) at the end of fiscal 2008. Evamist(TM), a unique
         transdermal estrogen therapy that delivers a low dose of estradiol in
         a once-daily spray, was acquired in May 2007 and received FDA
         approval in July 2007. We began shipping this new product at the end
         of March 2008 and generated fiscal 2008 sales of $2.0 million. We
         believe Evamist(TM) will significantly augment the women's health
         offerings of our branded segment as we leverage the promotion of this
         product through our expanded branded sales force.

         The growth in specialty generic/non-branded sales resulted primarily
         from the launch in July 2007 of the 100 mg and 200 mg strengths of
         metoprolol succinate extended-release tablets, the generic version of
         Toprol-XL(R) (marketed by AstraZeneca). 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 these generic formulations. Since we were the first company to
         file with the FDA for generic approval of the 100 mg and 200 mg
         dosage strengths, we were accorded the opportunity for a 180-day
         exclusivity period for marketing these two dosage strengths. We began
         shipping these two products in July 2007 and they generated net
         revenues of $119.1 million during fiscal 2008. We received FDA
         approval to market the 25 mg strength of metoprolol succinate
         extended-release tablets in March 2008 and began shipping this
         product at that time. Sales of this product totaled $0.9 million in
         fiscal 2008. In addition, we received FDA approval to market the 50
         mg strength of metoprolol succinate extended-release tablets in May
         2008. As a result of the recent 50 mg approval, we now offer the
         complete line of all four dosage strengths of metoprolol succinate
         extended-release tablets - 200 mg, 100 mg, 50


                                      44

<PAGE>
<PAGE>

         mg and 25 mg - and as of March 2008, we had a 69.1% and 72.5% share
         of the generic market according to IMS Inc. for the 200 mg and 100 mg
         strengths, respectively. Our specialty generic sales for the year
         were also favorably impacted by sales of six strengths of Diltiazem
         HCI ER Capsules (AB rated to Tiazac(R)) which we launched in
         September 2006. These products generated net revenues of $22.1
         million in fiscal 2008, an increase of $10.5 million over the prior
         year amount.

<TABLE>
         GROSS PROFIT BY SEGMENT
         -----------------------

<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               ---------------------------------------------------
                                                                                      CHANGE
                                                                              --------------------
    ($ IN THOUSANDS):                               2008          2007             $          %
                                               ------------   -----------     ----------    ------
<C>                                            <C>            <C>             <C>           <C>
Branded products                              $     192,666  $   167,864      $   24,802      14.8%
   as % of net revenues                                89.7%        89.0%
Specialty generics/non-branded                      232,182      138,272          93,910      67.9%
   as % of net revenues                                63.1%        58.7%
Specialty materials                                   7,173        6,005           1,168      19.5%
   as % of net revenues                                39.8%        34.4%
Other                                               (16,680)     (15,777)           (903)     (5.7)%
                                              -------------  -----------      ----------
   Total gross profit                         $     415,341  $   296,364      $  118,977      40.1%
      as % of total net revenues                       69.0%        66.8%
</TABLE>

         The increase in gross profit was primarily due to the sales growth
         experienced by our specialty generics and branded products segments.
         The increase in specialty generic sales resulted primarily from the
         launch in July 2007 of the 100 mg and 200 mg strengths of metoprolol
         succinate extended-release tablets, which along with the 25 mg
         approved and launched in March 2008, generated net revenues of $120.0
         million in fiscal 2008. Since we were the first company to file with
         the FDA for generic approval of the 100 mg and 200 mg dosage
         strengths, we were accorded the opportunity for a 180-day exclusivity
         period for marketing these two dosage strengths. The gross profit
         percentages at our specialty generic/non-branded segment and on a
         consolidated basis increased over the prior year because the 180-day
         exclusivity period allowed us to offer the 100 mg and 200 mg
         strengths of metoprolol succinate extended-release tablets at
         relatively higher margins than our other generic/non-branded
         products. Impacting the "Other" category are contract manufacturing
         revenues, pricing and production variances, and changes to inventory
         reserves associated with production. Any inventory reserve changes
         associated with finished goods are reflected in the applicable
         segment. During fiscal 2008, the provision for obsolete inventory
         increased to $18.8 million compared to $12.0 million in fiscal 2007.
         The increase in the provision for obsolete inventory was primarily
         due to the impact of the FDA hold on certain unapproved specialty
         generic products that occurred in March 2008. We included in the
         reserve for obsolete inventory $5.5 million for all of the unapproved
         specialty generic products subject to the FDA hold, including the raw
         materials used to manufacture the products and work-in-process
         inventories that we had on hand at March 31, 2008.

<TABLE>
         RESEARCH AND DEVELOPMENT
         ------------------------

<CAPTION>
                                                  YEARS ENDED MARCH 31,
                                                ---------------------------------------------------
                                                                                      CHANGE
                                                                                ------------------
    ($ IN THOUSANDS):                               2008        2007                $          %
                                                -----------  -----------        ----------    ----
<C>                                             <C>          <C>                <C>           <C>
Research and development                        $    46,634  $    31,462        $   15,172    48.2%
   as % of net revenues                                 7.7%         7.1%
</TABLE>

                                      45

<PAGE>
<PAGE>

         The increase in research and development expense was primarily due to
         a growing product development pipeline, 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.

<TABLE>
         PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
         ---------------------------------------------

<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                                -----------------------------------------------------
                                                                                        CHANGE
                                                                                 --------------------
    ($ IN THOUSANDS):                               2008         2007                 $           %
                                                -----------  -----------         -----------    -----
<C>                                             <C>            <C>               <C>            <C>
Purchased in-process research
         and development                        $    17,500  $     -             $    17,500      NM
</TABLE>

         In May 2007, we acquired from VIVUS, Inc the U.S. marketing rights to
         Evamist(TM), a new estrogen replacement therapy product delivered
         with a patented metered-dose transdermal spray system (see Note 3 of
         the Notes to Consolidated Financial Statements). Under terms of the
         agreement, we paid $10.0 million in cash at closing and made
         additional cash payments of $141.5 million in July 2007 when final
         approval of the product was received from the FDA. Since the product
         had not yet obtained FDA approval when the initial payment was made
         at closing, we recorded a $10.0 million purchased in-process research
         and development charge in fiscal 2008.

         In January 2008, we entered into a definitive asset purchase
         agreement with CYTYC to acquire the U.S. and worldwide rights to
         Gestiva(TM) (17-alpha hydroxyprogesterone caproate). The NDA for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. Under the terms of the asset purchase agreement, we agreed to
         pay $82.0 million for Gestiva(TM), $7.5 million of which was paid at
         closing. Because the product had not obtained FDA approval when the
         initial payment was made, we recorded the $7.5 million payment as
         in-process research and development expense in fiscal 2008.

<TABLE>
         SELLING AND ADMINISTRATIVE
         --------------------------

<CAPTION>
                                                    YEARS ENDED MARCH 31,
                                                  -----------------------------------------------
                                                                                      CHANGE
                                                                                 ----------------
    ($ IN THOUSANDS):                                2008           2007             $         %
                                                  ---------      ---------       --------    ----
<C>                                               <C>            <C>             <C>         <C>
Selling and administrative                        $ 208,206      $ 171,936       $ 36,270    21.1%
  as % of net revenues                                 34.6%          38.8%
</TABLE>

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

              o   $13.9 million increase in personnel costs due to increases
                  in management, sales and other personnel;

              o   $8.3 million increase in branded marketing and promotions
                  expense;

              o   $2.3 million increase in travel and auto leasing costs at
                  our branded products segment;

              o   $4.0 million increase in legal and professional expense
                  commensurate with an increase in litigation activity; and

              o   $4.5 million increase in costs associated with
                  redistribution fees paid to major wholesalers and chains.
                  Redistribution fees are fees paid to large customers for
                  single point shipping services which allow manufacturers to
                  ship to a single location rather than to multiple customer
                  warehouse locations.



                                      46

<PAGE>
<PAGE>

<TABLE>
         AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS
         ------------------------------------------------
<CAPTION>
                                                      YEARS ENDED MARCH 31,
                                                    --------------------------------------------
                                                                                     CHANGE
                                                                                ----------------
    ($ IN THOUSANDS):                                   2008        2007           $         %
                                                    ----------  -----------     -------    -----
<C>                                                 <C>         <C>             <C>        <C>
Amortization and impairment of intangible assets    $   12,631  $     4,810     $ 7,821    162.6%
    as % of net revenues                                   2.1%         1.1%
</TABLE>

         The increase in the amortization of intangible assets of $6.7 million
         was primarily due to the purchase of Evamist(TM) in May 2007 and the
         impact of intangible assets that we recorded thereon (see Note 3 of
         the Notes to Consolidated Financial Statements). Under terms of the
         purchase agreement, we made two cash payments: $10.0 million was paid
         in May 2007 and expensed as in-process research and development and
         $141.5 million was paid in July 2007 when final approval of the
         product was received from the FDA. The preliminary purchase price
         allocation, which is subject to change based on the final fair value
         assessment, resulted in estimated identifiable intangible assets of
         $52.4 million to product rights; $15.2 million to trademark rights;
         $66.4 million to rights under a sublicense agreement; and, $7.5
         million to a covenant not to compete. Upon FDA approval in July 2007,
         we began amortizing the product rights, trademark rights and rights
         under the sublicense agreement over 15 years and the covenant not to
         compete over nine years.

         During the year ended March 31, 2008, we recognized an impairment
         charge of $1.1 million for the intangible asset related to a product
         right acquired under an external development agreement. Price erosion
         on the product eliminated the economics of marketing the product. The
         entire balance of the intangible asset was written-off as the product
         is no longer expected to generate positive future cash flows.

<TABLE>
         OPERATING INCOME
         ----------------
<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               -------------------------------------------------
                                                                                    CHANGE
                                                                              ------------------
    ($ IN THOUSANDS):                             2008          2007              $           %
                                               ---------      --------        ---------     ----
<C>                                            <C>            <C>             <C>           <C>
Operating income                               $ 130,370      $ 88,156        $  42,214     47.9%
</TABLE>


         The improvement in operating income was primarily due to sales of the
         100 mg and 200 mg strengths of metoprolol succinate extended-release
         tablets. We began shipping these two products in July 2007 and they
         generated net revenues of $119.1 million during the year. The related
         increase in gross profit of $119.0 million was offset in part by a
         $76.8 million increase in operating expenses, which included
         purchased in-process research and development expenses of $10.0
         million and $7.5 million recorded in connection with the Evamist(TM)
         and Gestiva(TM) acquisitions, respectively (see Note 3 of the Notes
         to the Consolidated Financial Statements). Excluding the effect of
         the $17.5 million of purchased in-process research and development
         expense, operating income for fiscal 2008 would have increased $59.7
         million, or 67.7%.

<TABLE>
         INTEREST EXPENSE
         ----------------
<CAPTION>
                                                YEARS ENDED MARCH 31,
                                               ---------------------------------------------
                                                                                 CHANGE
                                                                            ----------------
    ($ IN THOUSANDS):                             2008        2007             $          %
                                               ---------    -------         -------     ----
<C>                                            <C>          <C>             <C>         <C>
Interest expense                               $  10,353    $ 8,985         $ 1,368     15.2%
</TABLE>

         The increase in interest expense was primarily the result of interest
         incurred on the $50.0 million of borrowings made under our credit
         facility in August 2007. The advance against our credit facility was
         used, along with cash on hand, to fund the $141.5 million payment for
         the purchase of Evamist(TM) (see Note 3 of the Notes to


                                      47

<PAGE>
<PAGE>

         Consolidated Financial Statements). We repaid $20.0 million of the
         borrowing against our credit facility in November 2007.

<TABLE>
         INTEREST AND OTHER INCOME
         -------------------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ------------------------------------------------
                                                                                    CHANGE
                                                                               ----------------
    ($ IN THOUSANDS):                              2008          2007             $         %
                                                ----------     -------         -------     ----
<C>                                             <C>            <C>             <C>         <C>
Interest and other income                       $   11,646     $ 9,901         $ 1,745     17.6%
</TABLE>

         The increase in interest and other income resulted primarily from an
         increase in the weighted average interest rate earned on short-term
         investments. The increase in the weighted average interest rate
         resulted principally from a restructuring of the investment portfolio
         in the prior year from short-term tax-exempt securities to short-term
         taxable securities.

<TABLE>
         PROVISION FOR INCOME TAXES
         --------------------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               -------------------------------------------------
                                                                                      CHANGE
                                                                              ------------------
($ IN THOUSANDS EXCEPT PER SHARE DATA):           2008           2007             $          %
                                               ---------      ---------       ---------     ----
<C>                                            <C>            <C>             <C>           <C>
Provision for income taxes                     $  43,309      $  32,958       $  10,351     31.4%
  effective tax rate                                32.9%          37.0%
</TABLE>

         The lower effective tax rate in fiscal 2008 resulted primarily from
         the reversal of certain tax liabilities associated with tax positions
         from previous years that were determined to no longer be necessary as
         the relevant statute of limitations had expired. The effective tax
         rates for both the current and prior periods were favorably impacted
         by the domestic manufacturer's deduction and the use of business
         credits. (See Note 15 of the Notes to Consolidated Financial
         Statements). The fiscal 2007 tax rate was adversely affected by the
         recording of additional liabilities associated with tax positions
         claimed on filed tax returns.

<TABLE>
         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               -------------------------------------------------
                                                                                    CHANGE
                                                                              ------------------
($ IN THOUSANDS EXCEPT PER SHARE DATA):          2008           2007              $          %
                                               --------       --------        ---------     ----
<C>                                            <C>            <C>             <C>           <C>
Net income                                     $ 88,354       $ 58,090        $  30,264     52.1%
    Diluted earnings per Class A share             1.57           1.05             0.52     49.5%
    Diluted earnings per Class B share             1.35           0.91             0.44     48.4%
</TABLE>

         The improvement in net income per share was primarily due to sales of
         the 100 mg and 200 mg strengths of metoprolol succinate
         extended-release tablets. We began shipping these two products in
         July 2007 and along with the approval and launch of the 25 mg in
         March 2008, they generated net revenues of $120.0 million during the
         year. The increase in gross profit of $119.0 million was offset in
         part by a $76.8 million increase in operating expenses, which
         included purchased in-process research and development expenses of
         $10.0 million and $7.5 million recorded in connection with the
         Evamist(TM) and Gestiva(TM) acquisitions, respectively (see Note 3 of
         the Notes to the Consolidated Financial Statements). Excluding the
         effect of the purchased in-process research and development expense,
         net income for fiscal 2008 would have increased $42.0 million, or
         72.3%.

                                      48

<PAGE>
<PAGE>

         FISCAL 2007 COMPARED TO FISCAL 2006

<TABLE>
         NET REVENUES BY SEGMENT
         -----------------------
<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               ---------------------------------------------------
                                                                                      CHANGE
                                                                                -------------------
    ($ IN THOUSANDS):                               2007          2006              $           %
                                               ------------   ------------      ----------     ----
<C>                                            <C>            <C>               <C>            <C>
Branded products                               $     188,681  $    145,503      $   43,178     29.7%
   as % of net revenues                                 42.5%         39.6%
Specialty generics/non-branded                       235,594       203,787          31,807     15.6%
   as % of net revenues                                 53.1%         55.4%
Specialty materials                                   17,436        16,988             448      2.6%
   as % of net revenues                                  3.9%          4.6%
Other                                                  1,916         1,362             554     40.7%
                                               -------------  ------------      ----------
   Total net revenues                          $     443,627  $    367,640      $   75,987     20.7%
</TABLE>

         The increase in branded product sales was due primarily to continued
         sales growth from our prescription prenatal and hematinic product
         lines coupled with increased sales of our anti-infective brand,
         Clindesse(R). Sales from our PreCare(R) product line increased 44.1%
         to $72.5 million during fiscal 2007. This increase was primarily due
         to sales growth experienced by PrimaCare ONE(R), the introduction of
         PreCare Premier(R) and product line price increases that occurred
         over the past 12 months. Sales of PrimaCare ONE(R) in fiscal 2007
         increased $22.3 million, or 104.2%, due primarily to market share
         gains over the past two years. Specifically, PrimaCare ONE(R)
         experienced an increase in prescription volume of 101.9% during
         fiscal 2007. Sales from our hematinic products increased 31.0% to
         $48.2 million in fiscal 2007. These increases primarily reflected
         $8.3 million of incremental sales of Repliva 21/7(R), a new hematinic
         product introduced in the second quarter of fiscal 2006, coupled with
         increased sales from our Niferex(R) products. Clindesse(R), a
         single-dose prescription cream therapy indicated to treat bacterial
         vaginosis, experienced sales growth of 44.6% to $31.8 million during
         fiscal 2007 as our share of the prescription intravaginal bacterial
         vaginosis market increased to 26.4% at the end of fiscal 2007. Sales
         of Clindesse(R) in fiscal 2007 also reflected the impact of a price
         increase in September 2006.

         The growth in specialty generic/non-branded sales resulted primarily
         from increases experienced by our cardiovascular, cough/cold and pain
         management product lines. The cardiovascular product line contributed
         sales growth of $16.0 million, or 18.7%, in fiscal 2007 due to $11.5
         million of incremental sales volume from new products with the
         remaining increase attributable to higher prices. The reported new
         products consisted of six strengths of diltiazem HCI ER Capsules (AB
         rated to Tiazac(R)) that were approved by the FDA in September 2006.
         In fiscal 2007, our cough/cold product line reported sales growth of
         $8.1 million, or 23.5%, as sales volume grew $5.0 million and price
         increases generated increased sales of $3.1 million. Sales from the
         pain management product line in fiscal 2007 increased $9.1 million,
         or 24.2%, due to incremental sales from three product approvals
         received late in fiscal 2006 and increased prices on the other pain
         management products.

         The increase in specialty material product sales was primarily due to
         the impact of price increases on certain products.



                                      49

<PAGE>
<PAGE>



<TABLE>
         GROSS PROFIT BY SEGMENT
         -----------------------
<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                      CHANGE
                                                                               --------------------
    ($ IN THOUSANDS):                               2007          2006              $           %
                                               ------------   -----------      ----------    ------
<C>                                            <C>            <C>              <C>           <C>
Branded products                               $    167,864   $   128,572      $   39,292      30.6%
   as % of net revenues                                89.0%         88.4%
Specialty generics/non-branded                      138,272       111,907          26,365      23.6%
   as % of net revenues                                58.7%         54.9%
Specialty materials                                   6,005         4,732           1,273      26.9%
   as % of net revenues                                34.4%         27.9%
Other                                               (15,777)       (1,506)        (14,271)   (947.6)%
                                               ------------   -----------      ----------
   Total gross profit                          $    296,364   $   243,705      $   52,659      21.6%
      as % of total net revenues                       66.8%         66.3%
</TABLE>


         The increase in gross profit was principally due to the sales growth
         experienced by our branded products and specialty generic/non-branded
         segments. The higher specialty generic gross profit percentage in
         fiscal 2007 was primarily attributable to sales of new cardiovascular
         products coupled with the impact of price increases on certain
         cardiovascular, cough/cold and pain management products. Impacting
         the Other category are contract manufacturing revenues, pricing and
         production variances, and changes to inventory reserves associated
         with production. Any inventory reserve changes associated with
         finished goods are reflected in the applicable segment. The
         fluctuation in the Other category was primarily due to the impact of
         higher production costs during the first six months of the fiscal
         year that resulted from lower-than-expected production volume,
         coupled with an increase in provisions for obsolete inventory on
         certain existing products in various stages of production. Also,
         during the last three quarters of fiscal 2007, we recorded provisions
         associated with certain new products where production occurred prior
         to receiving FDA approval and the upcoming expiration dates made them
         unsalable. The provision for obsolete inventory for fiscal 2007 and
         2006 was $12.0 million and $4.2 million, respectively.

<TABLE>
         RESEARCH AND DEVELOPMENT
         ------------------------
<CAPTION>
                                                  YEARS ENDED MARCH 31,
                                               ---------------------------------------------------
                                                                                      CHANGE
                                                                                ------------------
    ($ IN THOUSANDS):                               2007          2006              $           %
                                               ------------   ------------      ----------     ---
<C>                                            <C>            <C>               <C>            <C>
Research and development                       $     31,462   $     28,886      $    2,576     8.9%
   as % of net revenues                                 7.1%           7.9%
</TABLE>

         The increase in research and development expense was due to increased
         spending on bioequivalence studies as we continued active development
         of various brand and non-brand/generic products in our internal and
         external pipelines, coupled with an increase in research and
         development personnel.

<TABLE>
         PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
         ---------------------------------------------
<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                               ---------------------------------------------------
                                                                                      CHANGE
                                                                                -------------------
    ($ IN THOUSANDS):                               2007          2006              $           %
                                               ------------   ------------      ----------     ----
<C>                                            <C>            <C>               <C>            <C>
Purchased in-process research
   and development                             $     -        $     30,441      $  (30,441)     NM
</TABLE>

                                      50

<PAGE>
<PAGE>

         During fiscal 2006, we recorded expense of $30.4 million in
         connection with the FemmePharma acquisition (see Note 3 of the Notes
         to the Consolidated Financial Statements) "Acquisitions and License
         Agreement" 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.

<TABLE>
         SELLING AND ADMINISTRATIVE
         --------------------------
<CAPTION>
                                                  YEARS ENDED MARCH 31,
                                               --------------------------------------------------
                                                                                     CHANGE
                                                                               ------------------
    ($ IN THOUSANDS):                             2007           2006              $           %
                                               ---------      ---------        ---------     ----
<C>                                            <C>            <C>              <C>           <C>
Selling and administrative                     $ 171,936      $ 143,437        $  28,499     20.0%
  as % of net revenues                              38.8%          39.0%
</TABLE>

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

              o   $14.8 million increase in personnel costs due to increases
                  in management and other personnel;
              o   $3.4 million increase in branded marketing and promotions
                  expense and
              o   $2.2 million increase in expense resulting from facility
                  expansion.

         The increase in personnel costs included $3.1 million of incremental
         stock-based compensation expense resulting from the adoption of SFAS
         123R, "Share-Based Payment," and an increase in accrued payroll
         taxes, interest and penalties associated with the disqualification of
         certain stock options. We adopted SFAS 123R using the modified
         prospective method and, as a result, did not retroactively adjust
         results from prior periods. Prior to the adoption of SFAS 123R, we
         accounted for stock-based compensation using the intrinsic value
         method prescribed in APB 25.

