UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
 FORM 10-K x
  Annual Report Pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Fiscal Year Ended March 31,
  2001oro
  Transition
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 333-33121 
 LEINER HEALTH PRODUCTS INC.(Exact name of
registrant as specified in its charter)  DELAWARE(State or other
  jurisdiction ofincorporation or
  organization)
  95–3431709(I.R.S. EmployerIdentification
  Number) 901 East 233rd Street, Carson,
California 90745
(310) 835-8400(Address and
telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to Section 12(g) of the
Act: None  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. YesýNoo 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.ý As of June 29, 2001, there were 1,000 shares of the
registrant's Common Stock, par value $1, outstanding, none of which were held
by non-affiliates.   LEINER
HEALTH PRODUCTS INC.

FORM
10-K
For the Fiscal Year Ended March 31, 2001
TABLE OF CONTENTS

PART I.Item 1.
  BusinessItem 2.
  PropertiesItem
  3.
  Legal
  ProceedingsItem
  4.
  Submission
  of Matters to a Vote of Security HoldersPART II.Item
  5.
  Market
  for Registrant's Common Equity and Related Stockholder MattersItem 6.
  Selected
  Financial DataItem
  7.
  Management's
  Discussion and Analysis of Financial Condition and Results of OperationsItem
  7A.
  Quantitative
  and Qualitative Disclosures about Market RiskItem
  8.
  Financial
  Statements and Supplementary DataItem
  9.
  Changes
  in and Disagreements with Accountants on Accounting and Financial DisclosurePART III.Item 10.
  Directors
  and Executive OfficersItem 11.
  Executive
  CompensationItem
  12.
  Security
  Ownership of Certain Beneficial Owners and ManagementItem
  13.
  Certain
  Relationships and Related TransactionsPART IVItem 14.
  Exhibits, Financial Statement Schedules
  and Reports on Form 8-K

The data contained in this Form 10-K with respect to the
Company's relative market share and competitive position are based on retail
sales, and are approximations based on Company estimates and industry sources,
including Information Resources, Inc. ("IRI Infoscan"), Multi-Sponsor
Survey, Inc. ("Gallup"), and Marketing and Management Information,
Inc. ("MMI Data"). The Company believes that such data are inherently
imprecise, but are generally indicative of its relative market share and
competitive position. Market share data are for the food, drug and mass
merchandisers' sector of the vitamin industry ("Mass Market") in the
U.S. only and do not include Canadian market share information for Vita Health
Products, Inc.

PART IITEM 1BUSINESS



General

Leiner Health
Products Inc. ("Leiner" or the "Company") is one of the
nation's leading manufacturers of vitamins, minerals, and nutritional
supplements and distributes its products primarily through Mass Market
retailers. The Company has approximately a 15.5% share of all Mass Market
vitamin sales in the United States, and an over 43% share of the Mass Market
private label segment. Notwithstanding the declines experienced in fiscal 2001,
Leiner's U.S. vitamin sales have grown at a compound annual rate of approximately
10% per year over the last seven years, higher than the industry growth rate in
the U.S. Leiner is also one of the nation's largest private label
over-the-counter ("OTC") pharmaceuticals manufacturers. Approximately
26% of the Companys sales are in OTC pharmaceutical and other products.

The Company is the ultimate successor to the vitamin
product division of P. Leiner & Sons, America, Inc. The division, founded
in 1973, was purchased in 1979 by management and Booker plc through Leiner,
then named P. Leiner Nutritional Products Corp. (the "Predecessor
Company"). On May 4, 1992, Leiner Health Products Group, Inc.
("Leiner Group") acquired Leiner (the "LHP Acquisition")
for a total purchase price of approximately $90.9 million. On May 22, 1992, Leiner
Group acquired privately held XCEL Laboratories, Inc., a major U.S. private
label OTC pharmaceuticals manufacturer for a total purchase price of
approximately $24.7 million. On March 8, 1993, XCEL Laboratories, Inc. was
merged into Leiner. Leiner subsequently changed its name to Leiner Health
Products Inc. Leiner Group was incorporated under the laws of the State of
Delaware in 1987 by AEA Investors, Inc. and did not have any significant
assets, liabilities or activities prior to the LHP Acquisition. Leiner Group is
a holding company with no significant operations or assets other than the stock
of Leiner, which it holds through its sole direct subsidiary, PLI Holdings,
Inc., itself a holding company ("PLI Holdings"). Leiner Group was
recapitalized effective June 30, 1997. See "Recapitalization."

In January 1997, the Company acquired Vita Health
Company (1985) Ltd., one of the leading manufacturers of private label and
branded vitamins, minerals and OTC pharmaceuticals in Canada, for a total
purchase price of approximately $16.0 million, including $1.1 million of direct
acquisition costs. Vita Health Company (1985) Ltd. changed its name in 1998 to
Vita Health Products Inc. ("Vita Health"). Vita Health is currently a
wholly owned indirect subsidiary of Leiner. Vita Health is headquartered in
Winnipeg, Manitoba, Canada. This location serves as Vita Health's headquarters,
manufacturing, tableting, packaging and distribution location.

On December 17, 1999, the Company acquired substantially
all of the assets of Granutec, Inc. ("Granutec"), a manufacturer and
distributor of private label, OTC pharmaceutical drugs in the United States,
and Vita Health acquired substantially all of the assets of Stanley
Pharmaceuticals Ltd. ("Stanley"), a manufacturer and distributor of
private label, OTC pharmaceutical drugs and vitamin supplement products in
Canada, both of which were subsidiaries of Novopharm Limited of Ontario, Canada
("Novopharm"). The Company also acquired certain related assets of
Novopharm (collectively, the "Acquisition"). See Item 7
"Management's Discussion and Analysis of Financial Condition and Results
of Operations-Acquisition."

The Company's fiscal year ends on March 31 of each year.
References herein to a "fiscal year" refer to the Company's fiscal
year ended March 31 in the calendar year indicated (e.g., references to fiscal
year 2001 are references to the Company's fiscal year ended March 31, 2001).

Debt Covenant Non-Compliance and Liquidity

In
1998, the Company entered into an Amended and Restated Credit Agreement (the
Amended Credit Agreement) with certain financial institutions (the Senior
Lenders). The Amended Credit Agreement contains a number of covenants that
significantly restrict the operations of the Company. In addition, the Company
is required to comply with specified financial ratios and tests, including
minimum net worth requirements, maximum leverage ratios, minimum fixed charge
coverage ratios and minimum EBITDA to cash interest expense ratios. Since
December 31, 2000, the Company has not been, and as of March 31,
2001, the Company was not in compliance with certain of these financial
covenants. Such covenant violations constitute events of default under the
terms of the Amended Credit Agreement. As a result, borrowings under the
Amended Credit Agreement, aggregating $278.0 million at March 31, 2001, have
been classified as a current liability in the Companys consolidated balance
sheet to reflect the Senior Lenders right to accelerate maturity of such
loans. See Item 8 Financial Statements and Supplementary Data.

The
Company entered into a waiver letter, as well as subsequent amendments (the
Amended Waiver) with the Senior Lenders. Under the latest amendment, dated as
of June 15, 2001, the Senior Lenders agreed to waive such events of
default and to forbear exercising any of their rights or remedies under the
Amended Credit Agreement for a limited period ending on June 27, 2001. The
Amended Waiver expired on June 27, 2001, and on June 28, 2001, the Company
received a formal notice of default from its Senior Lenders.

The
Company is currently in active discussions with the Senior Lenders regarding a
forebearance agreement that would provide the Company a period of time during
which the Senior Lenders would agree not to exercise the remedies available to
them while a long-term restructuring solution is pursued.

Both
prior to and during the waiver period, the Company made all scheduled principal
and interest payments on a timely basis. The Company has retained financial and
legal advisors to assist it in evaluating its restructuring and financing
alternatives.  The Company and its
financial advisors have provided the Senior Lenders with a business plan that
reflects the effects of the operational restructuring and reengineering initiatives
discussed below and serves as a basis for discussions regarding a forebearance
agreement and long-term restructuring alternatives.

There
can be no assurance that the Company and the Senior Lenders will agree upon the
terms of or enter into a forbearance agreement.

An
outstanding event of default under the Amended Credit Agreement would permit
the Senior Lenders to declare all amounts outstanding thereunder to be
immediately due and payable, together with accrued and unpaid interest, and to
terminate their commitments to make further extensions of credit thereunder.

Should
the Senior Lenders accelerate the maturity of the loans under the Amended
Credit Agreement, all amounts due under the indenture (the Indenture)
governing the $85 million of Senior Subordinated Notes (the Subordinated
Notes) may also be accelerated. As a result of this uncertainty, the
Subordinated Notes have been classified as a current liability in the Company's
consolidated balance sheet as of March 31, 2001. On June 28, 2001, the Senior
Lenders delivered a notice (the Blockage Notice) to the Company and the
trustee under the Indenture prohibiting payments on account of any principal or
interest obligation related to the Subordinated Notes or the purchase or
redemption of such obligations. The Blockage Notice will be effective for 179
days.  If the Blockage Notice remains in
effect on August 1, 2001, the 30 day grace period with respect to payment
defaults on the Subordinated Notes will expire and failure to pay will constitute
an event of default under the Indenture and 25% in the aggregate principal
amount of the holders of the Subordinated Notes may accelerate the amounts due
under the Indenture.  The Company has
initiated negotiations with several major holders of the Subordinated Notes
regarding such a long-term restructuring alternative.

If
the Senior Lenders were to accelerate maturity of amounts due under the Amended
Credit Agreement, or if the holders of the Subordinated Notes were to
accelerate the amounts due under the Indenture, and other long-term debt became
immediately payable as a result of such action, the Company would not have
sufficient funds to repay its outstanding debt, and no assurance can be given
that alternative sources of sufficient financing would be available on
acceptable terms, or at all. These conditions, together with the Companys net
loss in fiscal 2001 and its deficit in shareholders equity, raise substantial
doubt about the Companys ability to continue as a going concern. The Companys
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.

The
Amended Waiver provided for a one percent increase in the applicable margin
effective through the end of the waiver period.  The Amended Waiver required, among other things, the payment to
the Senior Lenders of total fees of $0.8 million, that the management fee and
additional expense reimbursement paid to North Castle and/ or its Affiliates
pursuant to the terms of the Management Services Agreement on January 2, 2001
in the amount $0.8 million be returned to the Company and that an amount equal
to $0.8 million be paid to the Senior Lenders as a prepayment of the loans
under the Amended Credit Agreement. 
Additionally, further payments of the management fee were not allowed
during the waiver period.

The
Amended Waiver also required that during the waiver period and concurrently
with the receipt by the Company of any judgment, settlement or other proceeds
or amounts, however characterized, arising from or in connection with any
antitrust claims (including the Antitrust Lawsuit, with all the foregoing
collectively referred to as the Proceeds), the Company shall make, or cause
to be made, a mandatory prepayment of the loans outstanding in the amount of
the Proceeds to be applied pro rata to the outstanding principal amount of all
term loans, the cash collateralization of $1.6 million of letters of credit,
and a corresponding reduction of each revolving loan commitment amount.

Certain
conditions to the Amended Waiver survive the expiration of the Amended Waiver
including the Companys agreement that: (a) interest and letter of credit fees
will be paid monthly instead of quarterly, (b) commitments to make further
credit extensions are suspended, and (c) outstanding amounts under the Amended
Credit Agreement cannot be continued as or converted into LIBOR or bankers
acceptance rate loans.

Restructuring

In fiscal 2001, the Company initiated a number of
operational restructuring actions focused on eliminating operational
complexities and reducing operating costs. The initiatives include workforce
reductions, facility consolidation, product line simplification, and customer
rationalization.

In February 2001, workforce reductions occurred at the
Companys locations in Carson, Garden Grove, and Valencia, California, as well
as in Kalamazoo, Michigan. When included with the reduction in force related to
the Acquisition, affecting the Companys Largo, Florida, Wilson, North
Carolina, and Vancouver, British Columbia locations, the worldwide workforce
has been reduced by approximately 500 full time employees, a reduction of over
12%.

Facility consolidations include the consolidation of the
Kalamazoo and Largo facilities into the Companys Fort Mill, South Carolina
location, the consolidation of the Vancouver facility into the Winnipeg,
Manitoba facility, and the closure of auxiliary warehouses in Carson,
Kalamazoo, Largo, and Vancouver.

U.S.product line
simplification developed in April 2001 includes the planned discontinuation of
approximately 2,600 stock keeping units (SKUs), approximately 40% of current
SKUs available. This discontinuation includes a phase-out period which extends
into fiscal year 2002. Approximately 1,500 of those discontinued SKUs will be
in vitamin related products with another 1,100 SKUs from the OTC pharmaceutical
products. In addition, Vita Health will be discontinuing its Health Food
product line. This simplification is a continuous and active process which is
expected to yield operational improvements.