<TABLE>
         AMORTIZATION OF INTANGIBLE ASSETS
         ---------------------------------
<CAPTION>
                                                    YEARS ENDED MARCH 31,
                                                    ------------------------------------------
                                                                                    CHANGE
                                                                                --------------
    ($ IN THOUSANDS):                                 2007      2006              $         %
                                                    -------   -------           -----      ---
<C>                                                 <C>       <C>               <C>        <C>
Amortization of intangible assets                   $ 4,810   $ 4,784           $  26      0.5%
    as % of net revenues                                1.1%      1.3%
</TABLE>

         The increase in amortization of intangible assets was due primarily
         to an increase in amortization of patent and trademark costs.

<TABLE>
         OPERATING INCOME
         ----------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                      CHANGE
                                                                                --------------------
    ($ IN THOUSANDS):                            2007           2006                $           %
                                               --------       --------          ---------      -----
<C>                                            <C>            <C>               <C>            <C>
Operating income                               $ 88,156       $ 36,157          $  51,999      143.8%
</TABLE>


                                      51

<PAGE>
<PAGE>

         The improvement in operating income was partially due to the $30.4
         million of expense we recorded during fiscal 2006 in connection with
         the FemmePharma acquisition. Excluding the effect of this $30.4
         million of expense, operating income for fiscal 2007 would have
         increased $21.6 million, or 32.4%.

<TABLE>
         INTEREST EXPENSE
         ----------------
<CAPTION>
                                                YEARS ENDED MARCH 31,
                                               -----------------------------------------------
                                                                                   CHANGE
                                                                              ----------------
    ($ IN THOUSANDS):                            2007         2006               $         %
                                               -------      -------           -------     ----
<C>                                            <C>          <C>               <C>         <C>
Interest expense                               $ 8,985      $ 6,045           $ 2,940     48.6%
</TABLE>

         The increase in interest expense resulted from interest incurred on
         the $43.0 million mortgage loan we entered into in March 2006 coupled
         with the completion of a number of sizable capital projects during
         fiscal 2006 and the related reduced level of capitalized interest
         recorded on those projects.

<TABLE>
         INTEREST AND OTHER INCOME
         -------------------------
<CAPTION>
                                                YEARS ENDED MARCH 31,
                                               -----------------------------------------------
                                                                                   CHANGE
                                                                              ----------------
    ($ IN THOUSANDS):                            2007         2006               $         %
                                               -------      -------           -------     ----
<C>                                            <C>          <C>               <C>         <C>
Interest and other income                      $ 9,901      $ 5,737           $ 4,164     72.6%
</TABLE>

         The increase in interest and other income resulted primarily from an
         increase in the average balance of invested cash coupled with an
         increase in the weighted average interest rate earned on short-term
         investments. The increase in the weighted average interest rate was
         due to higher short-term market interest rates.

<TABLE>
         PROVISION FOR INCOME TAXES
         --------------------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               -------------------------------------------------
                                                                                     CHANGE
                                                                                ----------------
    ($ IN THOUSANDS):                            2007           2006               $         %
                                               --------       --------          -------     ----
<C>                                            <C>            <C>               <C>         <C>
Provision for income taxes                     $ 32,958       $ 24,433          $ 8,525     34.9%
  effective tax rate                               37.0%          68.2%
</TABLE>

         The higher effective tax rate for fiscal 2006 was attributable to the
         determination that $30.4 million of expense we recorded for the
         FemmePharma acquisition was not deductible for tax purposes. The
         effective tax rate would have been 36.9% for that year when applied
         to a pre-tax income amount that excluded the FemmePharma acquisition
         expense of $30.4 million. The effective tax rates in both fiscal 2007
         and 2006 were adversely affected by the recording of additional
         liabilities associated with tax positions claimed on filed tax
         returns for those years.

                                      52

<PAGE>
<PAGE>

<TABLE>
         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------
<CAPTION>
                                                 YEARS ENDED MARCH 31,
                                               -----------------------------------------------
                                                                                  CHANGE
                                                                            ------------------
    ($ IN THOUSANDS):                            2007           2006            $          %
                                               --------       --------      ---------    -----
<C>                                            <C>            <C>           <C>          <C>
Net income                                     $ 58,090       $ 11,416      $  46,674    408.9%
    Diluted earnings per Class A share             1.05           0.23           0.82    356.5%
    Diluted earnings per Class B share             0.91           0.20           0.71    355.0%
</TABLE>

         The improvement in net income per share was partially due to the
         $30.4 million of expense we recorded during fiscal 2006 in connection
         with the FemmePharma acquisition. Net income was also favorably
         impacted by a $52.7 million increase in gross profit, offset in part
         by a $31.1 million increase in operating expenses before taking into
         account the $30.4 million of expense associated with the prior year
         acquisition of FemmePharma.

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

         The Company reports cash and cash equivalents and working capital of
         $86.3 million and $88.8 million, respectively, at March 31, 2008,
         compared to $82.6 million and $372.3 million, respectively, at March
         31, 2007. The decrease in working capital resulted primarily from the
         $200.0 million principal amount of Convertible Subordinated Notes
         (the "Notes") that we classified as a current liability at March 31,
         2008 due to the holders having the right to require us to repurchase
         all or a portion of their Notes on May 16, 2008. Working capital was
         also reduced in fiscal 2008 by the reclassification of $81.5 million
         of auction rate securities from current assets to non-current assets
         (see Note 4 of the Notes to Consolidated Financial Statements).

         The primary source of operating cash flow used in the funding of our
         businesses continues to be internally generated funds from product
         sales. Our net cash flow from operating activities of $122.4 million
         in fiscal 2008 resulted primarily from net income adjusted for
         non-cash items.

         Net cash flow used in investing activities included capital
         expenditures of $23.7 million in fiscal 2008 compared to $25.1
         million for the prior year. Investing activities in fiscal 2008 also
         consisted of two cash payments made under the Evamist(TM) purchase
         agreement: $10.0 million was paid in May 2007 and expensed as
         in-process research and development and $141.5 million was paid in
         July 2007 when final approval of the product was received from the
         FDA. The preliminary purchase price allocation, which is subject to
         change based on the final fair value assessment, resulted in
         estimated identifiable intangible assets of $52.4 million to product
         rights; $15.2 million to trademark rights; $66.4 million to rights
         under a sublicense agreement; and $7.5 million to a covenant not to
         compete. Upon FDA approval in July 2007, we began amortizing the
         product rights, trademark rights and rights under the sublicense
         agreement over 15 years and the covenant not to compete over nine
         years. In addition, other investing activities in fiscal 2008
         included a $7.5 million payment we made when we acquired the U.S. and
         worldwide rights to Gestiva(TM) in January 2008. Because the product
         had not obtained FDA approval when the initial payment was made at
         closing, we recorded the $7.5 million as in-process research and
         development expense. The remainder of the purchase price is payable
         on the completion of two milestones: (1) $2.0 million on the earlier
         to occur of the seller's receipt of acknowledgement from the FDA that
         their response to the FDA's October 20, 2006 "approvable" letter is
         sufficient for the FDA to proceed with their review of the NDA or the
         receipt of FDA's approval of the Gestiva(TM) NDA and (2) $72.5
         million on FDA approval of a Gestiva(TM) NDA, transfer of all rights
         in the NDA to us and receipt by us of defined launch quantities of
         finished Gestiva(TM) suitable for commercial sale. We expect approval
         of the Gestiva(TM) NDA in fiscal 2009. Finally, other investing
         activities for 2008 included $125.4 million and $158.8 million of
         purchases and sales, respectively, of investment securities
         classified as available for sale.

         At March 31, 2008, we had invested $83.9 million in principal
         amount of auction rate securities ("ARS"). Our investments in ARS
         represent interests in securities that have student loans as
         collateral that are guaranteed by the U.S. Government. Accordingly,
         ARS that are backed by student loans are viewed as having low default
         risk and very low risk of downgrade. The interest rates on these
         securities are reset through an auction process that resets the
         applicable interest rate at pre-determined intervals, up to 35 days.
         The auctions have historically provided a liquid market for these
         securities. The ARS investments held by us all had AAA credit ratings
         at the time of purchase and at the end of our fiscal 2008 year end.
         With the liquidity issues experienced in global credit


                                      53

<PAGE>
<PAGE>

         and capital markets, the ARS held by us at March 31, 2008 experienced
         failed auctions beginning in February 2008 as the amount of
         securities submitted for sale exceeded the amount of purchase orders.
         Given the failed auctions, our ARS will continue to be illiquid until
         there is a successful auction for them. We cannot predict how long
         the current imbalance in the auction rate market will continue. The
         estimated fair value of our ARS holdings at March 31, 2008 was $81.5
         million, which reflected a $2.4 million difference from the principal
         amount of $83.9 million. The estimated fair value of the ARS was
         based on a discounted cash flow model that considered, among other
         factors, the time to work out the market disruption in the
         traditional trading mechanism, the stream of cash flows (coupons)
         earned until maturity, the prevailing risk free yield curve, credit
         spreads applicable to a portfolio of student loans with various
         tenures and ratings and an illiquidity premium. These factors were
         used in a Monte Carlo simulation based methodology to derive the
         estimated fair value of the ARS. Although the ARS continue to pay
         interest according to their stated terms, we recorded during the
         fourth quarter of fiscal 2008 an unrealized loss of $1.6 million, net
         of tax, as a reduction to shareholders' equity in accumulated other
         comprehensive loss, reflecting adjustments to the ARS holdings that
         we have concluded have a temporary decline in value.

         ARS have historically been classified as short-term marketable
         securities in our consolidated balance sheet. Given the failed
         auctions, we have reclassified the $81.5 million of ARS as of March
         31, 2008 from current assets to non-current assets (see Note 4 to the
         Notes to Consolidated Financial Statements). We believe that as of
         March 31, 2008, based on our current cash, cash equivalents and
         marketable securities balances of $126.9 million and our current
         borrowing capacity under our credit facility of $290.0 million, the
         current lack of liquidity in the auction rate market will not have a
         material impact on our ability to fund our operations or interfere
         with our external growth plans, although we cannot assure you that
         this will continue to be the case.

         Our debt balance, including current maturities, was $269.5 million at
         March 31, 2008 compared to $241.3 million at March 31, 2007. In
         August 2007, we borrowed $50.0 million under our credit facility, the
         proceeds of which were used in the funding of the Evamist(TM)
         purchase. We repaid $20.0 million of the borrowing under our credit
         facility in November 2007.

         In May 2003, we issued $200.0 million principal amount of 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 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. In November 2007, the average
         trading price of the Notes reached the threshold for the five-day
         trading period that results in the payment of contingent interest and
         beginning November 16, 2007 the Notes began to bear interest at a
         rate of 3.00% per annum. We 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) to the date
         of redemption. Holders may require us 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 100% of the principal amount of the Notes, plus accrued and unpaid
         interest (including contingent interest, if any) to the date of
         repurchase, payable in cash. Even though no holders required us to
         repurchase all or a portion of their Notes on May 16, 2008, we
         classified the Notes as a current liability as of March 31, 2008 due
         to the right the holders had to require us to repurchase the Notes on
         May 16, 2008. Since the holders did not elect to cause us to
         repurchase any of the Notes, the Notes will be reclassified as
         long-term beginning with our consolidated balance sheet as of June
         30, 2008. The Notes are subordinate to all of our existing and future
         senior obligations.

         We have a credit agreement with ten banks that provides for a
         revolving line of credit for borrowing up to $320.0 million. The
         credit agreement also includes a provision for increasing the
         revolving commitment, at the lenders' sole discretion, by up to an
         additional $50.0 million. This credit facility is unsecured unless
         we, under certain specified circumstances, utilize the facility to
         redeem part or all of our outstanding 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 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
         credit facility has a five-year term expiring in June 2011. As of
         March 31, 2008, we were in


                                      54

<PAGE>
<PAGE>
         compliance with all of our financial covenants. At March 31, 2008, we
         had $0.9 million in open letters of credit issued under the revolving
         credit line and $30.0 million of cash borrowings outstanding under
         the facility.

         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 of the Notes 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 ten years
         subsequent to the property being placed in service. Industrial
         revenue bonds totaling $120.4 million were outstanding at March 31,
         2008. 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 5
                                                            TOTAL          1 YEAR         1-3 YEARS   3-5 YEARS       YEARS
                                                            -----          ------         ---------   ---------       -----
        OBLIGATIONS AT MARCH 31, 2008
        -----------------------------
        <C>                                                 <C>         <C>               <C>         <C>           <C>
        Long-term debt obligations(1)                       $ 269,452   $   202,020       $  4,420    $  34,976     $  28,036
        Operating lease obligations                             8,147         2,183          2,909        2,116           939
        Other long-term obligations(2)                          8,551             -              -            -         8,551
                                                            ---------   -----------       --------    ---------     ---------
         Total contractual cash obligations(3)(4)           $ 286,150   $   204,203       $  7,329    $  37,092     $  37,526
                                                            =========   ===========       ========    =========     =========
<FN>
        ------------------
         (1)   Holders of the $200.0 million aggregate principal amount of
               Notes had the right to require the Company to repurchase them
               for an amount equal to the unpaid principal amount in May 2008.
               No bonds were tendered to the Company under the holders put
               right.

         (2)   Represents the accrual of retirement compensation the Company
               is obligated to pay its CEO beginning at retirement for the
               longer of ten years or the life of the CEO.

         (3)   Excluded from the contractual obligations table is the
               liability for unrecognized tax benefits totaling $11.7 million.
               This liability for unrecognized tax benefits has been excluded
               because we cannot make a reliable estimate of the period in
               which the unrecognized tax benefits will be realized.

         (4)   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 $31.0 million as of March 31, 2008.  Also, under
               terms of the Evamist(TM) asset purchase agreement, it provides
               for two future payments upon achievement of certain net sales
               milestones.  If Evamist(TM) achieves $100.0 million of net
               sales in a fiscal year, a one-time payment of $10.0 million
               will be made, and if net sales levels reach $200.0 million in a
               fiscal year, a one-time payment of up to $20.0 million will be
               made.  In addition, under terms of the Gestiva(TM) asset
               purchase agreement, the remainder of the purchase price is
               payable on the completion of two milestones: (1) $2.0 million
               on the earlier to occur of the seller's receipt of
               acknowledgement from the FDA that their response to the FDA's
               October 20, 2006 "approvable" letter is sufficient for the FDA
               to proceed with their review of the NDA or the receipt of FDA's
               approval of the Gestiva(TM) NDA and (2) $72.5 million on FDA
               approval of a Gestiva(TM) NDA, transfer of all rights in the
               NDA to us and receipt by us of defined launch quantities of
               finished Gestiva(TM) suitable for commercial sale.
</TABLE>

         On February 14, 2006, the Company announced it had entered into an
         agreement with Gedeon Richter under which the Company had acquired
         exclusive rights to market a group of generic products in the U.S.
         However, due to changes in the generic drug marketplace, the Company
         and Gedeon Richter have agreed the current portfolio of products
         covered by the agreement, which has now been terminated, no longer
         represent market opportunities that are worth pursuing. The two
         companies remain committed partners in other endeavors and are
         keeping options open to explore other more meaningful joint
         opportunities.

         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 generally has been invested in short-term, highly liquid
         instruments, however, certain of our investments in auction-rate
         securities have become illiquid, as described

                                      55

<PAGE>
<PAGE>

         above. 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.

         GOVERNMENT REGULATION

         In March 2008, representatives of the Missouri Department of Health
         and Senior Services, accompanied by representatives of the FDA,
         notified us of a hold on our inventory of certain unapproved drug
         products, restricting our ability to remove or dispose of those
         inventories without permission.

         The hold relates to a misinterpretation about the intended scope of
         recent FDA notices setting limits on the marketing of unapproved
         guaifenesin products. In response to notices issued by the FDA in
         2002 and 2003 with respect to single-entity timed-release guaifenesin
         products, and a further notice issued in 2007 with respect to
         combination timed-released guaifenesin products, we timely
         discontinued a number of our guaifenesin products and believed that,
         by doing so, had complied with those notices. The recent action to
         place a hold on certain of our products indicates that additional
         guaifenesin products should also have been discontinued. In addition,
         the FDA expanded the hold to include other products that did not
         contain guaifenesin but were being marketed by us without FDA
         approval under certain "grandfather clauses" and statutory and
         regulatory exceptions to the pre-market approval requirement for "new
         drugs" under the FDCA. FDA policies permit the agency to initiate
         broad action against the marketing of additional categories of our
         unapproved products, if the FDA deems approval necessary, even if the
         agency has not instituted similar actions against the marketing of
         such products by other parties. Pursuant to discussions with the
         Missouri Department of Health and Senior Services and with the FDA,
         the affected Morphine and Oxycodone products have been released from
         the hold. We will discontinue manufacturing and marketing
         substantially all unapproved products subject to the hold.

         The FDA has not proposed, nor do we expect them to propose, that the
         products subject to the hold be recalled from the distribution
         channel. As such, we have written-off the value of the products
         subject to the hold in our inventory as of March 31, 2008. We also
         evaluated the active pharmaceutical ingredients and excipients used
         in the manufacture of the hold products and determined that they
         should also be written-off since we will be discontinuing further
         manufacturing and many of them cannot be returned or sold to other
         manufacturers. The write-off included in the results of operations
         for the fourth quarter of fiscal 2008 totaled $5.5 million.

         During most of fiscal 2008, we marketed approximately 30 products in
         our generic/non-branded respiratory line, which consisted primarily
         of cough/cold products. The cough/cold line accounted for $38.5
         million, or 10.5%, of our specialty generic net revenues in fiscal
         2008. As a result of the FDA hold discussed above, we are currently
         marketing one generic cough/cold product with four strengths that has
         been approved by the FDA. Since its launch in December 2007, this
         approved product generated sales of $0.9 million during fiscal 2008.

         On June 6, 2008, ETHEX initiated a voluntary recall of a single lot
         of morphine sulfate 60 mg extended release tablets due to a report
         that a tablet with as much as double the appropriate thickness was
         identified and therefore the possibility that other oversized tablets
         could have been commercially released in the affected lot. On June
         13, 2008, the recall was expanded to include additional specific lots
         of morphine sulfate 60 mg extended release tablets and specific lots
         of morphine sulfate 30 mg extended release tablets. We accrued a
         liability of $0.9 million in the fourth quarter of fiscal 2008 for
         the anticipated cost of the recall. No oversized tablets have been
         identified in any additional distributed lot of these products and
         based on our investigation, there are likely to be few, if any,
         oversized tablets in the recall lots. In addition, under ordinary
         pharmacy dispensing procedures, any significantly oversized tablets
         would likely be identified at the time of dispensing. However, the
         decision to recall the additional lots has been taken as a
         responsible precaution because of the possibility that there may be
         oversized tablets in the recalled lots.

         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
         effects of competition have 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
         GAAP. Our significant accounting policies are described in Note 2 of
         the Notes to Consolidated Financial Statements. Certain of our
         accounting policies are particularly important to the presentation of
         our financial condition and results of operations and require the
         application of significant judgment by our management. As a result,
         amounts determined under 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


                                      56

<PAGE>
<PAGE>

         industry, information that is obtained from customers and outside
         sources, and on various other assumptions that we believe 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.

         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 among other factors, 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.

         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 these incentives are normal and customary in the
         industry. Sales allowances are accrued and revenue is recognized as
         sales are made in accordance with 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
         non-branded/generics product line in conjunction with trade shows
         sponsored by our major wholesale customers and for other promotional
         programs accounted for 10.4% and 11.6% of total gross revenues for
         fiscal 2008 and fiscal 2007, 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 60% of our unit sales in fiscal 2008,
         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.



                                      57

<PAGE>
<PAGE>

         The following table reflects the fiscal 2008 activity for each
         accounts receivable reserve:

<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, 2008
  Accounts Receivable Reserves:
    Chargebacks                             $ 13,005         $ 145,005          $          -          $ (140,410)      $ 17,600
    Sales rebates                              5,386            36,582                     -             (29,384)        12,584
    Sales returns                              2,873            15,733                     -             (14,311)         4,295
    Cash discounts and other allowances        3,511            26,674                     -             (24,518)         5,667
    Medicaid rebates                           6,506            10,433                     -             (10,439)         6,500
                                            --------         ---------          ------------          ----------       --------
      Total                                 $ 31,281         $ 234,427          $          -          $ (219,062)      $ 46,646
                                            ========         =========          ============          ==========       ========
</TABLE>

         The increase in the reserve for chargebacks at March 31, 2008 was
         primarily due to chargeback reserves established on the 100 mg and
         200 mg strengths of metoprolol succinate extended-release tablets,
         the generic version of Toprol-XL(R) (marketed by AstraZeneca). We
         began shipping these two products in July 2007, and along with the
         approval and launch of the 25 mg in March 2007, they generated net
         revenues of $120.0 million in fiscal 2008. The increases in the
         reserves for sales rebates and cash discounts and other allowances at
         March 31, 2008 were also primarily due to the impact of sales
         associated with the two strengths of metoprolol succinate
         extended-release tablets. We received FDA approval to market the 25
         mg strength of metoprolol succinate extended-release tablets in March
         2008 and began shipping this product at that time. Sales of this
         product near year-end and wholesaler inventory levels of such at
         March 31, 2008 increased the reserves for chargebacks and sales
         rebates as well. The increase in the reserve for sales returns
         resulted primarily from the discontinuance of certain cardiovascular
         products late in fiscal 2008 coupled with higher returns of two pain
         management products in fiscal 2008.

         The following table reflects the fiscal 2007 activity for each
         accounts receivable reserve:

<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, 2007
  Accounts Receivable Reserves:
    Chargebacks                             $ 14,312          $ 94,716          $       -            $ (96,023)        $ 13,005
    Sales rebates                              2,214            17,155                  -              (13,983)           5,386
    Sales returns                              2,127            12,591                  -              (11,845)           2,873
    Cash discounts and other allowances        4,226            17,541                  -              (18,256)           3,511
    Medicaid rebates                           5,818             6,819                  -               (6,131)           6,506
                                            --------         ---------          ---------           ----------         --------
      Total                                 $ 28,697         $ 148,822          $       -           $ (146,238)        $ 31,281
                                            ========         =========          =========           ==========         ========
</TABLE>


         The decrease in the reserve for chargebacks at March 31, 2007 was
         primarily due to a decline in customer inventory levels of our
         specialty generic/non-branded products at the end of the year. The
         higher reserve for sales rebates at March 31, 2007 resulted from
         increased reserves on rebates associated with branded product sales
         to managed care organizations that began late in the fiscal 2006 year
         and ongoing sales promotions on new specialty generic/non-branded
         products introduced in fiscal 2007. The increase in the reserve for
         sales returns at March 31, 2007 was primarily due to an increase in
         branded product sales coupled with reserves established on certain
         new specialty generic/non-branded products where inventory with short
         shelf lives was sold.

                                      58

<PAGE>
<PAGE>

         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.