The Company is also conducting a comprehensive
rationalization of its customer base. As a result of this process, 47 unprofitable
or overly complex customers were identified for discontinuation at March 31,
2001. Plans are already in place to receive final orders, deplete specifically
allocated inventory, and close business with these customers. The Company plans
to continue to re-assess the profitability of its customer base allowing
management to focus on more profitable customers. As of May 31, 2001 an
additional group of less profitable, more complex customers were under
consideration for discontinuance. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Fiscal 2001 Compared
to Fiscal 2000."

The
Company has retained financial, operational and legal advisors to assist it in
evaluating its restructuring and financing alternatives. The Company and its
financial advisors have provided the Senior Lenders with a business plan that
reflects the effects of the operational restructuring and reengineering
initiatives discussed above and serves as a basis for discussions regarding long-term
restructuring alternatives.  In
addition, the Company has engaged a management consulting firm to assist in
identifying and implementing improvements to the Company's supply chain
processes. These initiatives are anticipated to yield customer service, working
capital and operational efficiency improvements.

Recapitalization

On June 30, 1997, Leiner Group completed a leveraged
recapitalization transaction (the "Recapitalization"). The
Recapitalization was effected pursuant to a Stock Purchase Agreement and Plan
of Merger, dated as of May 31, 1997 (the "Recapitalization
Agreement") among Leiner Group, North Castle Partners I, L.L.C.
("North Castle"), and LHP Acquisition Corp., a wholly-owned
subsidiary of North Castle (the "Merger Entity"). North Castle, a
Delaware limited liability company, is an investment fund formed by Mr. Charles
F. Baird, Jr., to effect the Recapitalization. Pursuant to the
Recapitalization, Leiner Group repurchased common stock from its existing
shareholders in an amount totaling (together with equity retained by such
shareholders) $211.1 million, issued $80.4 million of new shares of the
recapitalized Leiner Group to North Castle, issued $85 million of Senior
Subordinated Notes (the "Subordinated Notes"), and established a $210
million senior secured credit facility that provided for both term and
revolving credit borrowings. Immediately upon consummation of the
Recapitalization, the obligations of Leiner Group under the Subordinated Notes
and the $210 million senior credit facility were assigned to and assumed by the
Company. The Recapitalization was accounted for as a recapitalization of Leiner
Group, which had no impact on the historical basis of assets and liabilities as
reflected in the Company's consolidated financial statements.

Upon consummation of the Recapitalization, (i) current
managers and employees of the Company who had been existing shareholders had
some of their existing common stock exchanged for cash, but together with Mr.
Baird, retained approximately 8.3% of Leiner Group equity (consisting of
approximately 58.6% of the non-voting Leiner Group common stock and 5.6% of the
voting Leiner Group common stock) and received rights under certain
circumstances to receive Leiner Group common stock ("Equity Rights")
equal to approximately 7.4% of Leiner Group equity, as well as certain warrants
to acquire Leiner Group common stock ("Warrants"), (ii) AEA
Investors Inc. and certain of its co-investors (the "AEA Group")
and certain former managers of the Company, all of whom had been existing
shareholders, had most of their common stock purchased for cash, but also
retained Leiner Group common stock equal to approximately 10.1% of Leiner Group
equity (consisting of approximately 41.4% of the non-voting Leiner Group common
stock and 8.8% of the voting Leiner Group common stock), as well as Warrants,
and (iii) North Castle acquired the remainder of Leiner Group equity, primarily
through the purchase of newly issued voting Leiner Group common stock equal to
approximately 73.8% of Leiner Group equity for a cash investment of $80.4
million. In connection with the Recapitalization, existing stock options held
by management shareholders were cashed out, exercised for common stock, or
converted into Equity Rights.

Seasonality

Leiner's business is seasonal, as
increased vitamin usage corresponds with the cough, cold and flu season. A
significant portion of the Company's sales and a more significant portion of
the Company's operating income occur in the second half of the fiscal year as shown
below (in millions):

Net Sales
  Operating
  Income (Loss)Fiscal 2001 (1)First quarter
  $   130.1
  $        7.1Second quarter
  165.0
  3.5Third quarter
  159.5
  (5.2)Fourth quarter
  157.5
  (89.1)$   612.1
  $   (83.7)Fiscal 2000First quarter
  $   120.9
  $           -Second quarter
  144.5
  2.7Third quarter (2)
  182.7
  12.7Fourth quarter (2)
  214.2
  23.8$   662.3
  $      39.2Fiscal 1999First quarter
  $   122.3
  $        5.9Second quarter
  149.4
  7.7Third quarter
  162.2
  13.1Fourth quarter
  193.0
  20.3$   626.9
  $      47.0__________

(1)
  The downturn in the vitamin market
  as well as the increasing importance of OTC pharmaceuticals as a percentage
  of total sales reduced the effects of seasonality in fiscal year 2001. First
  quarter operating income includes recoveries associated with certain of the
  Companys legal proceedings, and the significant operating loss in the fourth
  quarter is due to operational restructuring activity. This data should be
  read in conjunction with Item 7 Managements Discussion and Analysis of
  Financial Condition and Results of Operations.(2)
  Net sales and operating
  income of $6.1 million and $1.1 million, respectively, in the third quarter
  of fiscal year 2000 and $33.0 million and $3.1 million, respectively, in the
  fourth quarter of fiscal year 2000, relate to the Acquisition. See Note 4 of
  Notes to Consolidated Financial Statements.Products

The following table sets forth the net sales of the
Company's vitamin, OTC pharmaceutical and other product lines for the periods
indicated (in millions):

Fiscal Years Ended March 31,2001
  2000
  1999Vitamin products
  $424.2
  $533.1
  $530.1OTC pharmaceuticals
  181.8
  98.8
  65.6Other products
  6.1
  30.4
  31.2Total
  $612.1
  $662.3
  $626.9

Vitamin
Products.The Company sells a full line of vitamin
products, including more than 900 products in approximately 7,500 SKUs.
Restructuring initiatives are projected to reduce the SKU count by
approximately 1,500 SKUs. The Company's products are sold in tablet and capsule
forms, and in varying sizes with different potencies, flavors and coatings. The
Company's vitamin products include national brand equivalents which compare to
the dietary ingredients contained in Centrum®, One-A-Day® and Ginsana®,
natural vitamin products such as vitamins C and E and folic acid, minerals such
as calcium, supplements such as glucosamine and herbal products such as St.
John's wort, ginseng and ginkgo biloba. In addition, Leiner's Your Life®
brand is one of the nation's largest broadline vitamin product brands. Sales of
vitamins C and E, in the aggregate, accounted for approximately 22.1% of the
Company's sales in fiscal 2001.

The Company sells vitamin products under its customers'
store names ("private label products"). The Company estimates that
private label products accounted for approximately 82.8% of Leiner's total
fiscal 2001 vitamin sales.

Vita Health produces approximately 450 different types
of vitamins and minerals. However, the majority of Vita Health's sales in this
segment are concentrated in a few core product categories. The top 5 product
categories, which comprise over one-half of Vita Health's vitamin sales, are
multivitamins, herbal products, supplements, vitamin C products, and vitamin E
products.

OTC
Pharmaceuticals.  The Company
markets approximately 300 different OTC pharmaceutical products in
approximately 4,300 SKUs, including products comparable to most major national
brands in the analgesic, cough and cold remedy and digestive aid categories.
Restructuring initiatives are projected to reduce the SKU count by
approximately 1,100 SKUs. The Company sells its OTC pharmaceuticals under its
customers' private labels as well as its own broadline brand, Pharmacist
Formula®, first introduced in 1989.

Vita Health's OTC pharmaceutical sales are primarily
analgesic products and cough and cold products. In Canada, there are two
primary classes of analgesic products, those with codeine and those without.
Vita Health produces both types of products.

In the Acquisition, the Company acquired rights from
Novopharm to market and manufacture pharmaceutical products previously
available only by prescription, but now sold over-the-counter, ("Rx-to-OTC
switch products"), including Ranitidine and Naproxen Sodium. The Company
intends to use the Chemistry, Manufacturing and Control ("CMC")
experience, (also gained in the Acquisition), with these and other Rx-to-OTC
switch products to further broaden its OTC product line. See "Government
Regulation-OTC Pharmaceuticals."

Services;
Other Products.  The Company
performs contract manufacturing services for selected consumer product
companies. The Company utilizes existing facilities, production equipment and
personnel to manufacture and package the contract manufactured products and
earns a profit margin based upon pre-established pricing.

Customers

The Company's vitamin products are sold in all 50 states
through more than 50,000 retail outlets, including drug store, supermarket,
mass merchandising, and warehouse club chains, as well as in convenience stores
and through the United States military outlets worldwide. Leiner is the vitamin
category manager for many leading retailers. The Company's vitamin product
customers include eight of the ten largest drug store chains (including CVS
Corp., Walgreen Company, Rite Aid Corporation, Eckerd Corporation, and Longs
Drug Stores), nine of the ten largest supermarket chains (including Kroger Co.,
Albertson's, Inc., Safeway, Ahold USA, and Winn-Dixie Stores), six of the ten
largest mass merchandising chains (including Wal-Mart, Target and Kmart), and
the two largest warehouse club chains (Sam's Club and Costco). During fiscal
2001, the Company had approximately 190 active U.S. customers. One of the
Companys restructuring initiatives is to refocus on key customers, which will
change this figure. In fiscal 2001, two customers accounted for approximately
34% and 12% of the Company's sales. Each of the Company's other major customers
accounted for less than 10% of the Company's sales for fiscal 2001. The
Company's top ten customers in the aggregate accounted for approximately 72% of
the Company's sales for fiscal 2001.

The Company is currently conducting a comprehensive
rationalization of its customer base. As a result of this process, 47
unprofitable or overly complex customers were identified for discontinuation at
March 31, 2001. Plans are in place to receive final orders, deplete
specifically allocated inventory, and close business with these customers. The
Company plans to continue to re-assess the profitability of its customer base
allowing management to focus on more profitable customers. As of May 31, 2001,
an additional group of less profitable, more complex customers were under
consideration for discontinuance. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Fiscal 2001 Compared
to Fiscal 2000."

Backlog Orders

The Company had approximately $29.8 million in backlog
orders, believed to be firm, as of March 31, 2001. Substantially all of these
orders are expected to be shipped in fiscal 2002. The Company had $20.5 million
in backlog orders, believed to be firm, as of March 31, 2000.

The
backlog trend into FY2002 remains positive versus the prior year. As of May 31,
2001, backlog orders approximated $39.2 million or 81% greater than at the
equivalent time in the prior year.

Purchased Materials

The Company purchases from third party suppliers raw
materials and certain products that the Company does not manufacture. Although
the Company currently has supply arrangements with several suppliers regarding
some but not all ingredients and products, and the Company's purchased
materials are generally available from numerous sources, an unexpected
interruption of supply could materially adversely affect the Company's results
of operations. Two suppliers provided approximately 20% of the materials
purchased during fiscal 2001 by the Company. No other single supplier accounted
for more than 10% of the Company's material purchases.

Competition

The markets for the Company's products are highly
competitive. The Company competes on the basis of customer service, product
quality, range of products offered, pricing and marketing support. In the Mass
Market vitamin product business, the Company believes that its major U.S.
competitors are Pharmavite, Royal Numico, and NBTY, Inc. (manufacturer of
Nature's Bounty vitamin products). In the OTC pharmaceuticals business, the
Company believes its major U.S. competitor is Perrigo Company.

In the United States, the Company sells approximately
90% of its vitamin products to Mass Market and warehouse club retailers. The
Company does not currently participate significantly in other U.S. distribution
channels such as health food stores, direct mail and direct sales, and,
therefore, may face competition from such alternative channels as more
customers utilize these channels of distribution to obtain vitamin products.

The Company competes with other major private label and
broadline brand manufacturers, certain of which are larger and have access to
greater resources than the Company. Among other factors, competition among
private label manufacturers is based upon price. If one or more manufacturers
significantly reduce their prices in an effort to gain market share, the
Company's results of operations or market position could be adversely affected.
However, the Company believes that it competes favorably with other companies
because of its (i) low manufacturing costs, (ii) sales and marketing strategies
(including the wide range of products offered), (iii) customer service
(including adaptability to customer needs and speed of delivery), and (iv)
reputation of supplying quality products.