         Chargeback transactions are almost exclusively related to our
         specialty generics/non-branded business segment. During fiscal 2008
         and 2007, the chargeback provision reduced the gross sales of our
         specialty generics segment by $142.9 million and $93.9 million,
         respectively. These amounts accounted for 98.8% and 99.2% of the
         total chargeback provisions recorded in fiscal 2008 and 2007,
         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:

         o    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 wholesaler customers based on historical buying
              patterns. During fiscal 2008, unit sales to our three major
              wholesale customers accounted for 82% of our total unit sales to
              all wholesalers, and the aggregate inventory position of the
              three major wholesalers at March 31, 2008 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
              wholesale customers for which we do not receive actual inventory
              data, as our experience and customer buying patterns indicate
              that our smaller wholesale customers carry less inventory than
              our large wholesale customers. As of March 31, 2008, each week
              of inventory for those remaining wholesalers represented
              approximately $0.2 million, or 1.2%, of the reported reserve for
              chargebacks.

         o    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, 2008, 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 1.0%, of the reported reserve for
              chargebacks.

         o    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, 2008, a 5% shift in the calculated
              chargeback per unit in the same direction across all products
              and customers would result in a $0.8 million, or 4.5%, impact on
              the reported reserve for chargebacks.

                                      59

<PAGE>
<PAGE>

         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. As a result of WAC
         decreases to certain specialty generic/non-branded products, we paid
         shelf-stock adjustments of $7.6 million to our wholesale customers
         during fiscal 2008.

         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 generic/non-branded business segments. Upon recognition of
         revenue from 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, 2008 by approximately $0.2 million, or 5.6%, 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, 2008 by approximately $0.3 million,
         or 8.1%, 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 non-branded/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 affected 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, 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, 2008 by
         $0.5 million, or 8.3% of the reported reserve for Medicaid rebates.
         Similarly, a 10% change in estimated patient usage would have changed
         the reserve by $0.5 million, or 8.3% 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.

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         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,
         which range from nine to 20 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 the carrying value may not be
         recoverable. Factors we consider important which could trigger an
         impairment review include: (1) significant underperformance relative
         to expected historical or projected future 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.

         STOCK-BASED COMPENSATION Effective April 1, 2006, we adopted SFAS
         ------------------------
         123R, which requires the measurement and recognition of compensation
         expense, based on estimated fair values, for all share-based
         compensation awards made to employees and directors over the vesting
         period of the awards. We adopted SFAS 123R using the modified
         prospective method and, as a result, did not retroactively adjust
         results from prior periods. Under the modified prospective method,
         stock-based compensation was recognized (1) for the unvested portion
         of previously issued awards that were outstanding at the initial date
         of adoption based on the grant date fair value estimated in
         accordance with the pro forma provisions of SFAS 123 and (2) for any
         awards granted on or subsequent to the effective date of SFAS 123R
         based on the grant date fair value estimated in accordance with the
         provisions of that statement. Determining the fair value of
         share-based awards at the grant date requires judgment to identify
         the appropriate valuation model and estimate the assumptions,
         including the expected term of the stock options and expected
         stock-price volatility, to be used in the calculation. Judgment is
         also required in estimating the percentage of share-based awards that
         are expected to be forfeited. We estimated the fair value of stock
         options granted using the Black-Scholes option-pricing model with
         assumptions based primarily on historical data. If actual results
         differ significantly from these estimates, stock-based compensation
         expense and our results of operations could be materially impacted.

         INCOME TAXES Our deferred tax assets and liabilities are determined
         ------------
         based on temporary differences between the financial reporting and
         tax basis of assets and liabilities. Deferred tax assets and
         liabilities are measured using the currently enacted tax rates that
         apply to taxable income in effect for the years in which those tax
         assets are expected to be realized or settled. We record a valuation
         allowance to reduce deferred tax assets to the amount that is
         believed more likely than not to be realized. Management believes it
         is more likely than not that forecasted income, including income that
         may be generated as a result of certain tax planning strategies,
         together with the tax effects of the deferred tax liabilities, will
         be sufficient to fully recover the remaining deferred tax assets. If
         all or part of the net deferred tax assets are determined not to be
         realizable in the future, an adjustment to the valuation allowance
         would be charged to earnings in the period such determination is
         made. Similarly, if we subsequently realize deferred tax assets that
         were previously determined to be unrealizable, the respective
         valuation allowance would be reversed, resulting in a positive
         adjustment to earnings in the period such determination is made.

         Management regularly reevaluates the Company's tax positions taken on
         filed tax returns using information about recent tax court decisions
         and legislative activities. Many factors are considered in making
         these evaluations, including past history, recent interpretations of
         tax law, and the specific facts and circumstances of each matter.
         Because tax regulations are subject to interpretation and tax
         litigation is inherently uncertain, these evaluations


                                      61

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<PAGE>

         can involve a series of complex judgments about future events and can
         rely heavily on estimates and assumptions. The recorded tax
         liabilities are based on estimates and assumptions that have been
         deemed reasonable by management. However, if our estimates are not
         representative of actual outcomes, recorded tax liabilities could be
         materially impacted.

         Our accounting for income taxes was affected by the adoption of FASB
         Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -
         an interpretation of FASB Statement No. 109," on April 1, 2007. See
         Note 15 of the Notes to Consolidated Financial Statements.

         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 we determine 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 future outcome of litigation and because of
         the potential that an adverse outcome in legal proceedings could have
         a material impact on our financial condition or results of
         operations, such estimates are considered to be critical accounting
         estimates. After review, it was determined at March 31, 2008 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 September 2006, the Financial Accounting Standards Board ("FASB")
         issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which
         provides enhanced guidance for using fair value to measure assets and
         liabilities. SFAS 157 clarifies the principle that fair value should
         be based on the assumptions that market participants would use when
         pricing an asset or liability, provides a framework for measuring
         fair value under GAAP and expands disclosure requirements about fair
         value measurements. SFAS 157 is effective for financial statements
         issued in fiscal years beginning after November 15, 2007, and interim
         periods within those fiscal years. We plan to adopt SFAS 157 at the
         beginning of fiscal 2009 and are evaluating the impact, if any, the
         adoption of SFAS 157 will have on our financial condition and results
         of operations.

         In February 2007, the FASB issued SFAS No. 159, "The Fair Value
         Option for Financial Assets and Financial Liabilities" ("SFAS 159"),
         which permits companies to choose to measure many financial
         instruments and certain other items at fair value. The objective is
         to improve financial reporting by providing companies with the
         opportunity to mitigate volatility in reported earnings caused by
         measuring related assets and liabilities differently without having
         to apply complex hedge accounting provisions. SFAS 159 is effective
         for fiscal years beginning after November 15, 2007. Companies are not
         allowed to adopt SFAS 159 on a retrospective basis unless they choose
         early adoption. We plan to adopt SFAS 159 at the beginning of fiscal
         2009 and are evaluating the impact, if any, the adoption of SFAS 159
         will have on our financial condition and results of operations.

         In March 2007, the FASB ratified the consensus reached by the EITF in
         Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar
         Life Insurance Arrangements" ("Issue 06-10"). Issue 06-10 requires
         companies with collateral assignment split-dollar life insurance
         policies that provide a benefit to an employee that extends to
         postretirement periods to recognize a liability for future benefits
         based on the substantive agreement with the employee. Recognition
         should be in accordance with FASB Statement No. 106, "Employers'
         Accounting for Postretirement Benefits Other Than Pensions," or APB
         Opinion No. 12, "Omnibus Opinion - 1967," depending on whether a
         substantive plan is deemed to exist. Companies are permitted to
         recognize the effects of applying the consensus through either (1) a
         change in accounting principle through a cumulative-effect adjustment
         to retained earnings or to other components of equity or net assets
         as of the beginning of the year of adoption or (2) a change in
         accounting principle through retrospective application to all prior
         periods. Issue 06-10 is effective for fiscal years beginning after
         December 15, 2007, with early adoption permitted. We plan to adopt
         Issue 06-10 at the beginning of fiscal 2009 and are evaluating the
         impact of the adoption of Issue 06-10 on our financial condition and
         results of operations.

         In June 2007, the FASB ratified the consensus reached by the EITF on
         Issue No. 07-3, Accounting for Advance Payments for Goods or Services
         Received for Use in Future Research and Development Activities
         ("Issue 07-3"),


                                      62

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<PAGE>

         which is effective for fiscal years beginning after December 15, 2007
         and is applied prospectively for new contracts entered into on or
         after the effective date. Issue 07-3 addresses nonrefundable advance
         payments for goods or services for use in future research and
         development activities. Issue 07-3 will require that these payments
         that will be used or rendered for future research and development
         activities be deferred and capitalized and recognized as an expense
         as the related goods are delivered or the related services are
         performed. If an entity does not expect the goods to be delivered or
         the services to be rendered the capitalized advance payments should
         be expensed. We plan to adopt Issue 07-3 at the beginning of fiscal
         2009 and are evaluating the impact of the adoption of this issue on
         our financial condition and results of operations.

         In September 2007, the EITF reached a consensus on Issue No. 07-1
         ("Issue 07-1"), "Accounting for Collaborative Arrangements." The
         scope of Issue 07-1 is limited to collaborative arrangements where no
         separate legal entity exists and in which the parties are active
         participants and are exposed to significant risks and rewards that
         depend on the success of the activity. The EITF concluded that
         revenue transactions with third parties and associated costs incurred
         should be reported in the appropriate line item in each company's
         financial statements pursuant to the guidance in Issue 99-19,
         "Reporting Revenue Gross as a Principal versus Net as an Agent." The
         EITF also concluded that the equity method of accounting under
         Accounting Principles Board Opinion 18, "The Equity Method of
         Accounting for Investments in Common Stock," should not be applied to
         arrangements that are not conducted through a separate legal entity.
         The EITF also concluded that the income statement classification of
         payments made between the parties in an arrangement should be based
         on a consideration of the following factors: the nature and terms of
         the arrangement; the nature of the entities' operations; and whether
         the partners' payments are within the scope of existing GAAP. To the
         extent such costs are not within the scope of other authoritative
         accounting literature, the income statement characterization for the
         payments should be based on an analogy to authoritative accounting
         literature or a reasonable, rational, and consistently applied
         accounting policy election. The provisions of Issue 07-1 are
         effective for fiscal years beginning on or after December 15, 2008,
         and companies will be required to apply the provisions through
         retrospective application. We plan to adopt Issue 07-1 at the
         beginning of fiscal 2010 and are evaluating the impact of the
         adoption of Issue 07-1 on our financial condition and results of
         operations.

         In December 2007, the FASB issued SFAS No. 141 (revised 2007),
         "Business Combinations" ("SFAS 141(R)"), which replaces SFAS 141 but
         retains the fundamental concept of purchase method of accounting in a
         business combination and improves reporting by creating greater
         consistency in the accounting and financial reporting of business
         combinations, resulting in more complete, comparable, and relevant
         information for investors and other users of financial statements. To
         achieve this goal, the new standard requires the acquiring entity in
         a business combination to recognize all the assets acquired and
         liabilities assumed in the transaction and any non-controlling
         interest at the acquisition date at their fair value as of that date.
         This statement requires measuring a non-controlling interest in the
         acquiree at fair value which will result in recognizing the goodwill
         attributable to the non-controlling interest in addition to that
         attributable to the acquirer. This statement also requires the
         recognition of assets acquired and liabilities assumed arising from
         contractual contingencies as of the acquisition date, measured at
         their acquisition fair values. SFAS 141(R) is effective for business
         combinations for which the acquisition date is on or after the
         beginning of the first annual reporting period beginning on or after
         December 15, 2008 and earlier adoption is prohibited. We plan to
         adopt SFAS 141(R) at the beginning of fiscal 2010 and are evaluating
         the impact of SFAS 141(R) on our financial condition and results of
         operations.

         In December 2007, the FASB issued SFAS No. 160, "Non-controlling
         Interests in Consolidated Financial Statements" ("SFAS 160"), an
         amendment of ARB No. 51, which will affect only those entities that
         have an outstanding non-controlling interest in one or more
         subsidiaries or that deconsolidate a subsidiary by requiring all
         entities to report non-controlling (minority) interests in
         subsidiaries in the same way as equity in the consolidated financial
         statements. In addition, SFAS 160 eliminates the diversity that
         currently exists in accounting for transactions between an entity and
         non-controlling interests by requiring they be treated as equity
         transactions. SFAS 160 is effective for fiscal years beginning after
         December 15, 2008. We plan to adopt SFAS 160 at the beginning of
         fiscal 2010 and are evaluating the impact of SFAS 160 on our
         financial condition and results of operations.

         In May 2008, the FASB issued FASB Staff Position No. APB 14-a,
         "Accounting for Convertible Debt Instruments That May Be Settled in
         Cash Upon Conversion (Including Partial Cash Settlement)." Under the
         new rules for convertible debt instruments that may be settled
         entirely or partially in cash upon conversion, an entity


                                      63

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<PAGE>

         should separately account for the liability and equity components of
         the instrument in a manner that reflects the issuer's economic
         interest cost. The effect of the proposed new rules for the
         debentures is that the equity component would be included in the
         paid-in-capital section of shareholders' equity on an entity's
         consolidated balance sheet and the value of the equity component
         would be treated as original issue discount for purposes of
         accounting for the debt component of convertible debt. The FSP will
         be effective for fiscal years beginning after December 15, 2008, and
         for interim periods within those fiscal years, with retrospective
         application required. Early adoption is not permitted. We are
         currently evaluating the proposed new rules and the impact on our
         financial condition and results of operations.





                                      64

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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.

         We currently have investments in taxable auction rate securities. The
         rates on these securities reset at pre-determined intervals up to 35
         days. As of March 31, 2008, we had invested $83.9 million principal
         amount in auction rate securities consisting of high quality (AAA
         rated) bonds secured by student loans which are guaranteed by the U.
         S. Government. The maturity of these securities is greater than 10
         years. During the fourth quarter of fiscal 2008, certain developments
         in the capital and credit markets adversely affected the market for
         auction rate securities, which has resulted in a loss of liquidity
         for these investments. We have evaluated these securities to
         determine if other-than-temporary impairment of the carrying value of
         the securities has occurred due to the loss of liquidity. At March
         31, 2008, the fair value of auction rate securities was $81.5 million
         and the resultant difference of $2.4 million was recorded in
         accumulated other comprehensive loss as the unrealized losses were
         considered to be temporary (see Note 4 of the Notes to Consolidated
         Financial Statements). We believe that as of March 31, 2008, based on
         our cash, cash equivalents and short-term marketable securities
         balances of $126.9 million, excluding auction rate securities, and
         our current borrowing capacity of $290.0 million under our credit
         facility, the current lack of liquidity in the auction rate market
         will not have a material impact on our ability to fund our operations
         or interfere with our external growth plans, although we cannot
         assure you that this will continue to be the case.

         The favorable impact on our pre-tax income as a result of a 25, 50 or
         100 basis point (where 100 basis points equals 1%) increase in
         short-term interest rates would be approximately $0.5 million, $1.1
         million or $2.2 million annually based on our average cash, cash
         equivalents and short-term marketable investment balances during the
         fiscal year ended March 31, 2008.

         Advances to us under our credit facility 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. At March 31, 2008, we had
         $30.0 million of borrowings outstanding under our credit facility.
         The unfavorable impact on our pre-tax income as a result of a 25, 50
         or 100 basis point (where 100 basis points equals 1%) increase in
         short-term interest rates would be approximately $0.1 million, $0.2
         million or $0.3 million annually based on the $30.0 million of
         borrowings that were outstanding under our line of credit at March
         31, 2008.

         In May 2003, we issued $200.0 million principal amount of Convertible
         Subordinated Notes. The interest rate on the Notes is fixed at 2.50%
         and therefore not subject to interest rate changes. Beginning May 16,
         2006, we became 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 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.
         In November 2007, the average trading price of the Notes reached the
         threshold for the five-day trading period that results in the payment
         of contingent interest and beginning November 16, 2007 the Notes
         began to bear interest at a rate of 3.00% per annum. Holders may
         require us 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 100% of the
         principal amount of the Notes, plus accrued and unpaid interest
         (including contingent interest, if any) to the date of repurchase,
         payable in cash. Even though no holders required us to repurchase all
         or a portion of their Notes on May 16, 2008, we have classified the
         Notes as a current liability as of March 31, 2008 due to the right
         the holders had to require us to repurchase the Notes on May 16,
         2008. Since the holders did not elect to cause us to repurchase any
         of the Notes, the Notes will be reclassified as long-term liabilities
         beginning with our consolidated balance sheet as of June 30, 2008.

         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.

                                      65

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ITEM 8. 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 (the Company) as of March 31, 2008 and
2007, and the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2008. In connection with our audits of the consolidated
financial statements, we also have 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, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2008, 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, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004), "Share-Based Payment", effective April 1, 2006.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), K-V Pharmaceutical Company's
internal control over financial reporting as of March 31, 2008, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated June 25, 2008 expressed an adverse opinion on the
effectiveness of the Company's internal control over financial reporting.

St. Louis, Missouri
June 25, 2008



                                      66

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

<CAPTION>
                                                                                                   MARCH 31,
                                                                                         ---------------------------
                                                                                             2008            2007
                                                                                         -----------     -----------

                                            ASSETS
                                            ------
<C>                                                                                      <C>             <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................    $    86,345     $    82,574
Marketable securities................................................................         40,548         157,812
Receivables, less allowance for doubtful accounts of $867 and $716
   in 2008 and 2007, respectively....................................................        107,070          78,634
Inventories, net.....................................................................         94,980          91,515
Prepaid and other assets.............................................................          7,792           6,571
Income taxes receivable..............................................................          9,872              --
Deferred tax asset...................................................................         22,812          14,364
                                                                                         -----------     -----------
   Total Current Assets..............................................................        369,419         431,470
Property and equipment, less accumulated depreciation................................        196,200         186,900
Investment securities................................................................         81,516              --
Intangible assets and goodwill, net..................................................        198,784          69,010
Other assets.........................................................................         23,108          20,403
                                                                                         -----------     -----------
TOTAL ASSETS.........................................................................    $   869,027     $   707,783
                                                                                         ===========     ===========
                                         LIABILITIES
                                         -----------

CURRENT LIABILITIES:
Accounts payable.....................................................................    $    32,119     $    18,506
Accrued liabilities..................................................................         46,516          33,218
Income taxes payable.................................................................             --           5,558
Current maturities of long-term debt.................................................        202,020           1,897
                                                                                         -----------     -----------
   Total Current Liabilities.........................................................        280,655          59,179
Long-term debt.......................................................................         67,432         239,451
Other long-term liabilities..........................................................         22,359           6,319
Deferred tax liability...............................................................         39,299          38,007
                                                                                         -----------     -----------
TOTAL LIABILITIES....................................................................        409,745         342,956
                                                                                         -----------     -----------
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, 2008 and
   2007 (convertible into Class A shares on a 8.4375 to one basis)...................             --              --
Class A and Class B Common Stock, $.01 par value;150,000,000 and
   75,000,000 shares authorized, respectively;
     Class A - issued 40,764,603 and 40,316,426 at March 31, 2008
       and 2007, respectively........................................................            407             403
     Class B - issued 12,170,172 and 12,393,982 at March 31, 2008 and
       2007, respectively (convertible into Class A shares on a one-for-one basis)...            122             124
Additional paid-in capital...........................................................        158,742         150,818
Retained earnings....................................................................        357,714         269,430
Accumulated other comprehensive (loss) income........................................         (1,543)             33
Less: Treasury stock, 3,289,324 shares of Class A and 92,902 shares of Class B Common
   Stock at March 31, 2008, and 3,237,023 shares of Class A and 92,902 shares
   of Class B Common Stock at March 31, 2007, at cost................................        (56,160)        (55,981)
                                                                                         -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................        459,282         364,827
                                                                                         -----------     -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................    $   869,027     $   707,783
                                                                                         ===========     ===========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      67

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                       YEARS ENDED MARCH 31,
                                                                       -----------------------------------------------------
                                                                          2008                  2007                  2006
                                                                       ---------             ---------             ---------
<C>                                                                    <C>                   <C>                   <C>
Net revenues.......................................................    $ 601,896             $ 443,627             $ 367,640
Cost of sales......................................................      186,555               147,263               123,935
                                                                       ---------             ---------             ---------
Gross profit.......................................................      415,341               296,364               243,705
                                                                       ---------             ---------             ---------
Operating expenses:
    Research and development.......................................       46,634                31,462                28,886
    Purchased in-process research and
        development and transaction costs..........................       17,500                    --                30,441
    Selling and administrative.....................................      208,206               171,936               143,437
    Amortization and impairment of intangible assets...............       12,631                 4,810                 4,784
                                                                       ---------             ---------             ---------
Total operating expenses...........................................      284,971               208,208               207,548
                                                                       ---------             ---------             ---------

Operating income...................................................      130,370                88,156                36,157
                                                                       ---------             ---------             ---------

Other expense (income):
    Interest expense...............................................       10,353                 8,985                 6,045
    Interest and other income......................................      (11,646)               (9,901)               (5,737)
                                                                       ---------             ---------             ---------
Total other expense (income), net..................................       (1,293)                 (916)                  308
                                                                       ---------             ---------             ---------
Income before income taxes and cumulative effect
    of change in accounting principle..............................      131,663                89,072                35,849
Provision for income taxes.........................................       43,309                32,958                24,433
                                                                       ---------             ---------             ---------
Income before cumulative effect of change
    in accounting principle........................................       88,354                56,114                11,416
Cumulative effect of change in accounting
    principle (net of $670 in taxes)...............................           --                 1,976                    --
                                                                       ---------             ---------             ---------
Net income.........................................................    $  88,354             $  58,090             $  11,416
                                                                       =========             =========             =========


(CONTINUED)






                                      68

<PAGE>
<PAGE>

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

                                                                                     YEARS ENDED MARCH 31,
                                                                   -------------------------------------------------------
                                                                       2008                  2007                  2006
                                                                   -----------           -----------           -----------
<C>                                                                <C>                   <C>                   <C>
Earnings per share before cumulative effect of change in
  accounting principle:
       Basic - Class A common..............................        $      1.87           $      1.19           $      0.24
       Basic - Class B common..............................               1.55                  0.99                  0.20
       Diluted - Class A common............................               1.57                  1.02                  0.23
       Diluted - Class B common............................               1.35                  0.88                  0.20

Per share effect of cumulative effect of
  change in accounting principle:
       Basic - Class A common..............................        $         -           $      0.04           $         -
       Basic - Class B common..............................                  -                  0.04                     -
       Diluted - Class A common............................                  -                  0.03                     -
       Diluted - Class B common............................                  -                  0.03                     -