The Company also competes with larger manufacturers of
nationally advertised brand name products such as American Home Products Corp.,
Bayer Group and Bristol-Myers Squibb Co., which have resources substantially
greater than those of the Company, and are substantially less leveraged than
the Company. In the future, one or more of these companies could seek to
compete more directly with the Company by manufacturing private label products
or by significantly lowering the prices of their national brand products. The
Company believes, however, that the mass-oriented manufacturing and marketing
methods used by national brand manufacturers are less suited to the customized
packaging and marketing requirements of private label customers, which the
Company satisfies by utilizing its packaging and graphics facilities.

Employees

In February 2001, workforce reductions occurred at the
Companys locations in Carson, Garden Grove, and Valencia, California, as well
as in Kalamazoo, Michigan. When included with the reduction in force related to
the Acquisition, affecting the Companys Largo, Florida, Wilson, North
Carolina, and Vancouver, British Columbia locations, the worldwide workforce
has been reduced by approximately 500 full time employees, a reduction of over
12%.

As of March 31, 2001, the Company had 2,606 full-time
employees; 961 employees were engaged in executive or administrative capacities
and 1,645 employees were engaged in manufacturing, packaging or distribution.
In addition, as of March 31, 2001, the Company employed approximately 756
temporary employees. The large number of temporary employees gives the Company
significant flexibility to adjust staffing levels in response to seasonal
fluctuations in demand. A collective bargaining unit represents certain of the
Vita Health employees. The Company considers its relations with its employees
to be good.

Government Regulation

The manufacturing, processing, formulation, packaging,
labeling, advertising and sale of the Company's products are subject to
regulation by one or more United States and Canadian federal agencies, including
the United States Food and Drug Administration ("FDA"), the United
States Federal Trade Commission ("FTC"), the United States Consumer
Product Safety ("CPSC") and Health Canada. The activities are also
regulated by various agencies of the states, provinces and localities in which
the Company's products are sold. In addition, the Company manufactures and
markets certain of its products in compliance with the guidelines promulgated
by voluntary standard organizations, such as the United States Pharmacopoeia
Convention, Inc. ("USP").

FDA.  The United States Food and Drug
Administration exercises authority over three aspects of the Company's
business: (i) the labeling and marketing of dietary supplements, (ii) the
labeling and marketing of monograph OTC, and abbreviated New Drug Application
("ANDA"), and (iii) the operation of its manufacturing and packaging
facilities.

Dietary
Supplements.  The Dietary
Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994 and amends the Federal Food, Drug and Cosmetic Act to (i)
define dietary supplements, (ii) expand with certain limitations the number of
products that can be marketed as dietary supplements, (iii) permit
"structure/function" statements for all nutrition supplement products,
including herbal products and (iv) permit the use of certain published
literature in the sale of vitamin products. Dietary supplements are regulated
as food products under DSHEA, and the FDA is prohibited from regulating the
dietary ingredients in supplements as food additives, or the supplements as
drugs, unless product claims trigger drug status.

DSHEA provides for specific nutritional labeling
requirements for dietary supplements. The latest FDA labeling regulations were
effective March 23, 1999. DSHEA permits substantiated, truthful and
nonmisleading statements of nutritional support to be made in labeling,
including describing the positive effects on general well-being from
consumption of a dietary ingredient or the role of a nutrient or dietary ingredient
in affecting or maintaining structure or function of the body. In addition,
DSHEA authorizes the FDA to promulgate current good manufacturing practices
specific to the manufacture of dietary supplements, to be modeled after current
good manufacturing practices for food.

On January 6, 2000, the FDA published a Final Rule
regarding statements made in dietary supplement labeling. Such statements
cannot state expressly or implicitly that a dietary supplement has any effect
on a disease. Since the passage of DSHEA the FDA has wavered on its definition
of disease. This Final Rule clarifies the FDA's definition of a disease. In
addition, the Final Rule opens up statements from several OTC drug monographs
for use on dietary supplements (e.g., relief of occasional sleeplessness). This
gives the industry a new level of freedom in marketing dietary supplements and
providing information to consumers about the use of dietary supplements.
Effective January 31, 2000, the Center for Food Safety and Applied Nutrition
("CFSAN") combined the former Office of Food Labeling and the former
Office of Special Nutritionals into a single entity now known as the Office of
Nutritional Products, Labeling and Dietary Supplements. The merger of the two
offices will maximize the resources that, in many cases, were previously
working on overlapping issues.

The Company cannot determine what effect the FDA's
future regulations, when and if promulgated, would have on its business in the
future. Such regulations could, however, among other things, require expanded
documentation of the properties of certain products, or scientific
substantiation regarding ingredients, product claims or safety. In addition,
the Company cannot predict whether new legislation regulating the Company's
activities will be enacted, or what effect any such legislation would have on
the Company's business.

OTC
Pharmaceuticals.  FDA
regulation of OTC pharmaceuticals takes two forms. Most of the Company's OTC
pharmaceutical products are governed by FDA monographs covering well-known
ingredients and specifying, among other things, permitted claims, required
warnings and precautions, allowable combinations of ingredients and dosage
levels. Marketing a product governed by a monograph or pending monograph
requires no prior approval of the FDA, only compliance with the applicable
monograph. Monographs may be changed from time to time, requiring formulation,
packaging or labeling changes for an affected product. While such changes may
cause the Company to incur costs to comply with such changes, disruption of
distribution or material obsolescence of inventory due to any such changes is
not likely.

The Company also markets Rx-to-OTC switch products,
which have gone through an FDA review and approval process before the products
can be distributed. The Company acquired from Novopharm, five Rx-to-OTC switch
products (Naproxen Sodium Tablets USP, Ibuprofen Tablets USP, Cimetidine
Tablets USP, Loperamide Tablets, USP, and Ranitidine Tablets, USP) that were
approved through the ANDA review process by the Office of Generic Drugs, FDA.
Based on current FDA regulations, all CMC issues related to these products are
controlled by the information included in the ANDAs. Changes to the approved
ANDAs and, therefore, changes to these products, are governed by specific
regulations and guidances that determine when changes, if approved by the FDA,
can be implemented. The Drug Price Competition and Patent Term Restoration Act
of 1984 (the Hatch-Waxman Amendments to the Federal Food, Drug and Cosmetic
Act) can give a three-year period of marketing exclusivity to a company that
obtains FDA approval of an Rx-to-OTC switch product. Unless Leiner establishes
relationships with such companies having exclusive marketing rights, the
Company's ability to market Rx-to-OTC switch products and offer its customers
products comparable to the national brand products would be delayed until the
expiration of the exclusivity granted to the company initiating such a switch.
There can be no assurance that, in the event that the Company applies for FDA
approvals, the Company would obtain such approvals to market Rx-to-OTC switch
products or, alternatively, that the Company would be able to obtain such
products from other manufacturers.

The Company is also subject to the requirements of the
Comprehensive Methamphetamine Control Act of 1996, a law designed to allow the
Drug Enforcement Administration (DEA) to monitor transactions involving
chemicals that may be used illegally in the production of methamphetamine. The
Comprehensive Methamphetamine Control Act of 1996 establishes certain
registration and recordkeeping requirements for manufacturers of OTC cold,
allergy, asthma and diet medicines that contain ephedrine, pseudoephedrine or
phenylpropanolamine. While certain of the Company's OTC pharmaceutical products
contain pseudoephedrine, none of the Company's products contain ephedrine, a
chemical compound that is distinct from pseudoephedrine. The Company has
discontinued all products containing phenylpropanolamine. Pseudoephedrine is a
common ingredient in decongestant products manufactured by the Company and
other pharmaceutical companies.

Manufacturing
and Packaging.  All
facilities where foods (including dietary supplements) and pharmaceuticals are
manufactured, packed, warehoused, or sold must comply with the FDA
manufacturing standards applicable to that type of product. The FDA performs
periodic audits to ensure that the Company's facilities remain in compliance
with the cGMP regulations. The failure of a facility to be in compliance may
lead to a breach of representations made to private label customers or to
regulatory action against the products made in that facility, including
seizure, injunction or recall. The Company believes that its facilities are in
compliance in all material respects with the cGMPs and other applicable
requirements for each facility.

CPSC.  The United States Consumer Product Safety
Commission has authority, under the Poison Prevention Packaging Act, to
designate those products, including vitamin products and OTC pharmaceuticals
that require child resistant closures to help reduce the incidence of
poisonings. The CPSC has adopted regulations requiring numerous OTC
pharmaceuticals and iron-containing dietary supplements to have such closures,
and has adopted rules on the testing of such closures by both children and
adults. The Company, working with its packaging suppliers, believes that it is
in compliance with all CPSC requirements.

FTC.  The United States Federal Trade Commission
exercises primary jurisdiction over the advertising and other promotional
practices of food and OTC pharmaceuticals marketers, and has concurrent
jurisdiction with the FDA over the advertising and promotional practices of
marketers of dietary supplements. The FTC has historically applied a different
standard to health-related claims than the FDA; the FTC has applied a
"substantiation standard," which is less restrictive than the
standard under the Nutritional Labeling Education Act ("NLEA"). The
FTC NLEA enforcement policy uses FDA regulations as a baseline (and safe
harbor) and permits (i) nutrient content descriptions that are reasonable
synonyms of FDA-permitted terms, and (ii) qualified health claims not approved
by FDA where adequate substantiation exists for the qualified or limited
claims.

State
Regulation.  All states
regulate foods and drugs under local laws that parallel federal statutes.
Because the NLEA gave the states the authority to enforce many labeling
prohibitions of the Federal Food, Drug, and Cosmetic Act after notification to
the FDA, the Company and other dietary supplement manufacturers may be subject
to increasing state scrutiny for NLEA compliance, as well as increasing FDA
review. The Company is also subject to California Proposition 65 and state
consumer health and safety regulations, which could have a potential impact on
the Company's business if any of the Company's products were ever found not in
compliance. The Company is not engaged in any enforcement or other regulatory
actions and is not aware of any products, which are not in compliance with
California Proposition 65 and other similar state regulations.

USP.  The United States Pharmacopoeia Convention,
Inc. is a nongovernmental, voluntary standard–setting organization. Its
drug standards are incorporated by reference into the Federal Food, Drug, and
Cosmetic Act as the standards that must be met for the listed drugs, unless
compliance with those standards is specifically disclaimed. USP standards exist
for most OTC pharmaceuticals. The FDA requires USP compliance as part of cGMP.

The USP began adopting standards for vitamin and mineral
dietary supplements in 1994. These standards cover composition (nutrient
ingredient potency and combinations), disintegration, dissolution, manufacturing
practices and testing requirements. These standards are codified in the USP
Monographs and the USP Manufacturing Practices. In 1995, USP compliance
included the standards for disintegration and dissolution. While USP standards
for vitamins are voluntary, and not incorporated into federal law, customers of
the Company may demand that products they are supplied meet these standards.
Label claims of compliance with the USP may expose a company to FDA scrutiny
for such claims. In addition, the FDA may in the future require compliance, or
such a requirement may be included in new dietary supplement legislation. All
of the Company's products labeled USP meet the USP standards.

Canadian
Regulation.  In Canada, the
Company's products are subject to federal and provincial law, particularly
federal drug legislation. Government regulation under the Food and Drug Act and
the regulations thereunder (the "Canadian Act") require regulatory
approvals of such products through a drug identification number ("DIN")
by Health Canada-Health Products and Food Branch (the "HPFB"). All
substances sold for ingestion by humans are regulated either as a food or drug
under the Canadian Act. In addition, certain of the Company's products are
subject to government regulation under the Canadian Controlled Drugs and
Substances Act and the regulations thereunder ("CDSA"). The Canadian
Act and the CDSA are enforced by the HPFB.

The Canadian Act governs the processing, formulation,
packaging, labeling, advertising and sale of the Company's products and
regulates what may be represented to the public on labels and in promotional
material, in respect of the properties of the various products. The Canadian
Act also provides that any drugs sold in Canada must have a label affixed
thereto which shows certain information such as its proper scientific or common
name, the name and address of the manufacturer, its lot number, adequate
directions for use, a quantitative list of its medical ingredients and its
expiration date. In addition, no person may sell a drug unless it has been
assigned a DIN. DINs are obtained through an application to the HPFB.
Regulations under the Canadian Act require all manufacturers to pay annual fees
for their DINs. HPFB approval for the sale of the Company's products may be
subject to significant delays despite the Company's best efforts.

The CDSA governs the manufacture and sale of controlled
substances as defined in the CDSA. The CDSA contains requirements for licenses
of the factory, approved security, a qualified person in charge of the factory
and detailed record keeping in connection with the manufacturing of controlled
substances.

Regulations under the Canadian Act set out mandatory and
rigorous procedures, practices and standards for manufacturers. Health Canada performs
inspections of companies in the industry to ensure compliance with the Canadian
Act and the CDSA. For each of the Company's products, the development process,
the manufacturing procedures, the use of equipment, and laboratory practices
and premises must comply with Good Manufacturing Practices and Establishment
Licensing regulations under the Canadian Act.

The Company's herbal products which are being marketed
with drug claims or which contain drug substances require regulatory approval
in the form of a DIN issued by Health Canada. Approvals are based on
traditional references and are approved as Traditional Herbal Medicines. In
addition, the Canadian government has established a panel to review the
regulatory framework for natural products. If the Canadian government
implements new or amended requirements for natural products it may result in
additional costs to the Company for the requisite regulatory approval.

Intellectual Property

The Company regards its trademarks and other proprietary
rights as valuable assets and believes they are important in the marketing of
the Company's products. Among the Company's most significant trademarks are Natures
Origin, Your Life®, Pharmacist Formula®, Daily Pak®,
Central-Vite®
and Bodycology®.
The Company has registered its marks in the United States and approximately 56
foreign countries. The Company now owns, through its wholly owned subsidiaries,
170 trademark registrations in the United States and 266 registrations abroad,
as well as 86 pending applications for registration of trademarks in the United
States and 27 pending applications in other countries. The Company intends to
maintain the foreign and domestic registrations of its trademarks so long as
they remain valuable to its business. The Company vigorously polices its marks
and protects them from infringement.

The Company does not currently have any patents on its
proprietary processes. While the Company believes most of its proprietary
processes are trade secrets better protected by stringent confidentiality, it
is seeking patent protection for a few of its processes.

Environmental Matters

The Company is subject to various United States and
Canadian federal, state, provincial and local environmental laws and
regulations. The costs of complying with such laws and regulations have not
had, and are not expected to have, a material adverse effect on the business of
the Company.

Risk Factors

Substantial Leverage; Default Under Amended Credit
Agreement.In 1998, the Company
entered into the Amended Credit Agreement with the Senior Lenders, and as a
result the Company is highly leveraged. The Amended Credit Agreement contains a
number of covenants that significantly restrict the operations of the Company.
In addition, the Company is required to comply with specified financial ratios
and tests, including minimum net worth requirements, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum EBITDA to cash interest
expense ratios. Since December 31, 2000, the Company has not been, and as of March
31, 2001 the Company was not in compliance with certain of these financial
covenants. Such covenant violations constitute events of default under the
terms of the Amended Credit Agreement. As a result, borrowings under the
Amended Credit Agreement, aggregating $278.0 million at March 31, 2001, have
been classified as a current liability in the Companys consolidated balance
sheet to reflect the Senior Lenders right to accelerate maturity of such
loans. See Item 8 "Financial Statements and Supplementary Data."

The
Company entered into the Amended Waiver with the Senior Lenders. Under the
latest amendment, dated as of June 15, 2001, the Senior Lenders agreed to
waive such events of default and to forbear exercising any of their rights or
remedies under the Amended Credit Agreement for a limited period ending on
June 27, 2001.  The Amended Waiver
expired on June 27, 2001, and on June 28, 2001, the Company received a formal
notice of default from its Senior Lenders.

The
Company is currently in active discussions with the Senior Lenders regarding a
forebearance agreement that would provide the Company a period of time during
which the Senior Lenders would agree not to exercise the remedies available to
them while a long-term restructuring solution is pursued.

Both
prior to and during the waiver period, the Company made all scheduled principal
and interest payments on a timely basis. 
The Company has retained financial and legal advisors to assist it in
evaluating its restructuring and financing alternatives.  The Company and its financial advisors have
provided the Senior Lenders with a business plan that reflects the effects of
the operational restructuring and reengineering initiatives, (see Item 1
"Business-Restructuring") and serves as a basis for discussions
regarding a forebearance agreement and long-term restructuring alternatives.

There
can be no assurance that the Company and the Senior Lenders will agree upon the
terms of or enter into a forbearance agreement.

An
outstanding event of default under the Amended Credit Agreement would permit
the Senior Lenders to declare all amounts outstanding thereunder to be
immediately due and payable, together with accrued and unpaid interest, and to
terminate their commitments to make further extensions of credit thereunder.

The
Subordinated Notes are unsecured, senior subordinated obligations of Leiner,
and as such, are subordinated in right of payment to all existing and future
senior debt of Leiner, including indebtedness of Leiner under the Amended
Credit Agreement and Leiner's guarantee of indebtedness of Vita Health under
the Amended Credit Agreement. The Subordinated Notes rank pari passu with all senior
subordinated indebtedness of Leiner, if any, and rank senior to all
subordinated indebtedness of Leiner, if any. The Subordinated Notes are also
effectively subordinated to all secured indebtedness of Leiner to the extent of
the value of the assets securing such indebtedness, and to all existing and
future obligations and liabilities of Leiner's subsidiaries. The obligations of
Leiner under the Amended Credit Agreement are secured by substantially all of
the assets of Leiner and any future U.S. subsidiary of Leiner and a pledge of
the capital stock of Leiner and any such subsidiary and 65% of the capital stock
of any direct foreign subsidiary of Leiner. The obligations of Vita Health
under the Amended Credit Agreement are additionally secured by substantially
all of the assets of Vita Health and its Canadian parents and subsidiaries.

In
the event of bankruptcy, liquidation, dissolution, reorganization or any
similar proceeding regarding Leiner, or any default in payment or acceleration
of any debt thereof, the assets of Leiner will be available to pay obligations
on the Subordinated Notes only after the senior debt of Leiner has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
all or any of such Subordinated Notes.

Should
the Senior Lenders accelerate the maturity of the loans under the Amended
Credit Agreement, all amounts due under the Indenture governing the
Subordinated Notes may also be accelerated. As a result of this uncertainty,
the Subordinated Notes have been classified as a current liability in the
Company's consolidated balance sheet as of March 31, 2001. On June 28, 2001,
the Senior Lenders delivered a notice (the Blockage Notice) to the Company
and the trustee under the Indenture prohibiting payments on account of any
principal or interest obligation related to the Subordinated Notes or the
purchase or redemption of such obligations. 
The Blockage Notice is effective for 179 days.  If the Blockage Notice remains in effect on August 1, 2001, the
30 day grace period with respect to payment defaults on the Subordinated Notes
will expire and failure to pay will constitute an event of default under the
Indenture and 25% in aggregate principal amount of the holders of the
Subordinated Notes may accelerate the amounts due under the Indenture. The
Company has initiated negotiations with several major holders of the Subordinated
Notes regarding such a long-term restructuring alternative.

If
the Senior Lenders were to accelerate maturity of amounts due under the Amended
Credit Agreement, or if the holders of the Subordinated Notes were to
accelerate the amounts due under the Indenture, and other long-term debt became
immediately payable as a result of such action, the Company would not have
sufficient funds to repay its outstanding debt, and no assurance can be given
that alternative sources of sufficient financing would be available on
acceptable terms, or at all.  These
conditions, together with the Companys net loss in fiscal 2001 and its deficit
in shareholders equity, raise substantial doubt about the Companys ability to
continue as a going concern.  The
Companys consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or liabilities that may result from the outcome of this uncertainty.

The
Company also has an outstanding balance of $6.6 million under an Industrial
Development Revenue Bond (the IRB Loan). The IRB Loan is secured by a letter
of credit issued under the Amended Credit Agreement. Under the terms of the
Amended Credit Agreement, if an event of default were continuing, upon notice
from the Senior Lenders, the Company would be obligated to reimburse the issuer
for the amount equal to the outstanding letter of credit. Accordingly, the IRB
Loan has been classified as a current liability in the Companys consolidated
balance sheet.

During
fiscal 2000, Vita Health entered into a loan agreement with the Manitoba
Industrial Opportunities Program (the MIOP Loan) to fund the expansion and
upgrading of Vita Health's manufacturing facility in Canada. As of March 31,
2001, Vita Health has received approximately $1.6 million in advances on the
loan, which also has been classified as a current liability in the Companys
consolidated balance sheet. The MIOP Loan is not to exceed a total of
approximately $1.9 million. Pursuant to the terms of the MIOP Loan, interest on
the loan is waived if Vita Health complies with certain obligations, including
meeting certain financial ratios. To date Vita Health has been successful in
meeting these ratios.

The
Amended Waiver provided for a one percent increase in the applicable margin
effective through the end of the waiver period.  The Amended Waiver required, among other things, the payment to
the Senior Lenders of total fees of $0.8 million, that the management fee and
additional expense reimbursement paid to North Castle and/ or its Affiliates
pursuant to the terms of the Management Services Agreement on January 2, 2001
in the amount $0.8 million be returned to the Company and that an amount equal
to $0.8 million be paid to the Senior Lenders as a prepayment of the loans
under the Amended Credit Agreement. Additionally, further payments of the
management fee were not allowed during the waiver period.

The
Amended Waiver also required that during the waiver period and concurrently with
the receipt by the Company of any judgment, settlement or other proceeds or
amounts, however characterized, arising from or in connection with any
antitrust claims (including the Antitrust Lawsuit, with all the foregoing
collectively referred to as the Proceeds), the Company shall make, or cause
to be made, a mandatory prepayment of the loans outstanding in the amount of
the Proceeds to be applied pro rata to the outstanding principal amount of all
term loans, the cash collateralization of $1.6 million of letters of credit,
and a corresponding reduction of each revolving loan commitment amount.

Certain
conditions to the Amended Waiver survive the expiration of the Amended Waiver
including the Companys agreement that: (a) interest and letter of credit fees
will be paid monthly instead of quarterly, (b) commitments to make further
credit extensions are suspended, and (c) outstanding amounts under the Amended
Credit Agreement cannot be continued as or converted into LIBOR or bankers
acceptance rate loans.

Fraudulent
Transfer Considerations.The incurrence of the indebtedness evidenced
by the Subordinated Notes may be subject to review under federal bankruptcy law
or relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit is
commenced by or on behalf of unpaid creditors of the Company.

Control
of the Company.North Castle holds approximately 85.7% of
the issued and outstanding Leiner Group voting common stock. Pursuant to the
terms of the Leiner Group Stockholders Agreement, dated as of June 30, 1997, as
amended (the "Stockholders Agreement"), and entered into in
connection with the Recapitalization, North Castle controls the Company and has
the power to appoint new management and approve any action requiring the
approval of the holders of Leiner Group common stock, including adopting
amendments to Leiner Group's certificate of incorporation and approving mergers
or sales of substantially all of the Company's assets. There can be no
assurance that the interests of North Castle will not conflict with the
interests of the holders of the Subordinated Notes. Under North Castle's
operating agreement, Mr. Baird has authority and discretion over the business
affairs and operations of North Castle. See Item 10 Directors and Executive
Officers and Item 13 Certain Relationships and Related Transactions.



Change of Control.Upon the
occurrence of a Change of Control (as defined in the indenture governing the
Subordinated Notes), the Company will be required to make an offer to purchase
all of the outstanding Subordinated Notes at a price equal to 101% of the
principal amount thereof at the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase. The occurrence of certain of the
events that would constitute a Change of Control under the indenture governing
the Subordinated Notes would constitute a default under the Amended Credit
Agreement and might constitute a default under other indebtedness of the
Company. In addition, the Amended Credit Agreement prohibits the purchase of
the Subordinated Notes in the event of a Change of Control, unless and until
such time as the indebtedness under the Amended Credit Agreement is repaid in
full. The Company's failure to purchase the Subordinated Notes in such instance
would result in default under each of the indentures governing the Subordinated
Notes and the Amended Credit Agreement. The inability to repay the indebtedness
under the Amended Credit Agreement, if accelerated, could have material adverse
consequences to the Company and to the holders of the Subordinated Notes.
Future indebtedness of the Company may also contain prohibitions of certain
events or transactions that could constitute a Change of Control or require
such indebtedness to be repurchased upon a Change of Control. In the event of a
Change of Control, there can be no assurance that the Company would have
sufficient assets to satisfy all of its obligations under the Amended Credit
Agreement and the Subordinated Notes.

Effect of
Research and Publicity on Vitamin Product Business.  The Company believes the negative growth
experienced in the last two years by the vitamin product business is based
largely on national media attention regarding recent scientific research
suggesting potential dangers from regular consumption of certain vitamin
products. Various studies published since 1992 by researchers at major
universities have suggested an association between regular consumption of
antioxidant supplements such as vitamins E and C and a reduced risk of certain
diseases, including heart disease, cancer and Alzheimer's disease. In addition,
certain other studies have reported that consumption of folic acid (a B
vitamin) can aid prevention of heart disease and neural tube birth defects.
Such research has been described in major medical journals, magazines,
newspapers and television programs. However, recent studies relating to certain
antioxidants have produced results contrary to the favorable indications of
other prior and subsequent studies. The scientific research to date with
respect to antioxidants and certain other of the Company's products is not
conclusive, and there can be no assurance of future favorable scientific
results and media attention, or the absence of unfavorable or inconsistent
findings. In the event of future unfavorable scientific results or media
attention, the Company's sales of vitamin products could be materially
adversely affected.