Earnings per share:
       Basic - Class A common..............................        $      1.87           $      1.23           $      0.24
       Basic - Class B common..............................               1.55                  1.03                  0.20
       Diluted - Class A common............................               1.57                  1.05                  0.23
       Diluted - Class B common............................               1.35                  0.91                  0.20

Shares used in per share calculation:
       Basic - Class A common..............................             37,150                36,813                35,842
       Basic - Class B common..............................             12,198                12,390                12,918
       Diluted - Class A common............................             59,144                58,953                49,997
       Diluted - Class B common............................             12,281                12,489                13,113



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>



                                     69

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                               YEARS ENDED MARCH 31,
                                                                                  -----------------------------------------------
                                                                                      2008             2007             2006
                                                                                  -----------       ----------      ------------
<C>                                                                               <C>               <C>             <C>
Net income.............................................................           $    88,354       $   58,090      $     11,416
Unrealized gain (loss) on available for sale securities:
   Unrealized holding gain (loss) during the period....................                (2,424)             100              (118)
   Reclassification of losses included in net income...................                    --              270                --
   Tax impact related to other comprehensive income (loss).............                   848             (126)               40
                                                                                  -----------       ----------      ------------
      Total other comprehensive income (loss)..........................                (1,576)             244               (78)
                                                                                  -----------       ----------      ------------

Total comprehensive income.............................................           $    86,778       $   58,334      $     11,338
                                                                                  ===========       ==========      ============
</TABLE>



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                                             70

<PAGE>
<PAGE>

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

<CAPTION>
                                                                 YEARS ENDED MARCH 31, 2008, 2007 AND 2006
                                         -------------------------------------------------------------------------------------------
                                                                                                               ACCUMULATED   TOTAL
                                                     CLASS A   CLASS B  ADDITIONAL                               OTHER       SHARE-
                                         PREFERRED   COMMON    COMMON    PAID-IN     TREASURY      RETAINED   COMPREHENSIVE HOLDERS'
                                           STOCK     STOCK     STOCK     CAPITAL       STOCK       EARNINGS   INCOME (LOSS)  EQUITY
                                           -----     -----     -----     -------       -----       --------   -------------  ------
                                                                             (Dollars in thousands)
<C>                                       <C>        <C>       <C>      <C>         <C>           <C>          <C>        <C>
BALANCE AT MARCH 31, 2005...............  $    --    $  386    $  133   $ 139,678   $  (53,651)   $  200,064   $   (133)  $ 286,477
Net income..............................       --        --        --          --           --        11,416         --      11,416
Dividends paid on preferred stock.......       --        --        --          --           --           (70)        --         (70)
Conversion of 736,778 Class B
  shares to Class A shares..............       --         7        (7)         --           --            --         --          --
Stock-based compensation................       --        --        --         927           --            --         --         927
Purchase of common stock for
  treasury..............................       --        --        --          --         (253)           --         --        (253)
Stock options exercised - 353,355
  shares of Class A and 127,519
  shares of Class B.....................       --         4         1       3,138           --            --         --       3,143
Excess income tax benefits from
  stock option exercises................       --        --        --       1,437           --            --         --       1,437
Other comprehensive loss................       --        --        --          --           --            --        (78)        (78)
                                          -----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2006...............       --       397       127     145,180      (53,904)      211,410       (211)    302,999
Net income..............................       --        --        --          --           --        58,090         --      58,090
Dividends paid on preferred stock.......       --        --        --          --           --           (70)        --         (70)
Conversion of 441,341 Class B
  shares to Class A shares..............       --         4        (4)         --           --            --         --          --
Stock-based compensation................       --        --        --       3,984           --            --         --       3,984
Purchase of common stock for
  treasury..............................       --        --        --          --       (2,077)           --         --      (2,077)
Stock options exercised - 166,169
  shares of Class A and 193,899
  shares of Class B.....................       --         2         1       3,617           --            --         --       3,620
Excess income tax benefits from
  stock option exercises................       --        --        --         683           --            --         --         683
Cumulative effect of change in
  accounting principle..................       --        --        --      (2,646)          --            --         --      (2,646)
Other comprehensive income..............       --        --        --          --           --            --        244         244
                                          -----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2007...............       --       403       124     150,818      (55,981)      269,430         33     364,827
Net income..............................       --        --        --          --           --        88,354         --      88,354
Dividends paid on preferred stock.......       --        --        --          --           --           (70)        --         (70)
Conversion of 234,528 Class B
  shares to Class A shares..............       --         2        (2)         --           --            --         --          --
Stock-based compensation................       --        --        --       5,205           --            --         --       5,205
Purchase of common stock for
  treasury..............................       --        --        --          --         (179)           --         --        (179)
Stock options exercised - 174,813
  shares of Class A and 9,427 shares
  of Class B...........................        --         2        --       1,343           --            --         --       1,345
Excess income tax benefits from
  stock option exercises...............        --        --        --       1,376           --            --         --       1,376
Reimbursement payment received
  from CEO - 45,531 shares of
  Class A Common Stock.................        --        --        --          --           --            --         --          --
Other comprehensive loss ..............        --        --        --          --           --            --     (1,576)     (1,576)
                                          -----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2008..............   $    --    $  407    $  122   $ 158,742   $  (56,160)   $  357,714   $ (1,543)  $ 459,282
                                          =========================================================================================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                     71

<PAGE>
<PAGE>


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

<CAPTION>
                                                                                              YEARS ENDED MARCH 31,
                                                                                 -----------------------------------------------
                                                                                      2008              2007              2006
                                                                                 ------------       ----------        ----------
<C>                                                                              <C>                <C>               <C>
Operating Activities:
Net income.............................................................          $     88,354       $   58,090        $   11,416
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Acquired in-process research and development........................                17,500               --            29,570
   Cumulative effect of change in accounting principle.................                    --           (1,976)               --
   Depreciation and  amortization .....................................                31,120           22,388            18,002
   Deferred income tax (benefit) provision.............................                (6,308)           7,698             6,062
   Deferred compensation...............................................                 2,232              877               965
   Stock-based compensation............................................                 5,205            3,984               927
   Excess tax benefits associated with stock options...................                (1,376)            (683)               --
   Other...............................................................                 1,440              270                --
Changes in operating assets and liabilities:
   Decrease (increase) in receivables, net.............................               (28,436)         (25,063)            7,593
   Increase in inventories.............................................                (3,465)         (20,349)          (16,792)
   Increase in prepaid and other assets................................                (6,443)          (2,771)           (1,185)
   (Decrease) increase in income taxes payable.........................                (1,622)           2,413             3,659
   Increase in accounts payable and accrued
      liabilities......................................................                24,157           12,257             4,392
                                                                                 ------------       ----------        ----------
Net cash provided by operating activities..............................               122,358           57,135            64,609
                                                                                 ------------       ----------        ----------
Investing Activities:
   Purchase of property and equipment..................................               (23,656)         (25,066)          (58,334)
   Purchase of marketable securities...................................              (125,426)        (178,949)          (61,187)
   Sale of marketable securities.......................................               158,750          128,000                --
   Purchase of preferred stock.........................................                    --             (400)          (11,300)
   Product acquisitions................................................              (159,000)              --           (25,643)
                                                                                 ------------       ----------        ----------
Net cash used in investing activities..................................              (149,332)         (76,415)         (156,464)
                                                                                 ------------       ----------        ----------
Financing Activities:
   Principal payments on long-term debt................................                (1,896)          (1,652)             (892)
   Proceeds from borrowing of long-term debt...........................                    --               --            32,764
   Proceeds from borrowing on line of credit...........................                50,000               --                --
   Repayment of borrowing on line of credit............................               (20,000)              --                --
   Dividends paid on preferred stock...................................                   (70)             (70)              (70)
   Purchase of common stock for treasury...............................                  (179)          (2,077)             (253)
   Excess tax benefits associated with stock options...................                 1,376              683                --
   Cash deposits received for stock options............................                 1,514            4,264             1,187
                                                                                 ------------       ----------        ----------
Net cash provided by financing activities.............................                 30,745            1,148            32,736
                                                                                 ------------       ----------        ----------
Increased (decrease)  in cash and cash equivalents.....................                 3,771          (18,132)          (59,119)
Cash and cash equivalents:
   Beginning of year...................................................                82,574          100,706           159,825
                                                                                 ------------       ----------        ----------
   End of year.........................................................          $     86,345       $   82,574        $  100,706
                                                                                 ============       ==========        ==========
Non-cash investing and financing activities:
   Term loans refinanced...............................................          $         --       $       --        $    9,859
   Stock options exercised (at expiration of two-year
      forfeiture period)..........................................                      1,345            3,620             3,143

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      72

<PAGE>
<PAGE>

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

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

         K-V Pharmaceutical Company and its subsidiaries ("KV" or the
         "Company") are primarily engaged in the development, manufacture,
         acquisition, 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
              ("GAAP"). 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.

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

              The preparation of financial statements in conformity with GAAP
              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
              revenue recognition and reductions to gross revenues, inventory
              valuation, intangible assets, stock-based compensation, income
              taxes, and loss contingencies related to legal proceedings.
              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.

              INVESTMENT SECURITIES
              ---------------------

              The Company's investment securities consist of mutual funds
              comprised of U.S. government guaranteed investments and auction
              rate securities. The Company classifies its investment
              securities as available-for-sale 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 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, up to 35 days. The Company
              reclassified these securities to non-current investment
              securities at March 31, 2008 to reflect the current lack of
              liquidity in these investments (see Note 4).


                                      73

<PAGE>
<PAGE>

              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 ranging from
              nine to 20 years. 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. The
              Company evaluates its intangible assets for impairment at least
              annually or 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.

              In accordance with Statement of Financial Accounting Standards
              ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
              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
              2008 determined there was no goodwill impairment.

              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 primarily to the
              Company's $12,284 investment at March 31, 2008 in the preferred
              stock of Strides Arcolab Limited.

                                      74

<PAGE>
<PAGE>

              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. The Company
              also enters into long-term agreements under which it assigns
              marketing rights for 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.

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


                                      75

<PAGE>
<PAGE>

                       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.
                  o    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. The provision for
                       Medicaid rebates is based upon historical experience of
                       claims submitted by the various states. The Company
                       also monitors Medicaid legislative changes to determine
                       what impact such legislation may have on the provision
                       for Medicaid rebates.

              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 $234,427, $148,822 and
              $154,662 for the years ended March 31, 2008, 2007 and 2006,
              respectively. The reserve balances related to the sales
              provisions totaled $46,646 and $31,281 at March 31, 2008 and
              2007, 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 U.S. 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 31.0%, 28.6% and 9.0%, and 33.7%, 19.7% and 15.1%
              of gross receivables at March 31, 2008 and 2007, respectively.

              For the year ended March 31, 2008, KV's three largest customers
              accounted for 24.6%, 23.9% and 9.8% of gross revenues. For the
              years ended March 31, 2007 and 2006, the Company's three largest
              customers accounted for gross revenues of 21.1%, 25.7% and 14.4%
              and 15.7%, 26.9% and 12.7%, 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.

              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

                                      76

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<PAGE>

              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 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
              $27,545, $21,932 and $18,366 for the years ended March 31, 2008,
              2007 and 2006, 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 convertible debt (see Note 10). 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 $5,635 and $4,471 at March 31, 2008 and
              2007, respectively. Deferred financing costs, net of accumulated
              amortization, are included in "Other Assets" in the accompanying
              consolidated balance sheets.

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

              The Company has two classes of common stock: Class A Common
              Stock and Class B Common Stock that is convertible into Class A
              Common Stock. With respect to dividend rights, holders of Class
              A Common Stock are entitled to receive cash dividends per share
              equal to 120% of the dividends per share paid on the Class B
              Common Stock. 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.

              The Company presents diluted earnings per share for Class B
              Common Stock for all periods using the two-class method which
              does not assume the conversion of Class B Common Stock into
              Class A Common Stock. The Company presents diluted earnings per
              share for Class A Common Stock using the if-converted method
              which assumes the conversion of Class B Common Stock into Class
              A Common Stock, if dilutive.

              Basic earnings per share is computed using the weighted average
              number of common shares outstanding during the period except
              that it does not include unvested common shares subject to
              repurchase. Diluted earnings per share is computed using the
              weighted average number of common shares and, if dilutive,
              potential common shares outstanding during the period. Potential
              common shares consist of the incremental common shares issuable
              upon the exercise of stock options, unvested common shares
              subject to repurchase,


                                      77

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<PAGE>

              convertible preferred stock and the Notes. The dilutive effects
              of outstanding stock options and unvested common shares subject
              to repurchase are reflected in diluted earnings per share by
              application of the treasury stock method. Convertible preferred
              stock and the Notes are reflected on an if-converted basis. The
              computation of diluted earnings per share for Class A Common
              Stock assumes the conversion of the Class B Common Stock, while
              the diluted earnings per share for Class B Common Stock does not
              assume the conversion of those shares.

              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 amount of existing
              assets and liabilities and the respective tax basis. 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. The Company evaluates the
              realizability of its deferred tax assets by assessing its
              valuation allowance and by adjusting the amount of such
              allowance, if necessary. The factors used to assess the
              likelihood of realization include the Company's forecast of
              future taxable income and available tax planning strategies that
              could be implemented to realize the net deferred tax assets.
              Failure to achieve forecasted taxable income in applicable tax
              jurisdictions could affect the ultimate realization of deferred
              tax assets and could result in an increase in the Company's
              effective tax rate on future earnings.

              The Company accounts for uncertain tax positions in accordance
              with FASB Interpretation No. 48, "Accounting for Uncertainty in
              Income Taxes -- an Interpretation of FASB Statement No. 109"
              ("FIN 48"), which was issued in July 2006. This interpretation
              addresses the determination of whether tax benefits claimed or
              expected to be claimed on a tax return should be recorded in the
              financial statements. Under FIN 48, the Company may recognize
              the tax benefit from an uncertain tax position only if it is
              more likely than not that the tax position will be sustained on
              examination by the taxing authorities, based on the technical
              merits of the position. The tax benefits recognized in the
              financial statements from such a position should be measured
              based on the largest benefit that has a greater than 50%
              likelihood of being realized upon ultimate settlement. The
              Company recognizes interest and penalties, if any, related to
              unrecognized tax benefits in income tax expense.

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

              Effective April 1, 2006, the Company adopted SFAS No. 123
              (revised 2004), "Share-Based Payment ("SFAS 123R"), which
              requires the measurement and recognition of compensation
              expense, based on estimated fair values, for all share-based
              compensation awards made to employees and directors over the
              vesting period of the awards. The Company adopted SFAS 123R
              using the modified prospective method and, as a result, did not
              retroactively adjust results from prior periods. Under the
              modified prospective method, stock-based compensation expense
              was recognized (1) for the unvested portion of previously issued
              awards that were outstanding at the initial date of adoption
              based on the grant date fair value estimated in accordance with
              the pro forma provisions of SFAS 123 "Accounting for Stock-Based
              Compensation" and (2) for any awards granted or modified on or
              subsequent to the effective date of SFAS 123R based on the grant
              date fair value estimated in accordance with the provisions of
              this statement. Prior to the adoption of SFAS 123R, the Company
              measured compensation expense for its employee stock-based
              compensation plans using the intrinsic value method prescribed
              by Accounting Principles Board Opinion No. 25 ("APB 25"). The
              Company also applied the disclosure provisions of SFAS 123, as
              amended by SFAS 148, as if the fair value-based method had been
              applied in measuring compensation expense. Under APB 25,
              compensation cost for stock options was recognized based on the
              excess, if any, of the quoted market price of the stock at the
              grant date of the award or other measurement date over the
              amount an employee must pay to acquire the stock.

                                      78

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              The following table provides the pro forma effects on net income
              and earnings per share for fiscal 2006 as if the fair value
              recognition provisions of SFAS 123 had been applied to options
              granted under the Company's employee compensation plans:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                    MARCH 31, 2006
                                                                  -------------------
<C>                                                               <C>
Net income                                                         $          11,416
Add: Stock-based compensation expense
      included in net income, net of tax                                         641
Deduct: Stock-based compensation using the
    fair value based method for all awards                                    (2,669)
                                                                  -------------------
Pro forma net income                                               $           9,388
                                                                  ===================

Earnings per share:
    Basic - Class A common                                         $            0.24
    Basic - Class B common                                                      0.20
    Diluted - Class A common                                                    0.23
    Diluted - Class B common                                                    0.20

Earnings per share - pro forma:
    Basic - Class A common                                         $            0.20
    Basic - Class B common                                                      0.17
    Diluted - Class A common                                                    0.19
    Diluted - Class B common                                                    0.16
</TABLE>

              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.

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

              The Company's financial instruments consist primarily of cash
              and cash equivalents, marketable securities, receivables,
              investments, trade accounts payable, the convertible debt,
              embedded derivatives related to the issuance of the convertible
              debt, a mortgage loan agreement, and borrowings under the
              Company's line of credit. The carrying amounts of cash and cash
              equivalents, receivables and trade accounts payable are
              representative of their respective fair values due to their
              relatively short maturities. The fair values of marketable
              securities are based on quoted market prices. The Company
              estimates the fair value of its fixed rate long-term obligations
              based on quoted market rates of interest and maturity schedules
              for similar issues. The carrying value of these obligations
              approximates their fair value.

              The Company's investment in the preferred stock of Strides
              Arcolab Limited of $14,311, including accrued but unpaid
              dividends, had a fair value of $14,600 at March 31, 2008 based
              on a valuation analysis. Based on quoted market rates, the
              Company's convertible debt had a fair value of $228,360 and
              $229,240 at March 31, 2008 and 2007, respectively. The carrying
              amount of the mortgage loan agreement and the outstanding
              balance of the line of credit approximate their fair values
              because their terms are similar to those which can be obtained
              for similar financial instruments in the current marketplace.

                                      79

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<PAGE>

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

              The Company's derivative financial instruments consist of
              embedded derivatives related to the convertible debt. These
              embedded derivatives include certain conversion features and a
              contingent interest feature. Although the conversion features
              represent embedded derivative financial instruments, based on
              the de minimis value of these features at the time of issuance
              and at March 31, 2008, 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 September 2006, the Financial Accounting Standards Board
              ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS
              157"), which provides enhanced guidance for using fair value to
              measure assets and liabilities. SFAS 157 clarifies the principle
              that fair value should be based on the assumptions that market
              participants would use when pricing an asset or liability,
              provides a framework for measuring fair value under GAAP and
              expands disclosure requirements about fair value measurements.
              SFAS 157 is effective for financial statements issued in fiscal
              years beginning after November 15, 2007, and interim periods
              within those fiscal years. The Company plans to adopt SFAS 157
              at the beginning of fiscal 2009 and is evaluating the impact, if
              any, the adoption of SFAS 157 will have on its financial
              condition and results of operations.

              In February 2007, the FASB issued SFAS No. 159, "The Fair Value
              Option for Financial Assets and Financial Liabilities" ("SFAS
              159"), which permits companies to choose to measure many
              financial instruments and certain other items at fair value. The
              objective is to improve financial reporting by providing
              companies with the opportunity to mitigate volatility in
              reported earnings caused by measuring related assets and
              liabilities differently without having to apply complex hedge
              accounting provisions. SFAS 159 is effective for fiscal years
              beginning after November 15, 2007. Companies are not allowed to
              adopt SFAS 159 on a retrospective basis unless they choose early
              adoption. The Company plans to adopt SFAS 159 at the beginning
              of fiscal 2009 and is evaluating the impact, if any, the
              adoption of SFAS 159 will have on its financial condition and
              results of operations.

              In March 2007, the FASB ratified the consensus reached by the
              Emerging Issues Task Force ("EITF") in Issue No. 06-10,
              "Accounting for Collateral Assignment Split-Dollar Life
              Insurance Arrangements" ("Issue 06-10"). Issue 06-10 requires
              companies with collateral assignment split-dollar life insurance
              policies that provide a benefit to an employee that extends to
              postretirement periods to recognize a liability for future
              benefits based on the substantive agreement with the employee.
              Recognition should be in accordance with FASB Statement No. 106,
              "Employers' Accounting for Postretirement Benefits Other Than
              Pensions," or APB Opinion No. 12, "Omnibus Opinion - 1967,"
              depending on whether a substantive plan is deemed to exist.
              Companies are permitted to recognize the effects of applying the
              consensus through either (1) a change in accounting principle
              through a cumulative-effect adjustment to retained earnings or
              to other components of equity or net assets as of the beginning
              of the year of adoption or (2) a change in accounting principle
              through retrospective application to all prior periods. Issue
              06-10 is effective for fiscal years beginning after December 15,
              2007, with early adoption permitted. The Company plans to adopt
              Issue 06-10 at the beginning of fiscal 2009 and is evaluating
              the impact of the adoption of Issue 06-10 on its financial
              condition and results of operations.

              In June 2007, the FASB ratified the consensus reached by the
              EITF on Issue No. 07-3, Accounting for Advance Payments for
              Goods or Services Received for Use in Future Research and
              Development Activities ("Issue 07-3"), which is effective for
              fiscal years beginning after December 15, 2007 and is applied
              prospectively for new contracts entered into on or after the
              effective date. Issue 07-3 addresses nonrefundable advance
              payments for goods or services for use in future research and
              development activities. Issue 07-3 will require that these
              payments that will be used or rendered for future research and
              development activities be deferred and capitalized and
              recognized as an expense as the related goods are delivered or
              the


                                      80

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<PAGE>

              related services are performed. If an entity does not expect the
              goods to be delivered or the services to be rendered, the
              capitalized advance payments should be expensed. The Company
              plans to adopt Issue 07-3 at the beginning of fiscal 2009 and is
              evaluating the impact of the adoption of this issue on its
              financial condition and results of operations.

              In September 2007, the EITF reached a consensus on Issue No.
              07-1 ("Issue 07-1"), "Accounting for Collaborative
              Arrangements." The scope of Issue 07-1 is limited to
              collaborative arrangements where no separate legal entity exists
              and in which the parties are active participants and are exposed
              to significant risks and rewards that depend on the success of
              the activity. The EITF concluded that revenue transactions with
              third parties and associated costs incurred should be reported
              in the appropriate line item in each company's financial
              statements pursuant to the guidance in Issue 99-19, "Reporting
              Revenue Gross as a Principal versus Net as an Agent." The EITF
              also concluded that the equity method of accounting under
              Accounting Principles Board Opinion 18, "The Equity Method of
              Accounting for Investments in Common Stock," should not be
              applied to arrangements that are not conducted through a
              separate legal entity. The EITF also concluded that the income
              statement classification of payments made between the parties in
              an arrangement should be based on a consideration of the
              following factors: the nature and terms of the arrangement; the
              nature of the entities' operations; and whether the partners'
              payments are within the scope of existing GAAP. To the extent
              such costs are not within the scope of other authoritative
              accounting literature, the income statement characterization for
              the payments should be based on an analogy to authoritative
              accounting literature or a reasonable, rational, and
              consistently applied accounting policy election. The provisions
              of Issue 07-1 are effective for fiscal years beginning on or
              after December 15, 2008, and companies will be required to apply
              the provisions through retrospective application. The Company
              plans to adopt Issue 07-1 at the beginning of fiscal 2010 and is
              evaluating the impact of the adoption of Issue 07-1 on its
              financial condition and results of operations.