Potential
for Increased Government Regulation.  The manufacturing, processing, formulation, packaging, labeling,
advertising and sale of the Companys products are subject to regulation by one
or more United States and Canadian federal agencies, including the FDA, the
FTC, CPSC and Health Canada. The Companys activities are also regulated by
various agencies of the states, provinces, localities and countries in which
the Companys products are sold. In addition, the Company manufactures and
markets certain of its products in compliance with the guidelines promulgated
by voluntary standard organizations, such as the USP. See Government
Regulation.

Reliance on
Certain Customers and Certain Products.  In fiscal 2001, the Company had approximately 190 active U.S.
customers. One of the Companys restructuring initiatives is to refocus on key
customers, which will change this figure. In fiscal 2001, two customers
accounted for approximately 34% and 12% of the Company's sales. Each of the
Company's other major customers accounted for less than 10% of the Company's
sales for fiscal 2001. The Company's top ten customers, in the aggregate,
accounted for approximately 72% of the Company's sales for fiscal 2001. Sales
of vitamins C and E, in the aggregate, accounted for approximately 22% of the
Company's sales in fiscal 2001. If one or more of the Company's major customers
substantially reduced their volume of purchases from the Company, or if sales
of vitamin C or E were substantially reduced, the Company's results of
operations could be materially adversely affected.

Potential
for Increased Competition. 
The market for the Company's products is highly competitive. The Company
competes with other vitamin product and OTC pharmaceuticals manufacturers.
Among other factors, competition among these manufacturers is based upon price.
If one or more manufacturers significantly reduce their prices in an effort to
gain market share, the Company's results of operations or market position could
be adversely affected. Certain of the Company's competitors, particularly
manufacturers of nationally advertised brand name products, are larger and have
resources substantially greater than those of the Company, and are less
leveraged than the Company. In the future, one or more of these companies could
seek to compete more directly with the Company by manufacturing private label
products or by significantly lowering the prices of their national brand
products.

The Company sells substantially all of its vitamin
products to Mass Market and warehouse club retailers. The Company does not
currently participate significantly in other channels such as health food
stores, direct mail and direct sales. The Company's products may, therefore,
face competition from such alternative channels as more customers utilize these
channels of distribution to obtain vitamin products.

Reliance on
Certain Suppliers; Availability and Cost of Purchased Materials.  The Company purchases from third party
suppliers raw materials and certain products that the Company does not
manufacture. Although the Company currently has supply arrangements with
several suppliers of these ingredients and products, and the Company's
purchased materials are generally available from numerous sources, an
unexpected interruption of supply could materially adversely affect the
Company's results of operations. See "Purchased Materials."

Possibility
of Trade Dress Claims.  The
Company's packaging of certain of its branded products identifies nationally
branded products to which the Company's products are comparable. Although the
Company designs its packaging to avoid infringing upon any proprietary rights of
national brand marketers and is not currently the subject of any legal actions
regarding infringement, there can be no assurance that the Company will not be
subject to such legal actions in the future.

Exposure to
Product Liability Claims. 
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces a risk of exposure to product liability
claims in the event that, among other things, the use of its products results
in injury. With respect to product liability coverage, the Company currently
has an aggregate of $81 million of insurance coverage, including primary
product liability and excess liability coverage with deductibles of $0.3
million per claim, subject to an annual aggregate deductible limit of $1 million.
There can be no assurance that product liability insurance will continue to be
available at an economically reasonable cost or that the Company's insurance
will be adequate to cover liability the Company incurs in respect to product
liability claims. See also Item 3 Legal Proceedings.

Reliance on
Key Management.  The
operation of the Company requires managerial and operational expertise. Leiner
has entered into severance benefit agreements with certain members of Leiner
senior management. See Item 11 Executive Compensation-Severance Arrangements.
If, for any reason, key personnel do not continue to be active in Leiner
management, operations could be adversely affected.

Risks
Associated With International Markets. Operating in international
markets exposes the Company to certain risks, including, among other things,
(i) changes in or interpretations of foreign import, currency transfer and
other restrictions and regulations that among other things may limit the
Company's ability to sell certain products or repatriate profits to the United
States, (ii) exposure to currency fluctuations, particularly in light of the
Company's substantial interest payment obligations, which must be paid in
United States and Canadian dollars, (iii) the potential imposition of trade or
foreign exchange restrictions or increased tariffs, and (iv) economic and
political instability.

ITEM 2PROPERTIES



The following table sets forth the location, type of
facility, square footage and ownership interest in each of the Company's principal
facilities. The Company also leases certain additional office space throughout
the United States.

Location
  Type of Facility
  Approx. 
  Square 
  Feet
  Leased or Owned
  Date of 
  Lease 
  ExpirationBritish
  Columbia, Canada
  Manufacturing
  and offices
  37,000
  Leased
  6/15/01
  (1)(2)British
  Columbia, Canada
  Manufacturing
  and distribution
  48,000
  Leased
  5/31/03
  (2)British
  Columbia, Canada
  Distribution
  38,000
  Leased
  6/30/01
  (2)Carson, CA
  Packaging,
  distribution and corporate offices
  471,500
  Leased
  3/31/04
  (3)Carson, CA
  Distribution
  and offices
  80,343
  Leased
  3/31/04Fort Mill,
  SC
  Manufacturing,
  packaging and distribution
  558,900
  Leased
  7/31/13Garden
  Grove, CA
  Manufacturing
  138,500
  Leased
  10/31/02
  (4)Garden
  Grove, CA
  Manufacturing
  6,960
  Leased
  4/30/01
  (5)Kalamazoo,
  MI
  Manufacturing
  51,250
  Owned
  -
  (6)(7)Kalamazoo,
  MI
  Auxiliary
  warehouse
  14,040
  Leased
  6/29/02
  (7)Largo, FL
  Packaging,
  distribution and offices
  71,000
  Leased
  10/31/03
  (7)Largo, FL
  Auxiliary
  warehouse
  42,914
  Leased
  11/30/03
  (7)Valencia,
  CA
  Manufacturing
  52,510
  Leased
  8/31/05Wilson, NC
  Manufacturing,
  warehouse and offices
  125,000
  Owned
  -Wilson, NC
  Auxiliary
  warehouse
  6,942
  Owned
  -Winnipeg,
  Canada
  Manufacturing,
  packaging and distribution
  185,000
  Owned
  -__________
(1)This facility was previously owned and was leased back
by the Company until 6/15/01.
(2)The British Columbia operations are in the process of
being merged with Winnipeg.
(3)The Company has the option to extend by 10 years.
(4)The Company is currently in negotiations to extend the
lease to 2011.
(5)This property was vacated as of 4/30/01.
(6)This property has been listed for sale.
(7)This property was dormant and not in operation at
3/31/01.

The Company believes that its facilities and equipment
are generally well maintained and in good operating condition.

Leiner's active manufacturing and distribution
facilities consist of approximately 1.8 million square feet of owned or leased
plant and office facilities in seven locations, in three U.S. states and one
Canadian Province. The Company is one of the largest manufacturers in the North
American vitamin products industry and is capable of packaging over 25 billion
doses each year. In April 1995, Leiner was the first major vitamin product
manufacturer to be certified as being in compliance with USP's vitamin
manufacturing standards, which became effective in January 1995. The Company's
U.S. facilities were audited by an independent quality assurance laboratory and
received the laboratory's highest categorical rating. All of the Company's U.S.
manufacturing facilities also have been audited by the FDA and have been found
to be in compliance with the FDA's cGMP.

Leiner has four U.S. manufacturing facilities, which are
located in Garden Grove, California, Valencia, California, Wilson, North
Carolina and Fort Mill, South Carolina. The primary manufacturing facilities
for the Company's vitamin products and OTC pharmaceuticals are its 138,500
square foot Garden Grove plant, its 125,000 square foot Wilson plant and its
558,900 square foot Fort Mill facility. In the event of a catastrophic casualty
to one of the Company's primary vitamin or OTC tableting facilities, the
Company has the ability to shift production to other facilities. The Company
operates 42 tableting machines in its Garden Grove, California facility, 12
tableting machines in its Fort Mill, South Carolina facility and 7 tableting
machines in its Wilson, North Carolina facility. In fiscal 2001, the Company
operated three packaging and distribution facilities in the U.S., which are
located in Carson, California, Fort Mill, South Carolina and Largo, Florida.
These facilities are equipped with a total of 32 packaging lines, and, as with
tableting, products can be shifted between facilities in the event such a need
arises.

In fiscal 1999, the Company established the Fort Mill,
South Carolina manufacturing, packaging and distribution center. The center
serves the Company's retail customers throughout the eastern United States and
operated at 65% capacity in fiscal 2001. The center will employ approximately
800 employees when it becomes fully operational. The majority of these
employees will be recruited from the local labor force with a smaller
percentage relocating from the Company's other facilities.

Vita Health currently tablets, bottles and packages its
products in a modern, newly expanded 185,000 square foot facility in Manitoba
of which approximately 20,000 square feet is office space.

ITEM
3
LEGAL PROCEEDINGS



On September 27, 1999, the Company filed a civil
antitrust lawsuit (the "Antitrust Lawsuit") against certain of its
raw material suppliers and other alleged co-conspirators. The complaint alleges
that the defendants conspired to fix vitamin prices and allocate vitamin
production volume and vitamin customers in the United States. The complaint
seeks unspecified damages and injunctive relief. After the lawsuit was filed,
it was consolidated, for pre-trial purposes, with other similar cases. Based on
the pretrial schedule set forth by the court, the case will not be ready for
trial until approximately April 2002. At the present time, management cannot
predict the outcome of this lawsuit, nor the estimated damages and potential
recovery, if any.

During fiscal 2001 and 2000, the Company entered into settlement
agreements with several of its suppliers named in the Antitrust Lawsuit (the
"Settlement Agreement"). Pursuant to the terms of the Settlement
Agreement, the Company agreed to release all claims it may have against the
suppliers based on the Company's purchases of various vitamins from the
suppliers and to opt out of any settlements in connection with the Antitrust
Lawsuit in so far as it pertains to these suppliers. In exchange for the
Company's release and agreement to opt out of any settlements in connection
with the Antitrust Lawsuit, the Company has been awarded settlements in the
aggregate amount of approximately $24.3 million and 2.4 million in the years
ended March 31, 2001 and 2000, respectively, which were offset by legal,
consulting and other related expenses of approximately $4.3 million and $0.2
million, respectively.

The Amended Waiver also required
that during the waiver period and concurrently with the receipt by the Company
of any judgment, settlement or other proceeds or amounts, however
characterized, arising from or in connection with any antitrust claims
(including the Antitrust Lawsuit, with all the foregoing collectively referred
to as the Proceeds), the Company shall make, or cause to be made, a mandatory
prepayment of the loans outstanding in the amount of the Proceeds to be applied
pro rata to the outstanding principal amount of all term loans, the cash
collateralization of $1.6 million of letters of credit, and a corresponding
reduction of each revolving loan commitment amount.

The Company is subject to other legal proceedings and
claims that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.

The Company, like other retailers, distributors and
manufacturers of products that are ingested, faces a risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has an aggregate of $81 million of insurance coverage, including
primary product liability and excess liability coverage with deductibles of
$0.3 million per claim, subject to an annual, aggregate deductible limit of $1
million.

ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



There were no matters submitted to a vote of security
holders during the fourth quarter of fiscal 2001.

PART IIITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS



There is no trading market for the Company's Common
Stock. All of the outstanding shares of the Company's Common Stock are held by
PLI Holdings. The Company did not pay any dividends in fiscal 2001 or fiscal
2000.

ITEM 6
SELECTED FINANCIAL DATA



The following table presents selected historical
financial data derived from the consolidated financial statements of the Company.
This data should be read in conjunction with Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations and Item 8
Financial Statements and Supplementary Data.



Fiscal Years
  Ended March 31,2001
  2000
  1999
  1998
  1997(dollars in
  millions)Statement of Operations Data:Net sales
  $612.1
  $662.3
  $626.9
  $502.1
  $392.8Cost of sales
  559.5
  495.7
  463.6
  368.6
  288.6Gross profit
  52.6
  166.6
  163.3
  133.5
  104.2Marketing, selling and distribution expenses
  81.2
  78.8
  72.2
  61.1
  51.1General and administrative expenses
  48.7
  38.9
  36.9
  29.3
  22.1Research and development expenses
  9.4
  7.3
  5.2
  1.7
  0.5Amortization of goodwill and other intangibles
  5.6
  2.7
  1.7
  1.7
  1.5Restructuring charges
  9.8
  0.6
  0.4
  1.2
  1.4Expenses related to recapitalization of parent(1)
  -
  -
  -
  32.8
  -Other operating (income) charges
  (18.4)
  (0.9)
  (0.1)
  1.3
  0.9Operating income (loss)
  (83.7)
  39.2
  47.0
  4.4
  26.7Loss from investment in joint venture
  0.7
  0.1
  -
  -
  -Interest expense, net
  36.0
  31.1
  28.7
  19.5
  8.3Income (loss) before income taxes and extraordinary item
  (120.4)
  8.0
  18.3
  (15.1)
  18.4Provision for income taxes before extraordinary item
  (1.5)
  3.1
  8.0
  1.2
  8.0Income (loss) before extraordinary item
  (118.9)
  4.9
  10.3
  (16.3)
  10.4Extraordinary loss, net of taxes
  -
  -
  -
  1.1
  2.8Net income (loss)
  $(118.9)
  $4.9
  $10.3
  $(17.4)
  $7.6Balance Sheet Data (end of period):Working capital (deficit)
  $(282.5)
  $161.6
  $166.6
  $106.1
  $79.4Total assets
  406.5
  509.5
  425.5
  365.8
  284.6Total debt
  374.4
  344.1
  321.9
  258.8
  105.4Minority interest in subsidiary
  -
  -
  -
  1.0
  4.7Total common shareholder's equity (deficit)
  (114.4)
  5.6
  (19.5)
  (29.9)
  80.2Other Data:Gross margin
  8.6%
  25.2%
  26.0%
  26.6%
  26.5%EBITDA(2)
  $(44.4)
  $59.3
  $61.8
  $27.3
  $38.1EBITDA margin(2)
  (7.3)%
  9.0%
  9.9%
  5.4%
  9.7%Depreciation and amortization(3)
  $30.3
  $19.6
  $14.3
  $13.3
  $12.3Capital expenditures
  8.1
  15.6
  17.5
  14.4
  3.5Cash flows from operating activities
  12.0
  48.9
  (38.3)
  (18.4)
  23.2Cash flows from investing activities
  (18.6)
  (76.6)
  (21.7)
  (18.9)
  (8.5)Cash flows from financing activities
  32.9
  30.7
  59.0
  36.1
  (13.8)Ratio of total debt to EBITDA(2)
  -
  5.8x
  5.2x
  9.5x
  2.8xRatio of EBITDA to interest expense(2)(4)
  -
  2.0
  2.3
  1.5
  4.7Ratio of earnings to fixed charges(2)(5)
  -
  1.2
  1.6
  -
  2.9

__________

(1)
  During fiscal 1998,
  non-recurring charges relating to the Recapitalization, consisting of (x) a
  compensation charge incurred by the Company for the in-the-money value of
  existing stock options of $15.6 million which were (i) converted into an
  equivalent value of Equity Rights at the date of the Recapitalization, (ii)
  paid out in cash, or (iii) exercised for common stock (or a combination
  thereof), (y) $5.2 million in transaction bonuses which were paid to members
  of the Company's management subsequent to the Recapitalization, and (z)
  expenses aggregating $12.0 million incurred by Leiner Group in connection
  with its capital raising activities. These non-recurring charges contributed
  significantly to the Company's net loss of $17.4 million for fiscal 1998.

(2)
  "EBITDA," as
  presented, represents earnings before interest expense, income taxes,
  depreciation and amortization and other non-cash charges, consisting of (i)
  the write off of deferred financing charges, net of income taxes, included as
  an extraordinary item in the statements of operations for fiscal 1998 and
  fiscal 1997, (ii) non-cash stock compensation charges, including those
  recorded in connection with the June 1997 Recapitalization (see Item 1
  Business-Recapitalization), (iii) expenses related to the closure of
  facilities, and (iv) other non-cash charges in fiscal 1997. Please note:
  ratios were not calculated for periods with negative EBITDA.

EBITDA
is calculated as follows (in thousands):

Fiscal Years Ended
  March 31,2001(a)
  2000
  1999
  1998(b)
  1997Net income (loss)
  $(118,902)
  $4,872
  $10,307
  $(17,417)
  $7,638Add back:Interest expense, net (4)
  35,947
  31,123
  28,732
  19,494
  8,281Income taxes
  (1,487)
  3,098
  8,034
  1,196
  8,028Depreciation and amortization(3)(4)
  30,282
  19,622
  14,319
  13,349
  12,309Restructuring charges
  9,761
  608
  380
  1,221
  1,416Extraordinary item
  -
  -
  -
  1,109
  295Compensation related to stock options
  -
  -
  -
  8,300
  99Other non-cash charges
  -
  -
  -
  -
  18Subtotal
  74,503
  54,451
  51,465
  44,669
  30,446EBITDA
  $(44,399)
  $59,323
  $61,772
  $27,252
  $38,084__________
             (a)Excluding other Operational Restructuring related
charges, EBITDA would have been $23.0 million for fiscal 2001.
             (b)Excluding the Recapitalization related expenses, EBITDA
would have been $51.8 million for fiscal 1998.

Although EBITDA (as well as related EBITDA ratios) is a
non-GAAP measurement, EBITDA, EBITDA margin, the ratio of total debt to EBITDA
and the ratio of EBITDA to interest expense are included because management
understands that such information is considered by certain investors to be an
additional basis for evaluating the Company's ability to pay interest, repay
debt and make capital expenditures. EBITDA should not be considered an
alternative to measures of operating performance as determined in accordance
with generally accepted accounting principles, including net income as a
measure of the Company's operating results and cash flows as a measure of the
Company's liquidity. Because EBITDA is not calculated identically by all
companies, the presentation herein may not be comparable to other similarly
titled measures of other companies.

(3)
  Depreciation and
  amortization as presented here does not include the amortization of deferred
  financing fees. In the statement of cash flows in the consolidated financial
  statements, the amortization of deferred financing fees is included in
  depreciation and amortization.(4)
  For purposes of calculating the ratio of EBITDA to interest expense, interest
  expense excludes the amortization of deferred financing fees, which is
  included in interest expense in the statement of operations in the
  consolidated financial statements.(5)
  In calculating the ratio of earnings to fixed charges, earnings consist of
  income before taxes plus fixed charges. Fixed charges consist of interest
  expense and amortization of deferred financing fees, whether capitalized or
  expensed, plus one-third of rental expense under operating leases (the
  portion that has been deemed by the Company to be representative of an
  interest factor). Earnings were inadequate to cover fixed charges by $79.3
  million and $15.1 million for the years ended March 31, 2001 and 1998, respectively.

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

The following discussion of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements of the Company contained elsewhere in this
report. The Company's fiscal year ends on March 31 of each year. References
herein to a "fiscal year" refer to the Company's fiscal year ended
March 31 in the calendar year indicated (e.g., references to fiscal 2001 are
references to the Company's fiscal year ended March 31, 2001).

General

Current
Trends.  The Company believes
that overall trends in the vitamin industry are the most significant trends
affecting the Company's financial performance. For the 52 week period ended
March 25, 2001, vitamin sales for the U.S. Mass Market decreased approximately
5.6% versus the comparable period in the prior year. For the 52 week period
ended March 26, 2000, vitamin sales for the U.S. Mass Market had increased more
than 7% over the prior 52 week period. According to industry sources, between
1992 and 2001, vitamin sales for the Mass Market increased at a compound annual
rate of approximately 13% to $3.3 billion, as the percentage of American adults
regularly using vitamins increased from 37% to 48%.

Increasing vitamin usage among the general population is
linked to three major factors. First, research expenditures devoted to the
positive effects of vitamin products have increased dramatically. Such research
has been described in major medical journals and reported in the popular media.
Second, the national trend towards improved fitness, greater self-care and
preventive medicine has increased the general population's focus on consumption
of nutritional products. Finally, the more favorable regulatory environment
resulting from the DSHEA has generated increased new product introductions and
more effective point of sale communication of the health benefits of vitamins
to consumers. However, as has been the case in the past, adverse scientific
research or publicity concerning the health benefits of vitamin consumption
could materially impact the growth of the vitamin market.

Operational Restructuring.In fiscal 2001,
the Company initiated a number of operational restructuring actions focused on
eliminating operational complexities and reducing operating costs. The
initiatives include workforce reductions, facility consolidation, product line
simplification, and customer rationalization,
a de-emphasis on research and development activities, and actions to improve
supply chain management and realize working capital, customer service and
operational efficiencies.

During
fiscal 2001, the Company reduced its workforce in its Carson, Garden Grove and
Valencia, California locations, as well as in Kalamazoo, Michigan. Severance
and other costs related to such reductions totaled $5.5 million, and is being
paid to the terminated employees on a weekly basis through February 2002. When
added to the reduction in force related to the Acquisition the worldwide
workforce has been reduced by approximately 500 full time employees.

Facility
consolidations include the consolidation of the Kalamazoo, Michigan and Largo,
Florida facilities into the Companys Fort Mill, South Carolina location, the
consolidation of the Vancouver, British Columbia facility into the Winnipeg,
Manitoba facility, and the closure of auxiliary warehouses in Carson,
Kalamazoo, Largo and Vancouver. Such consolidations are expected to be
completed during the first quarter of fiscal 2002.

The following table summarizes the
activities in the Companys restructuring reserves (in millions):

Costs for
  Terminated
  Employees
  Facility
  Consolidation
  and Other
  TotalRestructuring
  charges
  $5.5
  $4.3
  $9.8Cash
  payments
  (1.8)
  (1.6)
  (3.4)Accrued
  restructuring charges at March 31, 2001
  $3.7
  $2.7
  $6.4

In
addition to the workforce reductions and facility consolidations discussed
above, the Company has undertaken product line simplification and customer
rationalization initiatives. In connection with its product line simplification
initiative, the Company plans to discontinue certain low margin vitamin and OTC
pharmaceutical product lines, as well as a health food product line at Vita
Health. Under its customer rationalization initiative, as of March 31, 2001,
the Company has identified 47 unprofitable or overly complex customers for
discontinuation.

In
connection with these initiatives, the Company recorded certain reserves and
wrote-off certain other assets totaling $67.3 million. The table below
summarizes these reserves and write-offs and where those charges have been
reflected in the Companys consolidated statement of operations for the period
ended March 31, 2001 (in millions):



Net
  Sales
  Cost of
  Sales
  Marketing,
  Selling &
  Distribution
  General &
  Administrative
  TotalInventory
  reserve provisions
  $      -
  $   52.5
  $      -
  $       -
  $   52.5Return
  reserves
  7.0
  -
  -
  -
  7.0Allowance
  for receivables and write-off of customer advances
  -
  1.3
  -
  3.2
  4.5Other
  -
  -
  0.6
  2.7
  3.3Total
  related charges
  $  7.0
  $   53.8
  $   0.6
  $   5.9
  $   67.3

During
the fourth quarter of fiscal 2001, the Company reserved or wrote-off inventory
in the amount of $52.5 million, the most significant component of which related
to additional reserves of $24.9 established for slow moving or obsolete
inventory, calculated based on a new demand-based estimation methodology. An
additional $17.0 million of inventory was reserved and $10.6 million was
written-off in connection with the Companys product line simplification and
customer rationalization initiatives and facility consolidations.

In
addition, the Company established a reserve of $7.0 million for anticipated
sales returns from discontinued customers or for discontinued products expected
to be returned by continuing customers. The Company also recorded $3.2 million
in additional reserves for estimated uncollectible accounts receivable and
wrote-off $1.3 million in customer advances related to the customer
rationalization initiative. Finally, the Company recorded other charges of $3.3
million primarily related to consulting expenses for its restructuring
initiatives and the write-off of certain fixed assets.

The
Companys efforts to restructure its operations and rationalize its customer
base will continue into fiscal 2002. In connection with those continuing
efforts, the Company expects to incur during the first two quarters of fiscal
2002, additional costs of approximately $7.5 million related to legal,
accounting, banking and consulting fees. These amounts will be charged to the
Companys results of operations when incurred.

Acquisition.On December 17, 1999, the Company acquired
substantially all of the assets of Granutec, Inc. ("Granutec"), a
manufacturer and distributor of private label, over-the-counter pharmaceutical
drugs in the United States, and Vita Health acquired substantially all of the
assets of Stanley Pharmaceuticals Ltd. ("Stanley"), a manufacturer
and distributor of private label, over-the-counter pharmaceutical drugs and
vitamin supplement products in Canada, both of which were subsidiaries of
Novopharm Limited of Ontario, Canada ("Novopharm"). The Company also
acquired certain related assets of Novopharm (collectively, the
"Acquisition"). On June 29, 2000, the Company reached a final
settlement agreement with Novopharm on the working capital adjustment provided
for in the acquisition agreement and, as a result, Novopharm paid the Company
$1.5 million. The Company recorded the final adjustments to the purchase price
allocation during the second quarter of fiscal year 2001.