              In December 2007, the FASB issued SFAS No. 141 (revised 2007),
              "Business Combinations" ("SFAS 141(R)") which replaces SFAS 141
              but retains the fundamental concept of purchase method of
              accounting in a business combination and improves reporting by
              creating greater consistency in the accounting and financial
              reporting of business combinations, resulting in more complete,
              comparable, and relevant information for investors and other
              users of financial statements. To achieve this goal, the new
              standard requires the acquiring entity in a business combination
              to recognize all the assets acquired and liabilities assumed in
              the transaction and any non-controlling interest at the
              acquisition date at their fair value as of that date. This
              statement requires measuring a non-controlling interest in the
              acquiree at fair value which will result in recognizing the
              goodwill attributable to the non-controlling interest in
              addition to that attributable to the acquirer. This statement
              also requires the recognition of assets acquired and liabilities
              assumed arising from contractual contingencies as of the
              acquisition date, measured at their acquisition date fair
              values. SFAS 141(R) is effective for business combinations for
              which the acquisition date is on or after the beginning of the
              first annual reporting period beginning on or after December 15,
              2008 and earlier adoption is prohibited. The Company plans to
              adopt SFAS 141(R) at the beginning of fiscal 2010 and is
              evaluating the impact of SFAS 141(R) on its financial condition
              and results of operations.

              In December 2007, the FASB issued SFAS No. 160, "Non-controlling
              Interests in Consolidated Financial Statements" ("SFAS 160") an
              amendment of ARB No. 51, which will affect only those entities
              that have an outstanding non-controlling interest in one or more
              subsidiaries or that deconsolidate a subsidiary by requiring all
              entities to report non-controlling (minority) interests in
              subsidiaries in the same way as equity in the consolidated
              financial statements. In addition, SFAS 160 eliminates the
              diversity that currently exists in accounting for transactions
              between an entity and non-controlling interests by requiring
              they be treated as equity transactions. SFAS 160 is effective
              for fiscal years beginning after December 15, 2008. The Company
              plans to adopt SFAS 160 at the beginning of fiscal 2010 and is
              evaluating the impact of SFAS 160 on its financial condition and
              results of operations.

              In May 2008, the FASB issued FASB Staff Position No. APB 14-a,
              "Accounting for Convertible Debt Instruments That May Be Settled
              in Cash Upon Conversion (Including Partial Cash Settlement)."
              Under the new rules for convertible debt instruments that may be
              settled entirely or partially in cash upon conversion, an


                                      81

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<PAGE>

              entity should separately account for the liability and equity
              components of the instrument in a manner that reflects the
              issuer's economic interest cost. The effect of the proposed new
              rules for the debentures is that the equity component would be
              included in the paid-in-capital section of shareholders' equity
              on an entity's consolidated balance sheet and the value of the
              equity component would be treated as original issue discount for
              purposes of accounting for the debt component of convertible
              debt. The FSP will be effective for fiscal years beginning after
              December 15, 2008, and for interim periods within those fiscal
              years, with retrospective application required. Early adoption
              is not permitted. The Company is currently evaluating the
              proposed new rules and the impact on its financial condition and
              results of operations.

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

         In January 2008, we entered into a definitive asset purchase
         agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
         acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
         hydroxyprogesterone caproate). The New Drug Application ("NDA") for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. The proposed indication is for women with a history of at
         least one spontaneous preterm delivery (i.e., less than 37 weeks),
         who are pregnant with a single fetus. Under the terms of the asset
         purchase agreement, the Company agreed to pay $82,000 for
         Gestiva(TM), $7,500 of which was paid at closing. For the year ended
         March 31, 2008, the Company recorded the $7,500 payment as in-process
         research and development expense because the product had not obtained
         FDA approval when the initial payment was made. The remainder of the
         purchase price is payable on the completion of two milestones: (1)
         $2,000 on the earlier to occur of CYTYC's receipt of acknowledgement
         from the FDA that their response to the FDA's October 20, 2006
         "approvable" letter is sufficient for the FDA to proceed with their
         review of the NDA or the receipt of FDA's approval of the Gestiva(TM)
         NDA and (2) $72,500 on FDA approval of a Gestiva(TM) NDA, transfer of
         all rights in the NDA to the Company and receipt by the Company of
         defined launch quantities of finished Gestiva(TM) suitable for
         commercial sale.

         In May 2007, the Company acquired the U.S. marketing rights to
         Evamist(TM), a new estrogen replacement therapy product delivered
         with a patented metered-dose transdermal spray system, from VIVUS,
         Inc. Under terms of the Asset Purchase Agreement, the Company paid
         $10,000 in cash at closing and agreed to make an additional cash
         payment of $141,500 upon final approval of the product by the U.S.
         Food and Drug Administration ("FDA"). The agreement also provides for
         two future payments upon achievement of certain net sales milestones.
         If Evamist(TM) achieves $100,000 of net sales in a fiscal year, a
         one-time payment of $10,000 will be made, and if net sales levels
         reach $200,000 in a fiscal year, a one-time payment of $20,000 will
         be made. For the year ended March 31, 2008, the Company recorded the
         $10,000 payment made at closing as in-process research and
         development expense because the product had not obtained FDA approval
         when the initial payment was made. In July 2007, FDA approval for
         Evamist(TM) was received and the payment of $141,500 was made to
         VIVUS, Inc. The preliminary purchase price allocation, which is
         subject to change based on the final fair value assessment, resulted
         in estimated identifiable intangible assets of $52,446 to product
         rights; $15,166 to trademark rights; $66,417 to rights under a
         sublicense agreement; and, $7,471 to a covenant not to compete. Upon
         FDA approval in July 2007, the Company began amortizing the product
         rights, trademark rights and rights under the sublicense agreement
         over 15 years and the covenant not to compete over nine years.

         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 separate agreements, 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 was
         originally part of the licensing arrangement with FemmePharma that
         provided the Company, among other things, marketing rights for the
         product principally in the U.S. In accordance with the new agreement,
         the Company acquired worldwide licensing rights of the endometriosis
         product, no longer was 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

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<PAGE>
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         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.

4.       INVESTMENT SECURITIES
         ---------------------

         The carrying amount of available-for-sale securities and their
         approximate fair values at March 31, 2008 and 2007 were as follows.

<TABLE>
<CAPTION>
                                                                                  MARCH 31, 2008
                                                    ----------------------------------------------------------------------------
                                                                            GROSS                 GROSS
                                                                          UNREALIZED            UNREALIZED               FAIR
                                                        COST                GAINS                 LOSSES                 VALUE
                                                        ----                -----                 ------                 -----
<C>                                                 <C>                   <C>                   <C>                   <C>
         Short-term marketable securities.....      $   40,538            $       10            $      -              $   40,548
         Non-current auction rate
            securities........................          83,900                    -                 (2,384)               81,516
                                                    ----------            ----------            ----------            ----------
             Total............................      $  124,438            $       10            $   (2,384)           $  122,064
                                                    ==========            ==========            ==========            ==========


<CAPTION>
                                                                                  MARCH 31, 2007
                                                    ----------------------------------------------------------------------------
                                                                            GROSS                 GROSS
                                                                          UNREALIZED            UNREALIZED               FAIR
                                                        COST                GAINS                 LOSSES                 VALUE
                                                        ----                -----                 ------                 -----
<C>                                                 <C>                   <C>                   <C>                   <C>
         Short-term marketable securities.....      $   38,612            $       50            $      -              $   38,662
         Short-term auction rate
            securities........................         119,150                    -                    -                 119,150
                                                    ----------            ----------            ----------            ----------
             Total............................      $  157,762            $       50            $      -              $  157,812
                                                    ==========            ==========            ==========            ==========
</TABLE>


         The Company accounts for its investment securities in accordance with
         SFAS 115, "Accounting for Certain Investments in Debt and Equity
         Securities," and classifies them as "available for sale." The
         Company's marketable securities at March 31, 2008 are recorded at
         fair value based on quoted market prices using the specific
         identification method and consisted of mutual funds comprised of U.S.
         government investments. These marketable securities are classified as
         current assets as the Company has the ability to use them for current
         operating and investing purposes. For the year ended March 31, 2007,
         a realized loss of $270 was recognized when the Company determined
         that its unrealized loss on marketable securities had become
         other-than-temporary as the duration of the losses had surpassed 24
         months and the Company no longer intended to hold these securities to
         recovery. There were no realized gains or losses for the years ended
         March 31, 2008 and 2006.

         At March 31, 2008 and 2007, the Company also had $83,900 and $119,150
         of principal invested in auction rate securities ("ARS"). These
         securities all have a maturity in excess of 10 years. The Company's
         investments in ARS primarily represent interests in collateralized
         debt obligations supported by pools of student loans, the principal
         of which is guaranteed by the U.S. Government. ARS backed by student
         loans are viewed as having low default risk and therefore very low
         risk of credit downgrade. The ARS held by the Company are AAA rated
         securities with long-term nominal maturities for which the interest
         rates are reset through a dutch auction at pre-determined intervals,
         up to 35 days. The auctions historically have provided a liquid
         market for these securities.

         With the liquidity issues experienced in global credit and capital
         markets, the ARS held by the Company at March 31, 2008 have
         experienced multiple failed auctions beginning in February 2008 as
         the amount of securities


                                      83

<PAGE>
<PAGE>

         submitted for sale has exceeded the amount of purchase orders. Given
         the failed auctions, the Company's ARS are illiquid until a
         successful auction for them occurs.

         The estimated fair value of the Company's ARS holdings at March 31,
         2008 was $81,516, which reflects a $2,384 difference from the
         principal value of $83,900. Although the ARS continue to pay interest
         according to their stated terms, the Company has recorded an
         unrealized loss of $1,550, net of tax, as a reduction to
         shareholders' equity in accumulated other comprehensive loss,
         reflecting adjustments to the ARS holdings that the Company has
         concluded have a temporary decline in value.

         The ARS are valued based on a discounted cash flow model that
         considers, among other factors, the time to work out the market
         disruption in the traditional trading mechanism, the stream of cash
         flows (coupons) earned until maturity, the prevailing risk free yield
         curve, credit spreads applicable to a portfolio of student loans with
         various tenures and ratings and an illiquidity premium. These factors
         were used in a Monte Carlo simulation based methodology to derive the
         estimated fair value of the ARS.

         At March 31, 2007, ARS are classified as current assets and included
         in the line item "Marketable securities." Given the failed auctions,
         the Company's ARS are illiquid until there is a successful auction
         for them. Accordingly, the $81,516 of ARS have been reclassified at
         March 31, 2008 from current assets to non-current assets and are
         included in the line item "Investment securities."

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

         Inventories as of March 31, consist of:

<TABLE>
<CAPTION>
                                                                        2008                  2007
                                                                        ----                  ----
                  <C>                                                <C>                   <C>
                  Finished goods.....................                $  27,654             $  35,420
                  Work-in-process....................                   15,925                13,294
                  Raw materials......................                   51,401                42,801
                                                                     ---------             ---------
                                                                     $  94,980             $  91,515
                                                                     =========             =========
</TABLE>

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

         Property and equipment as of March 31, consist of:

<TABLE>
<CAPTION>
                                                                                 2008                  2007
                                                                                 ----                  ----
                  <C>                                                         <C>                   <C>
                  Land and improvements.................................      $    6,253            $    6,253
                  Buildings and building improvements...................         109,128               108,631
                  Machinery and equipment...............................          86,490                73,461
                  Office furniture and equipment........................          32,417                27,819
                  Leasehold improvements................................          21,057                21,057
                  Construction-in-progress..............................          14,870                 5,865
                                                                              ----------            ----------
                                                                                 270,215               243,086
                  Less accumulated depreciation.........................         (74,015)              (56,186)
                                                                              ----------            ----------
                     Net property and equipment.........................      $  196,200            $   86,900
                                                                              ==========            ==========
</TABLE>

         Capital additions to property and equipment were $23,656, $25,066 and
         $58,334 for the years ended March 31, 2008, 2007 and 2006,
         respectively. Depreciation of property and equipment was $18,317,
         $16,208 and $11,916 for the years ended March 31, 2008, 2007 and
         2006, respectively.

         Property and equipment projects classified as
         construction-in-progress at March 31, 2008 are projected to be
         completed during the next 12 months at an estimated cost of $4,595.

         During the year ended March 31, 2006, the Company recorded
         capitalized interest on qualifying construction projects of $940. In
         fiscal 2008 and 2007, the Company did not record any capitalized
         interest.

                                      84

<PAGE>
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                    2008                                         2007
                                                      ---------------------------------           ---------------------------------
                                                         GROSS                                       GROSS
                                                       CARRYING            ACCUMULATED              CARRYING            ACCUMULATED
                                                        AMOUNT             AMORTIZATION              AMOUNT            AMORTIZATION
                                                        ------             ------------              ------            ------------
         <C>                                          <C>                   <C>                   <C>                   <C>
         Product rights acquired:
            Micro-K(R)..........................      $   36,140            $  (16,318)           $   36,140            $  (14,513)
            PreCare(R)..........................           8,433                (3,654)                8,433                (3,233)
            Evamist(TM)..........................         52,446                (2,378)                   --                    --
         Trademarks acquired:
            Niferex(R)..........................          14,834                (3,709)               14,834                (2,967)
            Chromagen(R)/StrongStart(R)...........        27,642                (6,910)               27,642                (5,528)
            Evamist(TM)..........................         15,166                  (688)                   --                    --
         License agreements:
            Evamist(TM)..........................         66,417                (3,011)                   --                    --
            Other.............................             2,300                    --                 4,400                  (480)
         Covenants not to compete:
            Evamist(TM)..........................          7,471                  (565)                   --                    --
            Other.............................               375                  (109)                  375                   (72)
         Trademarks and patents...............             5,317                  (972)                4,196                  (774)
                                                      ----------            ----------            ----------            ----------
                  Total intangible assets.....           236,541               (38,314)               96,020               (27,567)
              Goodwill........................               557                     -                   557                     -
                                                      ----------            ----------            ----------            ----------
                                                      $  237,098            $  (38,314)           $   96,577            $  (27,567)
                                                      ==========            ==========            ==========            ==========
</TABLE>

         As of March 31, 2008, the Company's intangible assets have a weighted
         average useful life of approximately 16 years. Amortization of
         intangible assets was $11,491, $4,810 and $4,784 for the years ended
         March 31, 2008, 2007 and 2006, respectively.

         During the year ended March 31, 2008, the Company recognized an
         impairment charge of $1,140 for the intangible asset related to a
         product right acquired under an external development agreement. Price
         erosion on the product eliminated the economics of marketing the
         product. The entire balance of the intangible asset was written-off
         as the product is no longer expected to generate positive future cash
         flows. The impairment loss is included in "Amortization and
         impairment of intangible assets" in the Consolidated Statement of
         Income and is included under the All Other segment in Note 21.

         Assuming no other additions, disposals or adjustments are made to the
         carrying values and/or useful lives of the intangible assets, annual
         amortization expense on product rights, trademarks acquired and other
         intangible assets is estimated to be approximately $14,500 in each of
         the five succeeding fiscal years.


                                      85

<PAGE>
<PAGE>

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

         Other assets as of March 31, consist of:

<TABLE>
<CAPTION>
                                                                                 2008                  2007
                                                                                 ----                  ----
                  <C>                                                         <C>                   <C>
                  Cash surrender value of life insurance...............       $    4,300            $    3,874
                  Preferred stock investments..........................           12,684                11,806
                  Accrued dividends on preferred stock ................            2,027                 1,198
                  Deferred financing costs, net........................              859                 2,159
                  Deposits.............................................            3,238                 1,366
                                                                              ----------            ----------
                                                                              $   23,108            $   20,403
                                                                              ==========            ==========
</TABLE>



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

         Accrued liabilities as of March 31, consist of:

<TABLE>
<CAPTION>
                                                                                  2008                 2007
                                                                                  ----                 ----
                  <C>                                                          <C>                  <C>
                  Salaries, wages, incentives and benefits.......              $  30,314            $   20,669
                  Accrued interest payable.......................                  2,721                 2,192
                  Professional fees..............................                  4,837                 5,921
                  Promotion expenses.............................                  4,984                   369
                  Stock option deposits..........................                  2,729                 2,560
                  Other..........................................                    931                 1,507
                                                                               ---------            ----------
                                                                               $  46,516            $   33,218
                                                                               =========            ==========
</TABLE>

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

         Long-term debt as of March 31, consists of:

<TABLE>
<CAPTION>
                                                                                 2008                  2007
                                                                                 ----                  ----
                  <C>                                                        <C>                   <C>
                  Building mortgages.............................            $    39,452           $    41,348
                  Line of credit.................................                 30,000                    --
                  Convertible notes..............................                200,000               200,000
                                                                             -----------           -----------
                                                                                 269,452               241,348
                  Less current portion...........................               (202,020)               (1,897)
                                                                             -----------           -----------
                                                                             $    67,432           $   239,451
                                                                             ===========           ===========
</TABLE>


         In June 2006, the Company entered into a credit agreement with ten
         banks that provides for a revolving line of credit for borrowing up
         to $320,000. This credit facility also includes a provision for
         increasing the revolving commitment, at the lenders' sole discretion,
         by up to an additional $50,000. The credit agreement is unsecured
         unless the Company, under certain specified circumstances, utilizes
         the facility to redeem part or all of its outstanding Notes. Interest
         is charged under the credit facility at the lower of the prime rate
         or LIBOR plus 62.5 to 150 basis points depending on the ratio of
         senior debt to EBITDA. The credit facility has a five-year term
         expiring in June 2011. The 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. At March 31, 2008, the Company had $942 in open
         letters of credit issued under the revolving credit line and $30,000
         of cash borrowings outstanding under the facility.

         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


                                      86

<PAGE>
<PAGE>

         mortgage loan was used for working capital and general corporate
         purposes. The 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.

         In May 2003, the Company issued $200,000 principal amount of 2.5%
         Contingent Convertible Subordinated Notes due 2033 (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. In November 2007,
         the average trading price of the Notes reached the threshold for the
         five-day trading period that resulted in the payment of contingent
         interest and beginning November 16, 2007 the Notes began to bear
         interest at a rate of 3.00% per annum.

         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.
         Even though no holders required the Company to repurchase all or a
         portion of their Notes on May 16, 2008, the Company classified the
         Notes as a current liability as of March 31, 2008 due to the right
         the holders had to require the Company to repurchase the Notes on May
         16, 2008. Since the holders did not elect to cause us to repurchase
         any of the Notes, the Notes will be reclassified as long-term
         beginning with our consolidated balance sheet as of June 30, 2008.

         The Notes are subordinate to all of our existing and future senior
         obligations. 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.

         The contingent interest feature of the Notes meets the criteria of
         and qualifies as an embedded derivative. Although this feature
         represents an embedded derivative financial instrument, based on its
         de minimis value at the time of issuance and at March 31, 2008, no
         value has been assigned to this embedded derivative.

         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.

                                      87

<PAGE>
<PAGE>

         The aggregate maturities of long-term debt as of March 31, 2008 are
         as follows:

                  Due in one year...............        $  202,020
                  Due in two years..............             2,144
                  Due in three years............             2,276
                  Due in four years.............            32,411
                  Due in five years.............             2,565
                  Thereafter....................            28,036
                                                        ----------
                                                        $  269,452
                                                        ==========

         The Company paid interest of $8,648 and $7,316 for the years ended
         March 31, 2008 and 2007, respectively. For the year ended March 31,
         2006, the Company paid interest, net of capitalized interest, of
         $4,692.

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 ten
         years subsequent to the property being placed in service. Industrial
         revenue bonds totaling $120,407 were outstanding at March 31, 2008.
         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 2021. Total rent expense for the years ended March 31, 2008,
         2007 and 2006 was $4,536, $4,132 and $3,819, respectively.

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

                  2009..........................          $  2,183
                  2010..........................             1,531
                  2011..........................             1,378
                  2012..........................             1,255
                  2013..........................               861
                  Thereafter....................               939


                                      88

<PAGE>
<PAGE>

         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 condition 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 $31,000.

         LITIGATION

         The Company and its subsidiaries Drugtech Corporation and Ther-Rx
         Corporation were named as defendants in a declaratory judgment case
         filed in the U.S. District Court for the District of Delaware by
         Lannett Company, Inc. ("Lannett") on June 6, 2008 and styled Lannett
         Company Inc. v. KV Pharmaceuticals et. al. Lannett has subsequently
         amended its complaint. The action seeks a declaratory judgment of
         patent invalidity, patent non-infringement, and patent
         unenforceability for inequitable conduct with respect to five patents
         owned by, and two patents licensed to, the Company or its
         subsidiaries and pertaining to the PrimaCare ONE(R) product marketed
         by Ther-Rx Corporation; unfair competition; deceptive trade
         practices; and antitrust violations. No specific amount of damages
         was stated in the complaint or amended complaint. We have not yet
         been served with either the complaint or the amended complaint.
         However, on June 17 2008, the Company filed a counterclaim against
         Lannett in that action asserting patent infringement; federal and
         common law trademark infringement, false advertising, and unfair
         competition; federal false designation of origin, false description
         and false representation; and common law misappropriation. The
         Company has requested a temporary restraining order and preliminary
         injunction against Lannett's continued sale of its product and
         continued infringement of the Company's trademarks and patents,
         unfair competition or misappropriation, and to require Lannett to
         recall all of its shipped product. A briefing schedule has been set
         by the court on the Company's motion and a hearing has been scheduled
         before the court on the Company's motion on June 25, 2008. No
         discovery has yet commenced nor a trial date been set.

         The Company is named as a defendant in a patent infringement case
         filed in the U.S. District Court for the District of Delaware by UCB,
         Inc. and Celltech Manufacturing CA, Inc. (collectively, "UCB") on
         April 21, 2008 and styled UCB, Inc. et al. v. KV Pharmaceutical
         Company. After the Company filed an ANDA with the FDA seeking
         permission to market a generic version of the 40 mg, 50 mg and 60 mg
         strengths of Metadate CD(R) methylphenidate hydrochloride
         extended-release capsules, UCB filed this lawsuit under a patent
         owned by Celltech. In a Paragraph IV certification accompanying the
         ANDA, KV contended that its proposed 40mg generic formulation would
         not infringe Celltech's patent. Because the patent was not listed in
         the Orange Book for the 50mg and 60mg dosages, a Paragraph I
         certification was filed with respect to them. Pursuant to the
         Hatch-Waxman Act, the filing of the suit against the Company
         instituted an automatic stay of FDA approval of the Company's ANDA
         with respect to the 40 mg strength of this product until the earlier
         of a judgment in the Company's favor, or 30 months from the date of
         suit. Inasmuch as the Celltech patent was not listed in the Orange
         Book with respect to the 50 mg and 60 mg strengths, it is the
         Company's belief that the automatic stay does not apply to the
         Company's 50 mg and 60 mg strengths of this product. UCB may,
         however, seek to keep these strengths tied up in the litigation. The
         Company has filed an answer, asserted certain affirmative defenses
         (including that Plaintiffs are estopped to assert infringement of the
         50 mg and 60 mg dosages due to their not listing the Celltech patent
         in the Orange Book for these dosages), and has asserted a
         counterclaim in which it seeks a declaratory judgment of invalidity
         and non-infringement of the claims in the Celltech patent, and an
         award of attorneys fees and costs. The case has recently commenced
         and no trial date has yet been set. The Company intends to vigorously
         defend its interests; however, it cannot give any assurance that it
         will prevail.

                                      89

<PAGE>
<PAGE>

         The Company is named as a defendant in a patent infringement case
         filed in the U.S. District Court for the District of New Jersey by
         Janssen, L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil
         Neurologics, Inc. (collectively, "Janssen") on December 14, 2007 and
         styled Janssen, L.P. et al. v. KV Pharmaceutical Company. After the
         Company filed an ANDA with the FDA seeking permission to market a
         generic version of the 8 mg and 16 mg strengths of Razadyne(R) ER
         (formerly Reminyl(R)) galantamine hydrobromide extended-release
         capsules, Janssen filed this lawsuit for patent infringement under a
         patent owned by Janssen. In the Company's Paragraph IV certification,
         KV contended that its proposed generic versions do not infringe
         Janssen's patent. 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 has filed an answer and
         counterclaim for declaratory judgment of non-infringement and patent
         invalidity. Discovery is on-going, but no trial date has yet been
         set. Following the Company's filing of an ANDA pertaining to a
         generic version of the 24 mg strength of Razadyne(R) ER (formerly
         Reminyl(R)) galantamine hydrobromide extended-release capsules and
         the Company's giving of notice of this filing to Janssen, Janssen has
         filed in June 2008 a second complaint in the same federal court,
         naming the Company as a defendant in a related patent infringement
         case under the same Janssen patent with respect to such 24 mg generic
         version. The time to answer the new complaint has not yet run. The
         Company anticipates that both cases will be coordinated before the
         court. The Company intends to vigorously defend its interests;
         however, it cannot give any assurance that it will prevail.

         The Company is named as a defendant in a patent infringement case
         filed in the U.S. District Court for the District of New Jersey by
         Celgene Corporation ("Celgene") and Novartis Pharmaceuticals
         Corporation and Novartis Pharma AG (collectively, "Novartis") on
         October 4, 2007 and styled Celgene Corporation et al. v. KV
         Pharmaceutical Company. After the Company filed an ANDA with the FDA
         seeking permission to market a generic version of the 10 mg, 20 mg,
         30 mg, and 40 mg strengths of Ritalin LA(R) methylphenidate
         hydrochloride extended-release capsules, Celgene and Novartis filed
         this lawsuit for patent infringement under the provisions of the
         Hatch-Waxman Act with respect to two patents owned by Celgene and
         licensed to Novartis. In the Company's Paragraph IV certification, KV
         contended that its proposed generic versions do not infringe
         Celgene'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 has been served with
         this complaint and has filed its answer and a counterclaim in the
         case, seeking a declaratory judgment of non-infringement, patent
         invalidity, and inequitable conduct in obtaining the patents. The
         case is just commencing and no trial date has yet been set. Celgene
         has moved to disqualify the Company's counsel in the case, asserting
         a conflict of interest despite its signing of an advance waiver with
         such counsel, and this motion is pending before the court. Should
         this motion be granted, the Company will need to retain new counsel.
         The Company does not believe that this would materially delay the
         progress of the lawsuit. The Company has filed a motion for sanctions
         against plaintiffs pursuant to Rule 11 of the Federal Rules of Civil
         Procedure for bringing an action without proper basis and is seeking
         an order dismissing the patent infringement complaint filed by
         plaintiffs, and awarding the Company its costs and attorneys' fees.
         Celgene has asked the court to dismiss the Company's Rule 11 motion,
         and the matter is pending before the court. The Company intends to
         vigorously defend its interests; however, it cannot give any
         assurance that it will prevail.

         The Company is named as a defendant in a patent infringement case
         brought by Purdue Pharma L.P., The P.F. Laboratories, Inc., and
         Purdue Pharmaceuticals L.P. ("Purdue") on January 17, 2007 against it
         and an unrelated third party and styled Purdue Pharma L.P. et al. v.
         KV Pharmaceutical Company et al. filed in the U.S. District Court for
         the District of Delaware. After the Company filed an ANDA with the
         FDA seeking permission to market a generic version of the 10 mg, 20
         mg, 40 mg, and 80 mg strengths of OxyContin(R) in extended-release
         tablet form, Purdue filed a lawsuit against KV for patent
         infringement under the provisions of the Hatch-Waxman Act with
         respect to three Purdue patents. In the Company's Paragraph IV
         certification, KV contended that Purdue's patents are invalid,
         unenforceable, or will not be infringed by KV's proposed generic
         versions. On February 12, 2007, a second patent infringement lawsuit
         was filed in the same court against the Company by Purdue, asserting
         patent infringement under the same three patents with respect to the
         Company's filing of an amendment to its ANDA with FDA to sell a
         generic equivalent of Purdue's OxyContin(R), 30 mg and 60 mg
         strengths, products. On June 6, 2007, a third patent infringement
         lawsuit was filed against the Company by Purdue in the U.S. District
         Court for the Southern District of New York, asserting patent
         infringement under the


                                      90

<PAGE>
<PAGE>

         same three patents with respect to the Company's filing of an
         amendment to its ANDA with FDA to sell a generic equivalent of
         Purdue's OxyContin(R), 15 mg strength, product. The two lawsuits
         filed in federal court in Delaware have been transferred to the
         federal court in New York for multi-district litigation purposes
         together with an additional lawsuit by Purdue against another
         unrelated company, also in federal court in New York. Purdue
         currently has similar lawsuits pending against additional unrelated
         companies in federal court in New York.

         The Company filed answers and counterclaims against Purdue in all
         three lawsuits, asserting various defenses to Purdue's claims;
         seeking declaratory relief of the invalidity, unenforceability and
         non-infringement of the Purdue patents; and asserting counterclaims
         against Purdue for violations of federal antitrust law, including
         Sherman Act Section 1 and Section 2 for monopolization, attempt to
         monopolize, and conspiracy to monopolize with respect to the U.S.
         market for controlled-release oxycodone, and agreements in
         unreasonable restraint of competition, and for intentional
         interference with valid business expectancy. Purdue has filed replies
         to the Company's counterclaims.

         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 court initially stayed all proceedings pending
         determining whether Purdue committed inequitable conduct in its
         dealings with the U.S. Patent and Trademark Office with respect to
         the issuance of its patents, which would render such patents
         unenforceable, and the court's subsequent decision on the issue. On
         January 7, 2008, the court issued its decision finding that Purdue
         had not committed inequitable conduct with respect to the patents in
         suit. The Company, among others, has asked the court to lift the stay
         so that the remainder of the case may resume but the stay has not yet
         been lifted. Discovery in the suit has not yet commenced but is
         expected to commence shortly after the stay is lifted on the case. No
         trial date has yet been set. The Company intends to vigorously defend
         its interests; however, it cannot give any assurance that it will
         prevail.

         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 U.S. District
         Court for the District of Minnesota. CIMA 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 U.S. Patent and Trademark Office's reexamination of a patent
         at issue in the suit. The Patent and Trademark Office has, to date,
         issued a final office action rejecting all existing and proposed new
         claims by CIMA with respect to this patent. CIMA has certain rights
         of appeal of this rejection of its claims and has exercised those
         rights. The product involved in this lawsuit is currently subject to
         a hold on the Company's inventory of certain unapproved products
         notified to the Company in March 2008 by representatives of the
         Missouri Department of Health and Senior Services and the FDA. In the
         event that such hold is lifted, ETHEX intends to resume marketing the
         product during the stay in the lawsuit with CIMA. The Company intends
         to vigorously defend its interests when or if the stay is lifted;
         however, it cannot give any assurance it will prevail or that the
         stay will be lifted.

         The Company and ETHEX are named as defendants in a case brought by
         Axcan ScandiPharm Inc. and styled Axcan ScandiPharm Inc. v. ETHEX
         Corporation et. al., filed in U.S. District Court in Minnesota on
         June 1, 2007. In general, Axcan alleges that ETHEX's comparative
         promotion of its Pangestyme(TM) UL12 and Pangestyme(TM) UL18 products
         to Axcan's Ultrase(R) MT12 and Ultrase(R) MT18 products resulted in
         false advertising and misleading statements under various federal and
         state laws, and constituted unfair and deceptive trade practices. The
         Company filed a motion for judgment on the pleadings in its favor on
         several grounds. The motion has been granted in part and denied in
         part by the court on October 19, 2007, with the court applying the
         statute of limitations to cut off Axcan's claims concerning conduct
         prior to June 2001, determining that it was too early to determine
         whether laches or res judicata barred the suit, and rejecting the
         remaining bases for dismissal. Discovery has since commenced and a
         trial date has been set for January 2010. Plaintiffs have recently
         filed a motion to amend their complaint to seek declaratory judgments
         that Axcan does not have "unclean hands" nor violated any antitrust
         or unfair competition laws. This motion is pending before the court.
         The Company intends to vigorously defend its interests; however, it
         cannot give any assurance that it will prevail.

         The Company has 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


                                      91

<PAGE>
<PAGE>

         caplets that are alleged to have been manufactured by the Company and
         to contain phenylpropanolamine, or 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 again in 2004, 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. 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 in the event of such
         future litigation; however, it cannot give any assurance it will
         prevail.

         The Company was named as a defendant in a case filed in U.S. District
         Court in Missouri by AstraZeneca AB, Aktiebolaget Hassle and
         AstraZeneca LP (collectively, "AstraZeneca") and styled AstraZeneca
         AB et. al. v. KV Pharmaceutical Company. 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 District Court in Missouri alleging, among other things, that
         AstraZeneca's patent is invalid and unenforceable. These motions were
         granted and AstraZeneca appealed. On July 23, 2007, the Court of
         Appeals for the Federal Circuit affirmed the decision of the District
         Court below with respect to the invalidity of AstraZeneca's patent
         but reversed and remanded with respect to inequitable conduct by
         AstraZeneca. AstraZeneca filed for rehearing by the Federal Circuit,
         which was denied and the time has now run with respect to any
         petition for certiorari to the United States Supreme Court. As a
         result, the Company no longer faces the prospect of any liability to
         AstraZeneca in connection with this lawsuit. KV continued to proceed
         with its counterclaim against AstraZeneca for inequitable conduct in
         obtaining the patents that have been ruled invalid, in order to
         recover the Company's defense costs, including legal fees. In May
         2008, the Company entered into a settlement agreement with
         AstraZeneca and settled its remaining counterclaims against
         AstraZeneca in exchange for a payment of $2,700.

         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
         States of Massachusetts, Alabama, Mississippi, Utah and Iowa, New
         York City, and approximately 45 counties in New York State. The State
         of Mississippi effectively voluntarily dismissed the Company and
         ETHEX without prejudice on October 5, 2006 by virtue of the State's
         filing an Amended Complaint on such date that does not name either
         the Company or ETHEX as a defendant. In the remaining cases, only
         ETHEX is a named defendant. On August 13, 2007, ETHEX settled the
         Massachusetts lawsuit for $575 in cash and pharmaceutical products
         valued at $150, both of which are to be paid or delivered over the
         next two years, and received a general release; no admission of
         liability was made. The New York City case and all New York county
         cases (other than the Erie, Oswego and Schenectady County cases) have
         been transferred to the U.S. District Court for the District of
         Massachusetts for coordinated or consolidated pretrial proceedings
         under the Average Wholesale Price Multidistrict Litigation (MDL No.
         1456). The cases pertaining to the State of Alabama, Erie County,
         Oswego


                                      92

<PAGE>
<PAGE>

         County, and Schenectady County were removed to federal court by a
         co-defendant in October 2006, but all of these cases have since been
         remanded to the state courts in which they originally were filed. A
         motion is pending in New York state court to coordinate the Oswego,
         Erie and Schenectady Counties cases. Each of these actions is in the
         early stages, with fact discovery commencing or ongoing in the
         Alabama case and the federal cases involving New York City and 42 New
         York counties. On October 24, 2007, ETHEX was served with a complaint
         filed in Utah state court by the State of Utah naming it and nine
         other pharmaceutical companies as defendants in a pricing suit. On
         November 19, 2007, the State of Utah filed an amended complaint. The
         Utah suit has been removed to federal court and a motion has been
         filed to transfer the case to the MDL litigation for pretrial
         coordination. The State is seeking to remand the case to state court,
         and the decision is pending before the court. The time for ETHEX to
         answer or respond to the Utah complaint has not yet run. On October
         9, 2007, the State of Iowa filed a complaint in federal court in Iowa
         naming ETHEX and 77 other pharmaceutical companies as defendants in a
         pricing suit. ETHEX and the other defendants have filed a motion to
         dismiss the Iowa complaint. 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.

         The Company and ETHEX were 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 alleged 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
         were 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 had not yet begun, and the court had set the trial to
         commence in July 2007. The plaintiff and the Company agreed, however,
         to a tolling agreement, under which the plaintiff dismissed the case
         without prejudice in return for the Company's agreement to toll the
         statute of limitations in the event the plaintiff refiled its case in
         the future. The case was dismissed without prejudice. On January 18,
         2008, the Company and ETHEX were served with a new complaint,
         substantially similar to the earlier law suit. KV and ETHEX have
         filed an answer to the new complaint, as well as a motion to dismiss
         the lawsuit based on expiration of the statute of limitations. This
         motion is pending before the court, with a hearing scheduled by the
         court on July 7, 2008. A trial date has been set for November 2008.
         The Company intends to vigorously defend its interests; however, it
         cannot give any assurance that it will prevail.

         On September 15, 2006, a shareholder derivative suit, captioned
         Fuhrman v. Hermelin et al., was filed in state court in St. Louis,
         Missouri against the Company, as nominal defendant, and seven present
         or former officers and directors, alleging that defendants had
         breached their fiduciary duties and engaged in unjust enrichment in
         connection with the granting, dating, expensing and accounting
         treatment of past grants of stock options between 1995 and 2002 to
         six current or former directors or officers. Relief sought included
         damages, disgorgement of backdated stock options and their proceeds,
         attorneys' fees, and equitable relief. On February 26, 2007, the
         Fuhrman lawsuit was dismissed without prejudice by the plaintiff in
         state court, and a lawsuit, captioned Krasick v. Hermelin et al., was
         filed in the U.S. District Court for the Eastern District of Missouri
         by the same law firms as in the Fuhrman lawsuit, with a different
         plaintiff. The Krasick lawsuit was also a shareholder derivative suit
         filed against the Company, as nominal defendant, and 19 present or
         former officers and directors. The complaint asserted within its
         fiduciary duties claims allegations that the officers and/or
         directors of KV improperly (including through collusion and aiding
         and abetting) backdated stock option grants in violation of
         shareholder-approved plans, improperly recorded and accounted for the
         allegedly backdated options in violation of GAAP, improperly took tax
         deductions under the Internal Revenue Code, disseminated and filed
         false financials and false SEC filings in violation of federal
         securities laws and rules thereunder, and engaged in insider trading
         and


                                      93

<PAGE>
<PAGE>

         misappropriation of information. Relief sought included damages, a
         demand for accounting and recovery of the benefits allegedly
         improperly received, rescission of the allegedly backdated stock
         options and disgorgement of their proceeds, and reasonable attorney's
         fees, in addition to equitable relief, including an injunction to
         require the Company to change certain of its corporate governance and
         internal control procedures. On May 11, 2007, the Company learned of
         the filing of another lawsuit, captioned Gradwell v. Hermelin et al.,
         also in the U.S. District Court for the Eastern District of Missouri.
         The complaint was brought by the same law firms that brought the
         Krasick litigation and was substantively the same as in the Krasick
         litigation, other than being brought on behalf of a different
         plaintiff and eliminating one individual defendant from the suit. On
         July 18, 2007, the Krasick and Gradwell suits were refiled as a
         consolidated action in U.S. District Court for the Eastern District
         of Missouri, styled In re K-V Pharmaceutical Company Derivative
         Litigation, which was substantively the same as the Krasick and
         Gradwell suits. The Company moved to terminate the litigation based
         on a determination by members of a Special Committee of the Board of
         Directors that continuation of the litigation was not in the best
         interest of KV and its shareholders. All individual officer and
         director defendants joined in that motion. Plaintiffs filed a motion
         for rule to show cause why the defendants' motion to terminate the
         lawsuit should not be stricken and dismissed. On February 15, 2008,
         the court stayed proceedings in the case until April 9, 2008, to
         permit mediation pursuant to the parties' stipulation. Mediation
         occurred on April 2, 2008. On May 23, 2008, all remaining parties to
         the litigation filed a proposed settlement with the court which, if
         approved by the court, would resolve all claims asserted in the
         Action. The proposed settlement provides for a payment of fees and
         expenses to plaintiffs' counsel not to exceed $1,650, which amount is
         expected to be covered by insurance. The proposed settlement received
         preliminary approval by the court on June 3, 2008. Notice of the
         terms of the settlement has been mailed to all shareholders of record
         as of May 23, 2008 and a final fairness hearing has been scheduled by
         the court to be conducted on August 26, 2008.

         In the course of the Special Committee's investigation, by letter
         dated December 18, 2006, the Company was notified by the SEC staff
         that it had commenced an investigation with respect to the Company's
         stock option plans, grants, exercises, and accounting treatment. The
         Company has cooperated with the SEC staff in its investigation and,
         among other things, has provided them with copies of the Special
         Committee's report and all documents collected by the Special
         Committee in the course of its review. In December 2007, the SEC
         staff, pursuant to a formal order of investigation, issued subpoenas
         for additional documents and testimony by certain employees. The
         production of additional documents called for by the subpoena and the
         testimony of the employees was completed in May 2008.

         The Company has received a subpoena from the Office of Inspector
         General of the Department of Health and Human Services, seeking
         documents with respect to two of ETHEX's nitroglycerin products. Both
         are unapproved products, that is, they have not received FDA
         approval. (FDA approval is not necessarily required for all drugs to
         be sold in the marketplace, such as pre-1938 "grandfathered" products
         or certain drugs reviewed under the so-called DESI process. The
         Company believes that its two products come within these exceptions.)
         The subpoena states that it is in connection with an investigation
         into potential false claims under Title 42 of the U.S. Code, and
         appears to pertain to whether these products are eligible for
         reimbursement under federal health care programs, such as Medicaid
         and VA programs.

         Resolution of any of the matters discussed above could have a
         material adverse effect on the Company's results of operations or
         financial condition.

         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 the ultimate outcome of such other proceedings
         will not have a material adverse effect on its results of operations
         or financial condition.

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



                                      94

<PAGE>
<PAGE>

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 non-compete 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 ten years or the life of the CEO. In accordance
         with this agreement, the Company recognized retirement expense of
         $2,232, $877 and $965 for the years ended March 31, 2008, 2007 and
         2006, respectively.

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

         In January 2007, the Company received a $3,600 payment from an
         insurance company in accordance with a settlement agreement entered
         into with the insurance company for insurance coverage associated
         with the Healthpoint litigation. The payment was reflected by the
         Company in the "Selling and Administrative" expense line item of
         operating income for the year ended March 31, 2007 and was recorded
         net of approximately $1,192 of attorney-related fees.

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

         The income tax provisions for the years ended March 31, 2008, 2007
         and 2006, are based on estimated federal and state taxable income
         using the applicable statutory rates. The current and deferred
         federal and state income tax provisions, excluding income taxes
         related to the cumulative effect of a change in accounting, for the
         years ended March 31, 2008, 2007 and 2006 are as follows:

<TABLE>
<CAPTION>
                                                                              2008             2007              2006
                                                                              ----             ----              ----
                  <C>                                                       <C>              <C>               <C>
                  PROVISION
                     Current:
                        Federal...............................              $ 44,280         $ 23,434          $ 17,035
                        State.................................                 3,414            1,918             1,552
                                                                            --------         --------          --------
                                                                              47,694           25,352            18,587
                                                                            --------         --------          --------
                     Deferred:
                        Federal...............................                (4,073)           7,042             5,521
                        State.................................                  (312)             564               325
                                                                            --------         --------          --------
                                                                              (4,385)           7,606             5,846
                                                                            --------         --------          --------
                                                                            $ 43,309         $ 32,958          $ 24,433
                                                                            ========         ========          ========
</TABLE>

The reasons for the differences between the provision for income taxes and the
expected federal income taxes at the U.S. statutory rate are as follows:


<TABLE>
<CAPTION>
                                                                              2008             2007              2006
                                                                              ----             ----              ----
                  <C>                                                      <C>               <C>              <C>
                  Expected income tax expense.................             $  46,082         $ 31,175         $  12,547
                  Purchased in-process research
                     and development..........................                    --               --            10,654
                  State income taxes, net of
                     federal income tax benefit...............                 2,016            1,613             1,218
                  Business credits............................                (1,213)            (945)             (831)
                  Domestic manufacturer deduction.............                (2,829)            (707)             (512)
                  Adjustment to unrecognized tax benefits.....                (2,464)           1,910             1,712
                  Other ......................................                 1,717              (88)             (355)
                                                                           ---------         --------         ---------
                  Provision for income tax expense............             $  43,309         $ 32,958         $  24,433
                                                                           =========         ========         =========
</TABLE>

                                      95

<PAGE>
<PAGE>


         As of March 31, 2008 and 2007, the tax effect of temporary
         differences between the tax basis of assets and liabilities and their
         financial reporting amounts are as follows:

<TABLE>
<CAPTION>
                                                                   2008                                         2007
                                                     --------------------------------            ---------------------------------
                                                      CURRENT             NON-CURRENT             CURRENT              NON-CURRENT
                                                      -------             -----------             -------              -----------
         <C>                                         <C>                  <C>                    <C>                   <C>
         Fixed asset basis differences........       $      --            $  (16,996)            $      --             $  (14,121)
         Reserves for inventory and
            receivables.......................          14,728                    --                10,307                     --
         Accrued compensation.................           1,612                    --                    --                     --
         Deferred compensation................              --                 3,138                    --                  2,320
         Amortization.........................              --                 2,120                    --                 (3,440)
         Convertible notes interest...........              --               (30,305)                   --                (22,766)
         Stock-based compensation.............           2,592                    --                 1,525                     --
         Payroll taxes........................           3,227                    --                 2,196                     --
         Other................................             653                 2,744                   336                     --
                                                     ---------            ----------             ---------             ----------
            Net deferred tax asset (liability)       $  22,812            $  (39,299)            $  14,364             $  (38,007)
                                                     =========            ==========             =========             ==========
</TABLE>

         In assessing the realizability of deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred tax assets will not be realized. The ultimate
         realization of deferred tax assets is dependent upon the generation
         of future taxable income during the periods in which those temporary
         differences become deductible. Management considers the timing of
         deferred tax liability reversals and projected future taxable income.
         Based upon the level of historical taxable income and projections for
         future taxable income over the periods in which the temporary
         differences are deductible, management believes it more likely than
         not the Company will realize the benefits of these deductible
         differences.