The
components of the purchase price and the purchase price allocation are as
follows (in millions):

Consideration
  and acquisition costs:Cash paid
  to Novopharm
  $50.0Acquisition
  costs
  3.4Debt
  assumed
  7.5Working
  capital adjustment
  (1.5)$59.4Allocation
  of purchase price:Current
  assets
  $43.1Property,
  plant and equipment
  20.8Acquired
  intangibles
  9.3Goodwill
  18.2Debt and
  other liabilities assumed
  (32.0)$59.4

In connection with the Acquisition and finalization of
managements integration plan, the Company recorded approximately $11.5 million
for employee severance and facility closure costs. As a component of the
purchase price allocation, the integration plan includes initiatives to
integrate the operations of Granutec and Stanley with those of the Company, and
reduce overhead, primarily through the consolidation of certain acquired
manufacturing activities to existing facilities. The Company expects the majority
of the integration actions to be completed in fiscal 2002.

The following table summarizes the activity in the
Companys reserves associated with the integration plan (in millions):



Separation
  Costs for
  Terminated
  Employees
  Facilities
  Closing &
  Downsizing
  TotalReserves
  recorded in connection with preliminary purchase price allocation at March
  31, 2000
  $5.4
  $1.6
  $7.0Additions
  to reserve
  3.5
  1.0
  4.5Cash
  payments
  (3.6)
  (0.1)
  (3.7)Balance at
  March 31, 2001
  $5.3
  $2.5
  $7.8

The
following unaudited pro forma financial information presents the consolidated
results of operations as if the Acquisition had occurred at the beginning of
the fiscal year presented and does not purport to be indicative of the results
that would have occurred had the Acquisition occurred at such date or of
results which may occur in the future (in millions).

Year Ended
  March 31,
  2000Net sales
  $760.1Operating
  income
  50.6Net income
  10.2

Results of Operations

The following table summarizes the Company's historical
results of operations as a percentage of net sales for fiscal 2001, 2000 and
1999.



Percentage of Net
  Sales
  For the Fiscal Years Ended March 31,2001
  2000
  1999Net sales
  100.0%
  100.0%
  100.0%Cost of
  sales
  91.4
  74.8
  74.0Gross
  profit
  8.6
  25.2
  26.0Marketing,
  selling and distribution expenses
  13.3
  11.9
  11.5General
  and administrative expenses
  8.0
  5.9
  5.9Research
  and development expenses
  1.5
  1.1
  0.8Amortization
  of goodwill and other intangibles
  0.9
  0.4
  0.3Restructuring
  charges
  1.5
  0.1
  0.1Other
  operating income
  (3.0)
  (0.1)
  (0.1)Operating
  income (loss)
  (13.6)
  5.9
  7.5Loss from
  investment in joint venture
  0.1
  -
  -Interest expense,
  net
  5.9
  4.7
  4.6Income
  (loss) before income taxes
  (19.6)
  1.2
  2.9Provision
  for (benefit from) income taxes
  (0.2)
  0.5
  1.3Net income
  (loss)
  (19.4)%
  0.7%
  1.6%

Fiscal 2001 Compared to Fiscal 2000

Net
sales for fiscal 2001 decreased by $50.1 million, from $662.3 million to $612.1
million, or 7.6% from fiscal 2000. This was primarily the result of an
industrywide 5.6% decline in sales of vitamin products to the U.S. Food, Drug,
and Mass Merchandising (FDM) market, compared to a 7% growth rate in the prior
year. On a business segment basis, domestic sales were down by $66.3 million,
or 10.9%, while International/Canadian sales were up by $20.5 million, or
35.8%. The decrease in U.S. sales reflects the weaker demand for the Companys
core vitamin products and continued pricing pressure in vitamin C and E
products, offset slightly by increased sales in the OTC product group. The
Company also experienced significant declines of approximately $50.0 million or
47% in its herbal category in the U.S. In addition, a restructuring related
charge of $7.0 million was made to establish a reserve for sales returns from
discontinued customers and for discontinued products expected to be returned by
continuing customers. The International/Canadian sales increase was due to
growth in the OTC product area primarily due to the acquisition of Stanley.
International/Canadian vitamin sales remained stable between 2000 and 2001.

Gross
profit margin, as a percentage of net sales for fiscal 2001 was 8.6% versus
25.2% in fiscal 2000. Gross profit decreased by $114.0 million or 68.4%, to
$52.6 million in fiscal 2001 from $166.6 million in fiscal 2000. As a part of
the Operational Restructuring, the Company reserved or wrote off inventory in
the amount of $52.5 million, as discussed above. In addition, approximately
$23.5 million of the decrease is customer and product mix related, caused by
increased competition, lower vitamin prices to customers driven by the breakup
of the illegal vitamin pricing cartel, and the increasing volume of lower
margin OTC pharmaceutical products as a percentage of total sales. An
additional $23.4 million is volume related, with the reduction in overall
volume caused by the declining vitamin market. Gross profit in fiscal 2001 was
impacted by the restructuring related charge of $7.0 million noted above.

Marketing,
selling and distribution expenses increased by $2.5 million to $81.2 million in
fiscal 2001 or 3.2% over the $78.7 million incurred in fiscal 2000. As a
percentage of net sales these expenses were 13.3% and 11.9% for fiscal 2001 and
2000, respectively. The main reason for the increase was $3.6 million in
additional expenses related to the integration of the Acquisition locations,
which was offset by a decrease in other expenses of $1.1 million due to cost
containment efforts.

General
and administrative expenses increased by $9.8 million to $48.8 million in
fiscal 2001 or 25.3% over the $38.9 million incurred in fiscal 2000. This
substantial increase was primarily due to the Restructuring initiatives begun
by the Company in fiscal 2001, as well as the additional costs of the
integration of the Acquisition locations as discussed above.

For
fiscal 2001, research and development expenses increased by $2.1 million over
fiscal 2000, from $7.3 million to $9.4 million, primarily due to additional
costs of $1.6 million to support the Companys advanced science and product
quality initiatives.

Amortization
of goodwill and other intangibles increased to $5.6 million in fiscal 2001
versus $2.7 million in fiscal 2000, primarily due to the fact that the
amortization of the goodwill from the Acquisition was included for a full year
in fiscal 2001, compared with only four months in fiscal 2000.

Other
operating income (charges) include Antitrust Lawsuit settlements of
approximately $24.3 million and $2.4 million in the years ended March 31, 2001
and 2000, respectively, which were offset by legal and consulting fees and
other costs of approximately $4.3 million and $0.2 million, respectively. (See
Item 3 Legal Proceedings.) Also included are management fee expenses of $1.5
million in both fiscal years 2001 and 2000.

Interest
expense increased $4.8 million from fiscal 2000 to fiscal 2001, due primarily
to the additional debt incurred for the Acquisition and to allow for working
capital in the last quarter of fiscal 2001. The increase is also, to lesser
degree, due to an increased rate of interest on the debt itself.

The
provision (benefit) for income taxes as a percentage of income (loss) before
taxes is (1.2)% in fiscal 2001, compared to 38.9% in 2000, due to the
establishment of a valuation allowance on deferred tax assets in 2001 due to
the significant losses incurred during the year.

The net loss before income taxes of
$120.4 million or (19.6)% of net sales in fiscal 2001 reflects $77.1 of
operational restructuring related charges. Excluding such charges the net loss
before income taxes would have been approximately $43.3 million or (7.1)% of
net sales.

Fiscal 2000 Compared to Fiscal 1999

Net sales for fiscal 2000 increased by $35.4 million, or
5.6% over fiscal 1999, from $626.9 million to $662.3 million. This increase was
due to the Acquisition, which provided an additional $39.1 million of sales
from OTC pharmaceutical drugs. Excluding net sales from Granutec and Stanley,
the Company's net sales decreased $3.7 million compared to the prior year. This
decrease was primarily the result of an overall slowdown in the Food, Drug and
Mass vitamin market. Management estimates that retail vitamin sales for the
overall U.S. Mass Market only grew by approximately 7% during the 52 week
period ended March 26, 2000 compared to the 16% growth during the 52 week
period ended March 28, 1999. The market slowdown resulted in decreased Company
sales as customers adjusted their inventory in response to the slower rate of
market growth.

Gross profit margin for fiscal 2000 was 25.2% versus
26.0% in fiscal 1999. Gross profit increased $3.3 million, or 2.0%, from $163.3
million in fiscal 1999 to $166.6 million in fiscal 2000. The increase in gross
profit is a result of the Acquisition, which accounted for $8.8 million of the
increase, which was offset by a decrease of $5.5 million attributable to lower
sales, a shift in the product mix to lower margin products, and pricing
pressures on vitamins C and E.

Marketing, selling and distribution expenses together
with general and administrative, and research and development expenses
(collectively, "Operating Expenses") increased $10.7 million, or
9.3%, in fiscal 2000 when compared to fiscal 1999. Operating Expenses for
fiscal 2000 totaled $125.0 million, representing 18.9% of net sales,
representing an increase over the prior year in which Operating Expenses
totaled $114.3 million or 18.2% of net sales. This increase in Operating
Expenses for fiscal 2000 is primarily the result of higher fixed costs
associated with infrastructure development in support of advanced science and
product quality initiatives, increased spending on information systems projects,
including those related to the year 2000 issue, and an increase in marketing
expenditures related to the relaunch of the Your Life® Brand.

Amortization of goodwill and other intangibles increased
to $2.7 million in fiscal 2000 versus $1.7 million in fiscal 1999, primarily as
a result of the Acquisition.

During fiscal 2000, the Company closed its Madison,
Wisconsin and Sherburne, New York facilities. As a result, the Company incurred
$1.1 million of expenses primarily for severance and relocation costs related
to the closures which were offset by a $0.3 million gain from the sale of the
Company's Chicago, Illinois facility and $0.2 million from the sale of the
Madison facility. In fiscal 1999, $0.4 million of additional expenses were
incurred related to the West Unity, Ohio facility, which closed in fiscal 1998.

Other operating income for fiscal 2000 was $0.9 million
versus other operating income of $0.1 million in fiscal 1999. The increase in
other operating income was due to the settlement of a supplier dispute in the
amount of $2.4 million, which is offset by management fees paid in the amount
of $1.5 million. In fiscal 1999, the Company received a non-recurring
settlement arising from a dispute involving a service provider and a former
employee, which was partially offset by management fees in the amount of $1.7
million and other operating charges of $0.2 million.

The Company's operating income for fiscal 2000 was $39.2
million, representing a $7.8 million decrease from fiscal 1999, primarily due
to higher operating expenses as described above.

Net interest expense increased by $2.4 million to $31.1
million during fiscal 2000, compared to $28.7 million for fiscal 1999. This was
due to an increase in the indebtedness of the Company resulting from the
Acquisition, and to a lesser degree, increased interest rates.

The provision for income taxes for fiscal 2000 was $3.1
million, which compares to $8.0 million for fiscal 1999. The Company's
effective tax rate is 39% for fiscal 2000, which closely approximates the
combined federal and state rate. The effect of non-deductible goodwill is
offset by the benefit of certain tax credits.

Primarily as a result of the previously discussed
factors, net income of $4.9 million was recorded in fiscal 2000 compared to a
net income of $10.3 million recorded in fiscal 1999.

Liquidity and Capital Resources

Cash Flow.
During fiscal 2001, net cash provided by operating activities totaled $12.0
million. This resulted primarily from a net loss of $118.9 million offset by
$114.5 million of non-cash charges to operations and changes in operating
assets and liabilities totaling $16.4 million. Changes in operating assets and
liabilities are comprised of a reduction in accounts receivable of $37.0
million, net of an increase in other current assets of $20.6 million. The
decrease in accounts receivable resulted from accelerated payment terms
negotiated by the Company with certain customers and the impact of the
operational restructuring.

Net cash used in investing
activities was $18.6 million in fiscal 2001. This was primarily due to net
capital expenditures of $8.1 million, $7.0 million in advances related to the
negotiation of long-term supply arrangements, a $1.7 million investment in a
joint venture, and an increase of $1.8 million in other non-current assets. The
major capital expenditures related to investments in capacity expansion at the
Companys manufacturing, packaging and distribution facility in Fort Mill,
South Carolina and at the Companys manufacturing facility in Garden Grove,
California.