         An income tax benefit has resulted from the determination that
         certain non-qualified stock options for which stock-based
         compensation expense was recorded will create an income tax
         deduction. This tax benefit has resulted in an increase to the
         Company's deferred tax assets for stock options prior to the
         occurrence of a taxable event or the forfeiture of the related
         options. Upon the occurrence of a taxable event or forfeiture of the
         underlying options, the corresponding deferred tax asset is reversed
         and the excess or deficiency in the deferred tax asset is recorded to
         paid-in capital in the period in which the taxable event or
         forfeiture occurs.

         The Company paid income taxes of $49,862, $22,134, and $15,482 during
         the years ended March 31, 2008, 2007 and 2006, respectively.

         The Company adopted FIN 48 effective April 1, 2007. The adoption of
         FIN 48 was not material to the Company's consolidated financial
         position, however, certain reclassifications of various income tax
         related balance sheet amounts were required.

         Upon adoption of FIN 48, the Company had $12,980 of gross
         unrecognized tax benefits, of which $12,980 represents the amount of
         unrecognized tax benefits that, if recognized, would favorably affect
         the effective income tax rate in future periods.



                                      96

<PAGE>
<PAGE>

         A reconciliation of the unrecognized tax benefits at the beginning
and end of the period is as follows:

<TABLE>
                  <C>                                                                                                 <C>
                  Balance of unrecognized tax benefits at April 1, 2007                                               $ 12,980

                  Increase/(decrease) in unrecognized tax benefits
                  resulting from tax positions taken during current period                                               1,347

                  Increase/(decrease) in unrecognized tax benefits
                  resulting from tax positions taken in prior periods                                                        0

                  Reduction to unrecognized tax benefits as a result
                  of a settlement with taxing authorities                                                                    0

                  Reduction to unrecognized tax benefits as a result
                  of the lapse of the applicable statute of limitations                                                 (2,670)
                                                                                                                      --------

                  Balance of unrecognized tax benefits at March 31, 2008                                              $ 11,657
                                                                                                                      ========
</TABLE>

         The Company recognizes interest and penalties associated with
         uncertain tax positions as a component of income tax expense. At
         April 1, 2007, the Company had accrued $1,950 for interest and
         penalties. Through March 31, 2008, the Company accrued an additional
         $1,450 of interest and penalties and released $1,248 of interest and
         penalties as a result of the expiration of the statute of
         limitations. As of March 31, 2008, the accrual for interest and
         penalties was $2,152.

         It is anticipated the Company will recognize approximately $1,100 of
         unrecognized tax benefits within the next 12 months. This recognition
         is as a result of the expected expiration of the relevant statute of
         limitations.

         The Company is subject to taxation in the U.S. and various states and
         is subject to examination by those authorities. The Company's federal
         statute of limitations has expired for fiscal years prior to 2005 and
         the relevant state statutes vary. The Company currently is being
         audited by the IRS for its March 31, 2006 and 2007 tax years. The IRS
         is also currently auditing the employment tax returns of the Company
         for calendar years 2004, 2005, 2006 and 2007. Various information
         requests with respect to the periods under audit have been received
         and responded to. The Company expects the IRS to issue additional
         information requests. The Company does not have any state
         examinations in progress at this time.

         Management regularly reevaluates the Company's tax positions taken on
         filed tax returns using information about recent court decisions and
         legislative activities. Many factors are considered in making these
         evaluations, including past history, recent interpretations of tax
         law, and the specific facts and circumstances of each matter. Because
         tax law and regulations are subject to interpretation and tax
         litigation is inherently uncertain, these evaluations can involve a
         series of complex judgments about future events and can rely heavily
         on estimates and assumptions. The recorded tax liabilities are based
         on estimates and assumptions that have been deemed reasonable by
         management. However, if the Company's estimates are not
         representative of actual outcomes, recorded tax liabilities could be
         materially impacted.

         The Company determined that certain options previously classified as
         ISO grants were determined to have been granted with an exercise
         price below the fair market value of the Company's stock on the
         revised measurement dates. Under Internal Revenue Code Section 422,
         ISOs may not be granted with an exercise price less than the fair
         market value on the date of grant, and therefore these grants would
         not likely qualify for ISO tax treatment. The disqualification of ISO
         classification exposes the Company and the affected employees to
         payroll related withholding taxes once the underlying shares are
         released from the post exercise two-year forfeiture period and the
         substantial risk of forfeiture has lapsed, which creates a taxable
         event. The Company and the affected employees may also be subject to
         interest and penalties for failing to properly withhold taxes and
         report the taxable event on their respective tax returns. The Company
         is currently reviewing the potential disqualification of ISO grants
         and the related withholding tax implications with the IRS in an
         effort to reach agreement on the


                                      97

<PAGE>
<PAGE>

         resulting tax liability. The Company recorded liabilities related to
         this matter of $9,765 as of March 31, 2008 in accrued liabilities on
         the consolidated balance sheet.

16.      STOCK-BASED COMPENSATION
         ------------------------

         In August 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 shares of common stock. Under the Company's
         stock option plan, 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 ten years and the options vest at the
         rate of 10% per year from the date of grant.

         The Company estimates the fair value of stock options granted using
         the Black-Scholes option pricing model (the "Option Model"). The
         Option Model requires the use of subjective and complex assumptions,
         including the option's expected term and the estimated future price
         volatility of the underlying stock, which determine the fair value of
         the share-based awards. The Company's estimate of expected term was
         determined based on the average period of time that options granted
         are expected to be outstanding considering current vesting schedules
         and the historical exercise patterns of existing option plans and the
         two-year forfeiture period. The expected volatility assumption used
         in the Option Model is based on historical volatility over a period
         commensurate with the expected term of the related options. The
         risk-free interest rate used in the Option Model is based on the
         yield of U.S. Treasuries with a maturity closest to the expected term
         of the Company's stock options.

         The Company's stock option agreements include a post-exercise service
         condition which provides that exercised options are to be held by the
         Company for a two-year period during which time the shares can not be
         sold by the employee. If the employee terminates employment
         voluntarily or involuntarily (other than by retirement, death or
         disability) during the two-year period, the stock option agreements
         provide the Company with the option of repurchasing the shares at the
         lower of the exercise price or the fair market value of the stock on
         the date of termination. This repurchase option is considered a
         forfeiture provision and the two-year period is included in
         determining the requisite service period over which stock-based
         compensation expense is recognized. The requisite service period
         initially is equal to the expected term (as discussed above) and is
         revised when an option exercise occurs.

         If stock options expire unexercised or an employee terminates
         employment after options become exercisable, no compensation expense
         associated with the exercisable, but unexercised, options is
         reversed. In those instances where an employee terminates employment
         before options become exercisable or the Company repurchases the
         shares during the two-year forfeiture period, compensation expense
         for these options is reversed as a forfeiture.

         When an employee exercises stock options, the exercise proceeds
         received by the Company are recorded as a deposit and classified as a
         current liability for the two-year forfeiture period. The shares
         issuable upon exercise of these options are accounted for as issued
         when the two-year forfeiture period lapses. Until the two-year
         forfeiture requirement is met, the underlying shares are not
         considered outstanding and not included in calculating basic earnings
         per share. In accordance with the provisions of SFAS 123R,
         share-based compensation expense recognized during a period is based
         on the value of the portion of share-based awards that are expected
         to vest with employees. Accordingly, the recognition of share-based
         compensation expense beginning April 1, 2006 has been reduced for
         estimated future forfeitures. SFAS 123R requires forfeitures to be
         estimated at the time of grant with adjustments recorded in
         subsequent period compensation expense if actual forfeitures differ
         from those estimates. Prior to adoption, the Company accounted for
         forfeitures as they occurred for the disclosure of pro forma
         information presented in the Notes to Consolidated Financial
         Statements for prior periods. Upon adoption of SFAS 123R on April 1,
         2006, the Company recognized the cumulative effect of a change in
         accounting principle to reflect the effect of estimated forfeitures
         related to outstanding awards that are not expected to vest as of the
         adoption date. For the year ended March 31, 2007, the cumulative
         adjustment increased net income by $1,976, net of tax, and increased
         diluted earnings per share for Class A and Class B shares by $0.03
         and $0.03, respectively.

                                      98

<PAGE>
<PAGE>

         The Company recognized, in accordance with SFAS 123R, stock-based
         compensation expense of $5,205 and $3,984, respectively, and related
         tax benefits of $1,250 and $1,134, respectively, for the years ended
         March 31, 2008 and 2007. Stock-based compensation expense of $927 and
         a related tax benefit of $286 were recognized in the year ended March
         31, 2006. There was no stock-based employee compensation cost
         capitalized as of March 31, 2008 or 2007. Cash received as deposits
         for option exercises was $1,514, $4,264, and $1,187 and the actual
         tax benefit realized for the tax deductions from option exercises (at
         expiration of two-year forfeiture period) was $1,522, $934, and
         $1,709 for 2008, 2007 and 2006, respectively.

         The following weighted average assumptions were used for stock
         options granted during the years ended March 31, 2008, 2007 and 2006:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED MARCH 31,
                                                             ---------------------------------------
                                                               2008           2007            2006
                                                               ----           ----            ----
         <C>                                                <C>            <C>             <C>
         Dividend yield...........................               None           None            None
         Expected volatility......................                42%            45%             48%
         Risk-free interest rate..................              4.53%          4.93%           4.91%
         Expected term............................          9.0 years      8.9 years       8.8 years
         Weighted average fair value per
            share at grant date...................          $   15.40      $   12.98       $   12.74
</TABLE>

         A summary of the changes in the Company's stock option plan for the
         years ended March 31, 2008, 2007 and 2006 consisted of the following:

<TABLE>
<CAPTION>
                                                                          WEIGHTED AVERAGE
                                                                    -----------------------------
                                                                                        REMAINING      AGGREGATE
                                                                    EXERCISE            EXPECTED       INTRINSIC
                                                      SHARES         PRICE                TERM           VALUE
                                                      ------         -----                ----           -----
     <C>                                              <C>           <C>                 <C>            <C>
     Balance, March 31, 2005...............            3,853        $ 12.53
     Options granted.......................              955          18.99
     Options exercised.....................             (481)          5.80                            $ 8,519
     Options canceled......................             (401)         14.59
                                                      ------
     Balance, March 31, 2006...............            3,926          14.71
     Options granted.......................              555          21.64
     Options exercised.....................             (360)          8.80                              5,631
     Options canceled......................             (455)         16.62
                                                      ------
     Balance, March 31, 2007...............            3,666          16.11
     Options granted.......................              944          27.02
     Options exercised.....................             (184)          5.19                              3,644
     Options canceled......................             (493)         19.28
                                                      ------
     Balance, March 31, 2008...............            3,933        $ 18.84               5.8          $24,114
                                                      ======

     Expected to vest at
          March 31, 2008...................            3,048        $ 18.84               5.8          $18,688

     Options exercisable at March 31, 2008
      (excluding shares in the two-year
          forfeiture period)...............            1,197       $  16.64               5.1          $10,210
</TABLE>

         As of March 31, 2008, the Company had $42,137 of total unrecognized
         compensation expense, related to stock option grants, which will be
         recognized over the remaining weighted average period of 5.0 years.

                                      99

<PAGE>
<PAGE>

17.      EMPLOYEE BENEFITS
         -----------------

         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 $500, $500 and $400 for the years ended March
         31, 2008, 2007 and 2006, 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 $2,477, $2,227 and $1,877 were made to the 401(k)
         investment funds for the years ended March 31, 2008, 2007 and 2006,
         respectively.

         PENSION PLANS

         Contributions are made to a multi-employer defined benefit plan
         administered by Teamsters Negotiated Pension Plan for certain union
         employees. In the event of a withdrawal from the multi-employer
         pension plan, the Company would incur an obligation to the plan for
         the portion of the unfunded benefit obligation applicable to its
         employees covered by the plan. Amounts charged to pension expense and
         contributed to this plan were $170, $197 and $180 for the years ended
         March 31, 2008, 2007 and 2006, respectively.

         In January 2008,133 employees represented by the Teamsters Union
         voted to decertify union representation effective February 7, 2008.
         As a result of the decertification, the Company recorded in fiscal
         2008 a withdrawal liability of $923 for the portion of the unfunded
         benefit obligation associated with the multi-employer pension plan
         administered by the union applicable to its employees covered by the
         plan.

         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. In fiscal 2005, the Company established a Voluntary
         Employees' Beneficiary Association ("VEBA") 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 $797 and $935 at
         March 31, 2008 and 2007, respectively. For union employees, the
         Company participated in a fully funded insurance plan sponsored by
         the union. The Company's participation in the union plan ended as a
         result of the decertification of union representation effective
         February 7, 2008. Total health and medical insurance expense for the
         two plans was $13,731, $12,029 and $9,662 for the years ended March
         31, 2008, 2007 and 2006, respectively.

18.      RELATED PARTY TRANSACTIONS
         --------------------------

         The Company currently leases certain real property from an affiliated
         partnership of the Chairman and CEO of the Company. Lease payments
         made for this property for the years ended March 31, 2008, 2007 and
         2006 totaled $303, $296, and $284, respectively.

19.      EQUITY TRANSACTIONS
         -------------------

         As of March 31, 2008 and 2007, 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.


                                     100

<PAGE>
<PAGE>

         There were no undeclared and accrued cumulative preferred dividends
         at March 31, 2008 and 2007. 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.

         In accordance with the Special Committee's investigation of the
         Company's stock option grant practices, a remediation plan was
         developed by the Committee that recommended reimbursement of $1,401
         by the Company's CEO. The recommended reimbursement was made by the
         CEO in November 2007 by delivery to the Company of 45,531 shares of
         Class A Common Stock.





                                     101

<PAGE>
<PAGE>

20.      EARNINGS PER SHARE
         ------------------

         The following table sets forth the computation of basic and diluted
         earnings per share:

<TABLE>
<CAPTION>

                                                                2008                       2007                      2006
                                                        CLASS A      CLASS B      CLASS A       CLASS B      CLASS A        CLASS B
                                                       --------      --------     --------      --------     -------        -------
<C>                                                    <C>           <C>          <C>           <C>          <C>            <C>
Basic earnings per share:
    Numerator:
      Allocation of undistributed earnings before
        cumulative effect of change in accounting
        principle                                      $ 69,317      $ 18,967     $ 43,768      $ 12,276     $  8,725       $ 2,621
      Allocation of cumulative effect of
        change in accounting principle                        -             -        1,543           433            -             -
                                                       --------      --------     --------      --------     --------       -------
      Allocation of undistributed earnings             $ 69,317      $ 18,967     $ 45,311      $ 12,709     $  8,725       $ 2,621
                                                       ========      ========     ========      ========     ========       =======
    Denominator:
      Weighted average shares outstanding                37,582        12,299       37,180        12,455       36,277        13,065
      Less - weighted average unvested
        common shares subject to repurchase                (432)         (101)        (367)          (65)        (435)         (147)
                                                       --------      --------     --------      --------     --------       -------
      Number of shares used in per
        share computations                               37,150        12,198       36,813        12,390       35,842        12,918
                                                       ========      ========     ========      ========     ========       =======

Basic earnings per share before cumulative
    effect of change in accounting principle           $   1.87      $   1.55     $   1.19      $   0.99     $   0.24       $  0.20
Per share effect of cumulative effect of
    change in accounting principle                            -             -         0.04          0.04            -             -
                                                       --------      --------     --------      --------     --------       -------
Basic earnings per share                               $   1.87      $   1.55     $   1.23      $   1.03     $   0.24       $  0.20
                                                       ========      ========     ========      ========     ========       =======

Diluted earnings per share:
    Numerator:
      Allocation of undistributed earnings
        for basic computation before cumulative
        effect of change in accounting principle       $ 69,317      $ 18,967     $ 43,768      $ 12,276     $  8,725       $ 2,621
      Reallocation of undistributed earnings as a
        result of conversion of Class B to
        Class A shares                                   18,967             -       12,276             -        2,621             -
      Reallocation of undistributed earnings to
        Class B shares                                        -        (2,344)           -        (1,297)           -           (12)
      Add - preferred stock dividends                        70             -           70             -           70             -
      Add - interest expense convertible notes            4,388             -        3,883             -            -             -
                                                       --------      --------     --------      --------     --------       -------
      Allocation of undistributed earnings
        for diluted computation before cumulative
        effect of change in accounting principle         92,742        16,623       59,997        10,979       11,416         2,609
      Allocation of cumulative effect of
        change in accounting principle                        -             -        1,976           362            -             -
                                                       --------      --------     --------      --------     --------       -------
      Allocation of undistributed earnings             $ 92,742      $ 16,623     $ 61,973      $ 11,341     $ 11,416       $ 2,609
                                                       ========      ========     ========      ========     ========       =======

      (CONTINUED)


                                     102

<PAGE>
<PAGE>

<CAPTION>
                                                       -----------------------------------------------------------------------------
                                                                  2008                       2007                       2006
                                                       ------------------------   ------------------------   -----------------------
                                                         CLASS A      CLASS B       CLASS A      CLASS B       CLASS A     CLASS B
                                                       -----------  -----------   -----------  -----------   -----------  ----------
<C>                                                    <C>          <C>           <C>          <C>           <C>          <C>
Diluted earnings per share (continued):
  Denominator:
    Number of shares used in basic computation            37,150       12,198        36,813       12,390        35,842       12,918
    Weighted average effect of dilutive securities:
      Conversion of Class B to Class A shares             12,198            -        12,390            -        12,918            -
      Employee stock options                                 766           83           720           99           899          195
      Convertible preferred stock                            338            -           338            -           338            -
      Convertible notes                                    8,692            -         8,692            -             -            -
                                                       ---------    ---------     ---------    ---------     ---------    ---------
    Number of shares used in per share
      computations                                        59,144       12,281        58,953       12,489        49,997       13,113
                                                       =========    =========     =========    =========     =========    =========

Diluted earnings per share before cumulative
    effect of change in accounting principle           $    1.57    $    1.35     $    1.02    $    0.88     $    0.23    $    0.20
Per share effect of cumulative effect of
    change in accounting principle                             -            -          0.03         0.03             -            -
                                                       ---------    ---------     ---------    ---------     ---------    ---------
Diluted earnings per share (1) (2)                     $    1.57    $    1.35     $    1.05    $    0.91     $    0.23    $    0.20
                                                       ==========   =========     =========    =========     =========    =========

<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, 2008, 2007 and
              2006, excluded from the computation were options to purchase
              649, 216 and 291 of Class A and Class B common shares,
              respectively.

(2)           For the year ended March 31, 2006, the $200,000 principal amount
              of 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>

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

         The reportable operating segments of the Company are branded
         products, specialty generic/non-branded and specialty materials. The
         branded products segment includes patent-protected products and
         certain trademarked off-patent products that the Company sells and
         markets as brand pharmaceutical products. The specialty generics
         segment includes off-patent pharmaceutical products that are
         therapeutically equivalent to proprietary products. The Company sells
         its branded and generic/non-branded 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.


                                     103

<PAGE>
<PAGE>

         The following represents information for the Company's reportable
operating segments for fiscal 2008, 2007 and 2006.

<TABLE>
<CAPTION>
                                     YEAR
                                     ENDED       BRANDED      SPECIALTY     SPECIALTY     ALL
                                   MARCH 31,     PRODUCTS     GENERICS      MATERIALS    OTHER    ELIMINATIONS     CONSOLIDATED
                                   ---------     --------     --------      ---------    -----    ------------     ------------
   ------------------------------------------------------------------------------------------------------------------------------
<C>                                   <C>        <C>          <C>            <C>      <C>         <C>               <C>
   NET REVENUES
                                      2008       $214,863     $367,862       $18,020     $1,151   $        -        $601,896
                                      2007        188,681      235,594        17,436      1,916            -         443,627
                                      2006        145,503      203,787        16,988      1,362            -         367,640
   ------------------------------------------------------------------------------------------------------------------------------
   SEGMENT PROFIT (LOSS)
                                      2008         95,143      218,111         5,900   (187,491)           -         131,663
                                      2007         87,346      125,596         2,799   (126,669)           -          89,072
                                      2006         58,704      100,731         1,082   (124,668)           -          35,849
   ------------------------------------------------------------------------------------------------------------------------------
   IDENTIFIABLE ASSETS
                                      2008         39,955       99,567         7,990    722,673       (1,158)        869,027
                                      2007         32,995       84,581         8,410    582,955       (1,158)        707,783
                                      2006         23,582       62,953         7,353    526,583       (1,158)        619,313
   ------------------------------------------------------------------------------------------------------------------------------
   PROPERTY AND EQUIPMENT ADDITIONS
                                      2008            257            -           119     23,280            -          23,656
                                      2007             96            -           108     24,862            -          25,066
                                      2006            540        1,097           269     56,428            -          58,334
   ------------------------------------------------------------------------------------------------------------------------------
   DEPRECIATION AND AMORTIZATION
                                      2008            753          319           177     29,871            -          31,120
                                      2007            709          338           163     21,178            -          22,388
                                      2006            587          317           173     16,925            -          18,002
   ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                 1ST            2ND            3RD           4TH           FULL
                                               QUARTER        QUARTER        QUARTER       QUARTER         YEAR
                                              --------------------------------------------------------------------
YEAR ENDED MARCH 31, 2008
-------------------------
<C>                                           <C>             <C>            <C>          <C>             <C>
Net revenues                                  $ 114,358       $172,925       $161,623     $ 152,990       $601,896
Gross profit                                     74,788        127,793        111,627       101,133        415,341
Income before income taxes                        9,917         62,002         46,093        13,651        131,663
Net income                                        6,200         40,223         32,612         9,319         88,354

Earnings per share:
   Basic - Class A common                          0.13           0.85           0.69          0.20           1.87
   Basic - Class B common                          0.11           0.71           0.57          0.16           1.55
   Diluted - Class A common                        0.12           0.70           0.57          0.18           1.57
   Diluted - Class B common                        0.10           0.60           0.49          0.15           1.35



                                     104

<PAGE>
<PAGE>

<CAPTION>
                                                          1ST            2ND            3RD           4TH           FULL
                                                        QUARTER        QUARTER        QUARTER       QUARTER         YEAR
                                                        ---------------------------------------------------------------------
YEAR ENDED MARCH 31, 2007
-------------------------
<C>                                                     <C>            <C>            <C>           <C>             <C>
 Net revenues........................................   $ 96,200       $108,983       $ 117,949       $120,495       $443,627
 Gross profit........................................     62,738         70,104          79,510         84,012        296,364
 Income before income taxes and cumulative
      effect of change in accounting principle.......     13,335         19,655          28,048         28,034         89,072
 Income before cumulative effect of change
      in accounting principle........................      8,122         12,085          18,462         17,445         56,114
 Cumulative effect of change in accounting
      principle......................................      1,976              -               -              -          1,976
 Net income..........................................     10,098         12,085          18,462         17,445         58,090

Earnings per share before effect of change
  in accounting principle:
        Basic - Class A common.......................      $0.17          $0.26           $0.39          $0.37          $1.19
        Basic - Class B common.......................       0.14           0.21            0.33           0.31           0.99
        Diluted - Class A common.....................       0.15           0.22            0.33           0.31           1.02
        Diluted - Class B common.....................       0.13           0.19            0.29           0.27           0.88
Per share effect of cumulative effect of
  change in accounting principle:
        Basic - Class A common.......................       0.04              -               -              -           0.04
        Basic - Class B common.......................       0.04              -               -              -           0.04
        Diluted - Class A common.....................       0.04              -               -              -           0.03
        Diluted - Class B common.....................       0.03              -               -              -           0.03
Earnings per share:
        Basic - Class A common.......................       0.21           0.26            0.39           0.37           1.23
        Basic - Class B common.......................       0.18           0.21            0.33           0.31           1.03
        Diluted - Class A common.....................       0.19           0.22            0.33           0.31           1.05
        Diluted - Class B common.....................       0.16           0.19            0.29           0.27           0.91
</TABLE>



                                     105

<PAGE>
<PAGE>

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


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

We have audited K-V Pharmaceutical Company's (the Company) internal control
over financial reporting as of March 31, 2008, based on 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, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, appearing under Item
9A(a). Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included
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.

A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. A
material weakness has been identified and included in management's assessment
that states the Company had inadequate policies and procedures over the
accounting for customer rebates.



                                     106

<PAGE>
<PAGE>

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, 2008 and 2007, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2008. This material weakness was considered in
determining the nature, timing and extent of audit tests applied in our audit
of the March 31, 2008 consolidated financial statements, and this report does
not affect our report dated June 25, 2008, which expressed an unqualified
opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weakness
on the achievement of the objectives of the control criteria, K-V
Pharmaceutical Company has not maintained effective internal control over
financial reporting as of March 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by COSO.



St. Louis, Missouri
June 25, 2008






                                     107

<PAGE>
<PAGE>

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

         (a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Our management is responsible for establishing and maintaining
         adequate internal control over financial reporting, as defined in
         Exchange Act Rule 13a-15(f) under the Securities Exchange Act of
         1934, as amended (the "Exchange Act"). Our management, including our
         Chief Executive Officer and Chief Financial Officer, conducted an
         evaluation of the effectiveness of our internal control over
         financial reporting as of March 31, 2008. In making this assessment,
         our management used the criteria established in Internal Control --
         Integrated Framework, issued by the Committee of Sponsoring
         Organizations of the Treadway Commission ("COSO").

         Internal control over financial reporting is a process designed by,
         or under the supervision of, the company's principal executive and
         principal financial officers, or persons performing similar
         functions, and effected by the company's board of directors,
         management, and other personnel, to provide reasonable assurance
         regarding the reliability of financial reporting and the preparation
         of financial statements for external purposes in accordance with
         generally accepted accounting principles and 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 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.

         Exchange Act Rule 12b-2 defines a material weakness as a deficiency,
         or a combination of deficiencies, in internal control over financial
         reporting, such that there is a reasonable possibility that a
         material misstatement of the company's annual or interim financial
         statements will not be prevented or detected on a timely basis.

         Based on our evaluation of internal control over financial reporting
         as of March 31, 2008, management has determined that the following
         material weakness existed in our internal control over financial
         reporting.

         The design of the Company's policies and procedures did not
         adequately address the financial reporting risks associated with
         customer rebate agreements. Specifically, the Company's policies and
         procedures were inadequate to ensure that the necessary information
         for new or modified rebate agreements was captured and communicated
         to those responsible for evaluating the accounting implications. This
         deficiency resulted in a reasonable possibility that a material
         misstatement of the Company's annual or interim financial statements
         will not be prevented or detected on a timely basis.

         As a result of the material weakness described above, management has
         concluded that the Company did not maintain effective internal
         control over financial reporting as of March 31, 2008 based on the
         criteria established in COSO's Internal Control - Integrated
         Framework.

         KPMG LLP, our independent registered public accounting firm, who
         audited the consolidated financial statements of the Company included
         in this annual report has issued an adverse opinion on the
         effectiveness of



                                     108

<PAGE>
<PAGE>

         our internal control over financial reporting as of March 31, 2008.
         This report appears on page 66 of this annual report.

         (b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         There were changes in the Company's internal control over financial
         reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
         under the Exchange Act) during the quarter ended March 31, 2008 that
         have materially affected, or are reasonably likely to materially
         affect, the Company's internal control over financial reporting.

         These changes consisted of controls we implemented to remediate the
         material weaknesses identified in our annual report on the
         effectiveness of internal control over financial reporting as of
         March 31, 2007, which related to the Company's accounting for
         stock-based compensation, income taxes and revenue recognition:

         Stock-Based Compensation - The design of the Company's policies and
         procedures did not adequately address the financial reporting risks
         associated with stock options. Specifically, these deficiencies in
         the design of the Company's controls resulted in a more than remote
         likelihood of a material misstatement in the Company's financial
         statements in each of the following areas:

         o    Determining measurement dates,
         o    Determining forfeiture provisions,
         o    Determining the tax treatment of stock option awards.

         Additionally, the Company's policies and procedures to ensure that
         the necessary information was captured and communicated to those
         responsible for stock option accounting were inadequate, and the
         Company's finance and accounting personnel involved in the stock
         option granting and administration process were inadequately trained.

         Income Taxes - The design of the Company's policies and procedures
         did not adequately address the financial reporting risks associated
         with uncertain tax positions. Additionally, the Company's policies
         and procedures to ensure that the necessary information was captured
         and communicated to those responsible for accounting for uncertain
         tax positions were inadequate.

         Revenue Recognition - The design of the Company's policies and
         procedures did not adequately address the financial reporting risks
         associated with customer shipping terms.

         During the quarter ended March 31, 2008, we implemented changes to
         internal control over financial reporting to complete remediation of
         the material weaknesses described above as follows:

         Stock-Based Compensation
         o    Expanded the General Counsel's role to include oversight of the
              process of documenting stock option grants in order to assure
              that grants are properly awarded under the approved plan
              document and proper grant dates are associated with awards.
         o    Engaged an outside professional services firm to advise us on
              improving the design of the internal controls over our stock
              option processes and controls over the preparation and review of
              stock-based compensation information in the Company's financial
              reports.
         o    Established an Employee Compensation Reporting Committee
              comprised of senior tax, legal, human resource, and
              accounting/finance personnel, to assure that grants are properly
              awarded under the plan document, proper grant dates are assigned
              for measurement purposes, the reasonableness of key assumptions
              used in the valuation of stock options are reviewed for
              appropriateness and any modifications to the standard terms of
              outstanding awards are reviewed for appropriate accounting
              treatment.
         o    Established a procedure whereby senior financial management
              reviews employment agreements, employment offers, and other
              employee agreements to ensure proper accounting based upon the
              terms and conditions of such agreements.


                                     109

<PAGE>
<PAGE>

         o    Training and education to ensure that all relevant personnel
              involved in the administration of and accounting for stock
              option grants, including tax personnel, understand the terms of
              the Company's stock option plans and the relevant accounting
              guidance under U.S. generally accepted accounting principles.
         o    Established quarterly testing by the Company's Internal Audit
              Department of controls relating to stock option activity and the
              accuracy of the model used in valuing the Company's stock
              options.

         Income Taxes
         o    Established quarterly meetings between the tax department,
              operating division executives and other management personnel to
              facilitate communication of relevant business issues impacting
              accounting for income taxes, and;
         o    Implemented procedures that require the documentation of tax
              liabilities and facilitate an effective review of the
              recognition and measurement of tax liabilities.

         Revenue Recognition
         o    Implemented a procedure to verify actual customer receipt dates
              of shipments made during the last several days of a period end
              for the FOB destination customers.
         o    Implemented a policy requiring that shipping terms for all
              customers are properly documented and reviewed by
              finance/accounting personnel to verify the appropriate timing of
              revenue recognition.

         (c) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
         including our Chief Executive Officer and Chief Financial Officer, we
         conducted an evaluation of the effectiveness of our disclosure
         controls and procedures, as such terms are defined in Rules 13a-15(e)
         and 15d-15(e) promulgated under the Exchange Act, as of March 31,
         2008, the end of the period covered by this Annual Report on Form
         10-K.

         Disclosure controls and procedures are controls and procedures
         designed to ensure that information required to be disclosed in the
         Company's reports filed under the Exchange Act, such as this Report,
         is recorded, processed, summarized and reported within the time
         periods specified in the SEC's rules and forms. Disclosure controls
         are also designed to ensure that such information is accumulated and
         communicated to the Company's management, including the Chief
         Executive Officer and Chief Financial Officer, as appropriate to
         allow timely decisions regarding required disclosure.

         As a result of the material weakness in our internal control over
         financial reporting described above, our management, including our
         Chief Executive Officer and our Chief Financial Officer concluded
         that our disclosure controls and procedures were not effective as of
         March 31, 2008. Notwithstanding the material weakness described
         above, our management have concluded that our consolidated financial
         statements for the periods covered by and included in this Annual
         Report on Form 10-K are fairly stated in all material respects in
         accordance with U.S. generally accepted accounting principles for
         each of the periods presented herein.

         (d) REMEDIATION ACTIVITIES

         Subsequent to March 31, 2008, we are taking several steps to
         remediate the material weakness related to revenue recognition
         described in (a) above by designing policies and procedures that
         require that all new or modified customer agreements are reviewed
         by accounting personnel with relevant GAAP knowledge to determine the
         appropriate accounting treatment.

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

         The Board of Directors of the Company has called the 2008 Annual
         Meeting of Stockholders (the "Annual Meeting") for Friday, September
         5, 2008, at 9:00 A.M., Central Daylight Savings Time, at The St.
         Louis Club (Lewis and Clark Room, 16th Floor), 7701 Forsyth
         Boulevard, Clayton, Missouri 63105.

         Proposals of stockholders and nominations for directors intended to
         be presented at the Annual Meeting must be received by the Company's
         Assistant Secretary no later than July 1, 2008 in order to be
         considered for inclusion


                                     110

<PAGE>
<PAGE>

         in the Company's proxy statement and proxy card for that meeting.
         Upon receipt of any such proposal, the Company will determine whether
         or not to include such proposal in the proxy statement and proxy in
         accordance with regulations governing the solicitation of proxies.

         Stockholder proposals and nominations for directors that do not
         appear in the proxy statement may be considered at the Annual Meeting
         only if written notice of the proposal is received by the Company's
         Assistant Secretary no later than July 1, 2008. Such notice must
         include a description of the proposed business and the reasons
         therefor. The Board of Directors or the presiding officer at the
         Annual Meeting may reject any proposal that is not made in accordance
         with these procedures or that is not a proper subject for stockholder
         action in accordance with applicable law. These requirements are
         separate from the procedural requirements a stockholder must meet to
         have a proposal included in the Company's proxy statement. All
         proposals should be addressed to the Assistant Secretary, K-V
         Pharmaceutical Company, 2503 South Hanley Road, St. Louis, MO 63144.






                                     111

<PAGE>
<PAGE>

                                   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 2008 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 2008
         Annual Meeting of Shareholders is incorporated herein by this
         reference.

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

         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 2008 Annual Meeting of Shareholders is
         incorporated herein by this reference.

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

         The information contained under the caption "COMPENSATION COMMITTEE
         INTERLOCKS AND INSIDER PARTICIPATION; TRANSACTIONS WITH DIRECTORS AND
         EXECUTIVE OFFICERS" in the Company's definitive proxy statement to be
         filed pursuant to Regulation 14(A) for its 2008 Annual Meeting of
         Shareholders is incorporated herein by this reference.

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

         The information contained under the caption "FEES BILLED BY
         INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" in the Company's
         definitive proxy statement to be filed pursuant to Regulation 14(A)
         for its 2008 Annual Meeting of Shareholders is incorporated herein by
         this reference.





                                     112

<PAGE>
<PAGE>

                                    PART IV

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

<TABLE>
<CAPTION>
(a)      1. Financial Statements:                                                          Page
<C>                                                                                        <C>
         The following consolidated financial statements of the Company are
         included in Part II, Item 8 of this report:

         Report of Independent Registered Public Accounting Firm........................    66

         Consolidated Balance Sheets as of March 31, 2008 and 2007......................    67

         Consolidated  Statements of Income for the Years Ended March 31,
         2008, 2007 and 2006............................................................   68-69

         Consolidated  Statements of Comprehensive Income for the Years
         Ended March 31, 2008, 2007 and 2006............................................    70

         Consolidated Statements of Shareholders' Equity for the Years
         Ended March 31, 2008, 2007 and 2006............................................    71

         Consolidated Statements of Cash Flows for the Years Ended
         March 31, 2008, 2007 and 2006..................................................    72

         Notes to Consolidated Financial Statements.....................................  73-105

         2. Financial Statement Schedules:

         Schedule II - Valuation and Qualifying Accounts................................   115
</TABLE>

(b)      Exhibits. See Exhibit Index on pages 116 through 121 of this Report.
         Management contracts and compensatory plans are designated on the
         Exhibit Index.



                                     113

<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  25, 2008             By       /s/  Marc S. Hermelin
          ----------------         ---------------------------------------------
                                     Chairman of the Board and
                                     Chief Executive Officer
                                     (Principal Executive Officer)

Date: June  25, 2008                 By       /s/  Ronald J. Kanterman
          ----------------             -----------------------------------------
                                     Vice President and Chief Financial Officer
                                     (Principal Financial Officer)

Date: June  25, 2008                 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 25, 2008              By       /s/  Marc S. Hermelin
             -------------         -----------------------------------------
                                     Marc S. Hermelin

Date: June 25, 2008              By       /s/  Norman D. Schellenger
             -------------         -----------------------------------------
                                     Norman D. Schellenger

Date: June 25, 2008              By       /s/  Kevin S. Carlie
             -------------         -----------------------------------------
                                     Kevin S. Carlie

Date: June 25, 2008              By       /s/  Jonathon E. Killmer
             -------------         -----------------------------------------
                                     Jonathon E. Killmer

Date: June 25, 2008              By       /s/  Jean M. Bellin
             -------------         -----------------------------------------
                                     Jean M. Bellin

Date: June 25, 2008              By    /s/  Terry B. Hatfield
             -------------         -----------------------------------------
                                     Terry B. Hatfield

Date: June 25, 2008              By       /s/  David S. Hermelin
             -------------         -----------------------------------------
                                     David S. Hermelin

Date: June 25, 2008              By      /s/  Ronald J. Kanterman
             -------------         -----------------------------------------
                                       Ronald J. Kanterman



                                     114

<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, 2006:
Allowance for doubtful accounts............    $         461    $         (49)    $          15    $          397
Reserves for sales allowances..............           20,142          154,662           146,107            28,697
Inventory obsolescence.....................            1,293            4,215             3,808             1,700
                                               -------------    -------------     -------------    --------------
                                               $      21,896    $     158,828     $     149,930    $       30,794
                                               =============    =============     =============    ==============

Year Ended March 31, 2007:
Allowance for doubtful accounts............    $         397    $         320     $           1    $          716
Reserves for sales allowances..............           28,697          148,822           146,238            31,281
Inventory obsolescence.....................            1,700           11,979             4,650             9,029
                                               -------------    -------------     -------------    --------------
                                               $      30,794    $     161,121     $     150,889    $       41,026
                                               =============    =============     =============    ==============

Year Ended March 31, 2008:
Allowance for doubtful accounts............    $         716    $         168     $          17    $          867
Reserves for sales allowances..............           31,281          234,427           219,062            46,646
Inventory obsolescence.....................            9,029           18,849            12,411            15,467
                                               -------------    -------------     -------------    --------------
                                               $      41,026    $     253,444     $     231,490    $       62,980
                                               =============    =============     =============    ==============
</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.



                                      115

<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.

                                     116

<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 was filed as Exhibit 3(o) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2006, is
                incorporated herein by this reference.

   3(p)         Amendment to Bylaws of the Company, effective June 28, 2004,
                which was filed as Exhibit 3(p) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2006, is
                incorporated herein by this reference.

   3(q)         Amendment to Bylaws of the Company, effective November 30,
                2007, which was filed as Exhibit 99 to the Company's Current
                Report on Form 8-K, filed December 31, 2007, is incorporated
                herein by this reference.

   3(r)         Amendment to Bylaws of the Company, effective March 26,
                2008, which was filed as Exhibit 3.1 to the Company's
                current Report on Form 8-K, filed March 28, 2008, is
                incorporated herein by this reference.

   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(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(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,
                which was filed as Exhibit 4(g) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2006, 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.

                                     117

<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, 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, 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.

   10(q)        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.


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<PAGE>
<PAGE>

   10(r)*       Amendment, dated November 5, 2004, to Employment Agreement
                between the Company and Marc S. Hermelin, 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(s)*       K-V Pharmaceutical 2001 Incentive Stock Option Plan, which
                was filed as Exhibit 10.1 to the Company's Current report on
                Form 8-K filed November 22, 2005, is incorporated by this
                reference.

   10(t)*       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(u)*       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(v)*       Employment Agreement between ETHEX and Patricia McCullough,
                Chief Executive Officer of ETHEX, dated January 30, 2006,
                which was filed as Exhibit 10(aa) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2006, is
                incorporated herein by this reference.

   10(w)*       Employment Agreement between the Company and Michael S.
                Anderson, Corporate Vice President, Industry Presence and
                Development, dated May 23, 1994, and amendments thereto,
                which was filed as Exhibit 10(bb) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2006, is
                incorporated herein by this reference.

   10(x)*       Employment Agreement between the Company and Ronald J.
                Kanterman, Vice President, Treasurer dated January 26, 2004,
                which was filed as Exhibit 10(x) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2007, is
                incorporated herein by this reference.

   10(y)*       Employment Agreement between the Company and Gregory S.
                Bentley, Senior Vice President and General Counsel, dated
                April 24, 2006, which was filed as Exhibit 10(y) to the
                Company's Annual Report on Form 10-K for the year ended
                March 31, 2007, is incorporated herein by this reference.

   10(z)*       Employment Agreement between the Company and David A. Van
                Vliet, Chief Administration Officer, dated September 29,
                2006, which was filed as Exhibit 10(z) to the Company's
                Annual Report on Form 10-K for the year ended March 31,
                2007, is incorporated herein by this reference.

   10(aa)*      Employment Agreement between the Company and Rita E. Bleser,
                President, Pharmaceutical Division, dated April 30, 2007,
                which was filed as Exhibit 10(aa) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2007, is
                incorporated herein by this reference.

   10(bb)*      Employment Agreement between Ther-Rx and Gregory J. Divis,
                Jr., President, Ther-Rx Corporation, dated July 20, 2007,
                which was filed as Exhibit 10(bb) to the Company's Annual
                Report on Form 10-K for the year ended March 31, 2007, is
                incorporated herein by this reference.

   10(cc)*      Employment Agreement by and between the Company and Richard
                H. Chibnall, Vice President, Finance and Chief Accounting
                Officer, dated December 22, 1995, as amended by amendment
                dated April 1, 2005, is incorporated herein by this
                reference.

   10(dd)*      Employment Agreement by and between Particle Dynamics, Inc.
                and Paul T. Brady, President, Particle Dynamics, Inc., dated
                May 5, 2005, which was filed as Exhibit 10(dd) to the
                Company's Annual Report on Form 10-K for the year ended March
                31, 2007, is incorporated herein by this reference,

   10(ee)*      Employment Agreement between the Company and David S.
                Hermelin, Vice President, Corporate Strategy and Operations
                Analysis, dated April 8, 1998, as amended by amendment dated
                August 16,


                                     119

<PAGE>
<PAGE>

                2004, which was filed as Exhibit 10(ee) to the Company's
                Annual Report on Form 10-K for the year ended March 31, 2007,
                is incorporated herein by this reference.

   10(ff)*      Amendment to Employment Agreement between the Company and
                Ronald J. Kanterman, Vice President and Chief Financial
                Officer, dated March 23, 2008, filed herewith.

   10(gg)*      Consulting agreement, dated March 23, 2008, between the
                Company and Gerald R. Mitchell, filed herewith.

   10(hh)**     Asset Purchase Agreement by and between the Company and
                VIVUS, Inc., dated as of March 30, 2007, which was filed as
                Exhibit 10.1 to The Company's Quarterly Report on Form 10-Q
                for the quarter ended September 30, 2007, is incorporated
                herein by this reference.

   10(ii)       Asset Purchase Agreement by and among the Company, CYTYC
                Prenatal Products, Corp. and Hologic, Inc., dated as of
                January 16, 2008, filed herewith.




                                     120

<PAGE>
<PAGE>


   21           List of Subsidiaries, filed herewith.

   23.1         Consent of KPMG 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, 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, filed herewith.

   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.

**  Confidential portions of this exhibit have been redacted and filed
    separately with the Commission pursuant to a confidential treatment
    request in accordance with Rule 24b-2 of the Securities Exchange Act of
    1934, as amended.





                                     121

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<PAGE>

                                   APPENDIX

Page 41 of the 10-K contains a Comparison of 5 Year Cumulative Total Return
Graph. The information displayed in the graph is presented in a tabular format
immediately following the graph.