Net cash provided by financing
activities during fiscal 2001 totaled $32.9 million, which primarily related to
borrowings of $38.1 million on the Companys revolving credit facilities and
payments in the amount of $5.2 million on other long-term debt.

Financing Arrangements.The
Company has entered into an Amended Credit Agreement with the Senior Lenders.
The Amended Credit Agreement provided for one U.S. term loan due December 30,
2004 in the amount of $68.0 million, two U.S. term loans due December 30, 2005
in the amounts of $65.0 million and $30.0 million, respectively, a Canadian
dollar denominated term loan due December 30, 2004 in the amount of
approximately U.S. $12.0 million (collectively, the Term Facility), and a revolving
credit facility in the amount of U.S. $125.0 million (the Revolving
Facility), a portion of which is made available to Vita Health in Canadian
dollars. The unpaid principal amount outstanding on the Revolving Facility is
due and payable on June 30, 2003.

Borrowings
under the Amended Credit Agreement bear interest at floating rates that are
based on the applicable alternate base rate (as defined in the Amended Credit
Agreement), plus applicable margins, and accordingly, the Company's financial
condition and performance is and will continue to be affected by changes in
interest rates. In addition, during the waiver period of the Amended Waiver to
the Amended Credit Agreement the applicable margin was subject to a one percent
increase.

Pursuant to the Amended Waiver,
borrowings may not be continued as or converted into LIBOR based loans. The
Amended Credit Agreement imposes certain restrictions on the Company, including
restrictions on its ability to incur additional debt, enter into sale-leaseback
transactions, incur contingent liabilities, pay dividends or make
distributions, incur or grant liens, sell or otherwise dispose of assets, make
investments or capital expenditures, repurchase or prepay its Subordinated
Notes or other subordinated debt, or engage in certain other activities. The
Company must also comply with certain financial ratios and tests, including
covenants with respect to minimum net worth, a maximum leverage ratio, a
minimum interest coverage ratio and a minimum cash flow coverage ratio. As
detailed below in the Liquidity subsection, the Company was not in compliance
with such financial covenants at March31,
2001, and such covenant violations constitute events of default under the
Amended Credit Agreement.

The
Subordinated Notes are unsecured, senior subordinated obligations of Leiner,
and as such, are subordinated in right of payment to all existing and future
senior debt of Leiner, including indebtedness of Leiner under the Amended
Credit Agreement and Leiner's guarantee of indebtedness of Vita Health under
the Amended Credit Agreement. The Subordinated Notes rank pari passu with all senior
subordinated indebtedness of Leiner, if any, and rank senior to all
subordinated indebtedness of Leiner, if any. The Subordinated Notes are also
effectively subordinated to all secured indebtedness of Leiner to the extent of
the value of the assets securing such indebtedness, and to all existing and
future obligations and liabilities of Leiner's subsidiaries. The obligations of
Leiner under the Amended Credit Agreement are secured by substantially all of
the assets of Leiner and any future U.S. subsidiary of Leiner and a pledge of
the capital stock of Leiner and any such subsidiary and 65% of the capital
stock of any direct foreign subsidiary of Leiner. The obligations of Vita
Health under the Amended Credit Agreement are additionally secured by
substantially all of the assets of Vita Health and its Canadian parent and
subsidiaries.

In
the event of bankruptcy, liquidation, dissolution, reorganization or any
similar proceeding regarding Leiner, or any default in payment or acceleration
of any debt thereof, the assets of Leiner will be available to pay obligations
on the Subordinated Notes only after the senior debt of Leiner has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
all or any of such Subordinated Notes.

The
Company may be required to purchase the Subordinated Notes upon a Change of
Control (as defined in the indenture governing the Subordinated Notes) and in
certain circumstances with the proceeds of asset sales. The Subordinated Notes
are subordinated to the indebtedness under the Amended Credit Agreement. The
indenture governing the Subordinated Notes imposes certain restrictions on the
Company and its subsidiaries, including restrictions on its ability to incur
additional debt, make dividends, distributions or investments, sell or
otherwise dispose of assets, or engage in certain other activities.

The
Company also has an outstanding balance of $6.6 million under an Industrial
Development Revenue Bond (the IRB Loan). The IRB Loan is secured by a letter
of credit issued under the Amended Credit Agreement. Under the terms of the
Amended Credit Agreement, if an event of default were continuing, upon notice
from the Senior Lenders, the Company would be obligated to reimburse the issuer
for the amount equal to the outstanding letter of credit. Accordingly, the IRB
Loan has been classified as a current liability in the Companys consolidated
balance sheet.

During
fiscal 2000, Vita Health entered into a loan agreement with the Manitoba
Industrial Opportunities Program (the MIOP Loan) to fund the expansion and
upgrading of Vita Health's manufacturing facility in Canada. As of March 31,
2001, Vita Health has received approximately $1.6 million in advances on the
loan, which also has been classified as a current liability in the Companys
consolidated balance sheet. The MIOP Loan is not to exceed a total of
approximately $1.9 million. Pursuant to the terms of the MIOP Loan, interest on
the loan is waived if Vita Health complies with certain obligations, including
meeting certain financial ratios. To date Vita Health has been successful in
meeting these ratios.

A
portion of the outstanding borrowings under the Amended Credit Agreement,
amounting to approximately U.S. $30.6 million as of March 31, 2001, is
denominated in Canadian dollars. All other outstanding borrowings under the
Amended Credit Agreement, and all of the borrowings under the Subordinated
Notes, are denominated in U.S. dollars.

At
March 31, 2001, borrowings under the Amended Credit Agreement bore interest at
a weighted average rate of 10.9% for U.S. borrowings and 8.4% for Canadian
borrowings per annum. The Subordinated Notes bear interest at a rate of 9.63%
per annum.

Liquidity.Since
December 31, 2000, the Company has not been, and at March 31, 2001, the Company
was not in compliance with certain financial covenants contained in the Amended
Credit Agreement with the Senior Lenders. Such covenant violations constitute
events of default under the terms of the Amended Credit Agreement and, as a
result, all borrowings under the Amended Credit Agreement, aggregating $278.0
million at March 31, 2001, have been classified as a current liability in the
Companys consolidated balance sheet to reflect the Senior Lenders right to
accelerate maturity of such loans.

The
Company entered into the Amended Waiver with the Senior Lenders, the latest
amendment, dated as of June 15, 2001, under which the Senior Lenders
agreed to waive such events of default and to forbear exercising any of their
rights or remedies under the Amended Credit Agreement for a limited period
ending on June 27, 2001.  The
Amended Waiver expired on June 27, 2001, and on June 28, 2001, the Company
received a formal notice of default from its Senior Lenders.

The
Company is currently in active discussions with the Senior Lenders regarding a
forebearance agreement that would provide the Company a period of time during
which the Senior Lenders would agree not to exercise the remedies available to
them while a long-term restructuring solution is pursued.

Both
prior to and during the waiver period, the Company made all scheduled principal
and interest payments on a timely basis. 
The Company has retained financial and legal advisors to assist it in
evaluating its restructuring and financing alternatives.  The Company and its advisors have provided
the Senior Lenders with a business plan that reflects the effects of the
operational restructuring and reengineering initiatives and serves as a basis
for discussions regarding a forebearance agreement and long-term restructuring
alternatives (See Item 1 "Business - Restructuring").

There
can be no assurance that the Company and the Senior Lenders will agree upon the
terms of or enter into a forbearance agreement.

An
outstanding event of default under the Amended Credit Agreement would permit
the Senior Lenders to declare all amounts outstanding thereunder to be
immediately due and payable, together with accrued and unpaid interest, and to
terminate their commitments to make further extensions of credit thereunder.

Should
the Senior Lenders accelerate the maturity of the loans under the Amended
Credit Agreement, all amounts due under the Indenture governing the
Subordinated Notes may also be accelerated. As a result of this uncertainty,
the Subordinated Notes have been classified as a current liability in the
Company's consolidated balance sheet as of March 31, 2001. On June 28, 2001,
the Senior Lenders delivered a notice (the Blockage Notice) to the Company
and the trustee under the Indenture prohibiting payments on account of any
principal or interest obligations related to the Subordinated Notes or the
purchase or redemption of such obligations. 
The Blockage Notice is effective for 179 days.  If the Blockage Notice remains in effect on August 1, 2001, the
30 day grace period with respect to payment defaults on the Subordinated Notes
will expire and failure to pay will constitute an event of default under the
Indenture and 25% in aggregate principal amount of the holders of the
Subordinated Notes may accelerate the amounts due under the Indenture. The
Company has initiated negotiations with several major holders of the
Subordinated Notes regarding such a long-term restructuring alternative.

If
the Senior Lenders were to accelerate maturity of amounts due under the Amended
Credit Agreement, or if the holders of the Subordinated Notes were to
accelerate the amounts due under the Indenture, and other long-term debt became
immediately payable as a result of such action, the Company would not have
sufficient funds to repay its outstanding debt, and no assurance can be given
that alternative sources of sufficient financing would be available on acceptable
terms, or at all.  These conditions,
together with the Companys net loss in fiscal 2001 and its deficit in
shareholders equity, raise substantial doubt about the Companys ability to
continue as a going concern.  The
Companys consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or liabilities that may result from the outcome of this uncertainty.

The
Amended Waiver provided for a one percent increase in the applicable margin
effective through the end of the waiver period.  The Amended Waiver required, among other things, the payment to
the Senior Lenders of total fees of $0.8 million, that the management fee and
additional expense reimbursement paid to North Castle and/ or its Affiliates
pursuant to the terms of the Management Services Agreement on January 2, 2001
in the amount $0.8 million be returned to the Company and that an amount equal
to $0.8 million be paid to the Senior Lenders as a prepayment of the loans
under the Amended Credit Agreement. Additionally, further payments of the
management fee were not allowed during the waiver period.

The
Amended Waiver also required that during the waiver period, and concurrently
with the receipt by the Company of any judgment, settlement or other proceeds
or amounts, however characterized, arising from or in connection with any
antitrust claims (including the Antitrust Lawsuit, with all the foregoing
collectively referred to as the Proceeds), the Company shall make, or cause
to be made, a mandatory prepayment of the loans outstanding in the amount of
the Proceeds to be applied pro rata to the outstanding principal amount of all
term loans, the cash collateralization of $1.6 million of letters of credit, and
a corresponding reduction of each revolving loan commitment amount.

Certain
conditions to the Amended Waiver survive the expiration of the Amended Waiver
including the Companys agreement that: (a) interest and letter of credit fees
will be paid monthly instead of quarterly, (b) commitments to make further
credit extensions are suspended, and (c) outstanding amounts under the Amended
Credit Agreement cannot be continued as or converted into LIBOR or bankers
acceptance rate loans.

Recently Issued Accounting
Pronouncements

The
Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has issued EITF 00-25, Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer, which is effective for
fiscal quarters beginning after December 15, 2001. The consensus of the EITF is
that consideration paid by a vendor to a retailer, such as slotting fees and
cooperative advertising, should be classified as a reduction in revenue in the
vendors income statement rather than as an operating expense, unless certain
criteria are met. The Company has not yet determined the impact of such a
change in classification on its presentation of the Companys statement of
operations. The Company will adopt this change in classification prior to the
end of fiscal 2002.

The Financial Accounting Standards Board has issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("Statement 133"), which is required to be
adopted in years beginning after June 15, 2000. The Company has not yet
determined the impact of the adoption of the Statement 133 on its consolidated
financial position or consolidated results of operations. The Company will
adopt Statement 133 in its fiscal year beginning April 1, 2001.

In March 2000, the Financial Accounting Standards Board
issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensationan
interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the definition of employee for purposes of applying Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
the criteria for determining whether a plan qualifies as a noncompensatory
plan, the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the Companys consolidated financial position or results of
operations.

Forward-Looking Statements and Associated Risks

Certain of the statements contained in this report
(other than the financial statements and other statements of historical fact)
are forward-looking statements, including statements regarding, without
limitation, (i) the Company's growth strategies, (ii) trends in the Company's
business and (iii) the Company's future liquidity requirements and capital
resources.

Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments
and their potential effects upon the Company. There can be no assurance that
future developments will be in accordance with management's expectations or
that the effect of future developments on the Company will be those anticipated
by management. The important factors described elsewhere in this report
(including, without limitation, those factors discussed in Item 1
Business-Risk Factors) could affect (and in some cases have affected) the
Company's actual results and could cause such results to differ materially from
estimates or expectations reflected in such forward-looking statements. In light
of these factors, there can be no assurance that events anticipated by the
forward-looking statements contained in this report will in fact transpire.

While the Company periodically reassesses material
trends and uncertainties affecting the Company's results of operations and
financial condition in connection with its preparation of management's
discussion and analysis of financial condition and results of operations
contained in its periodic reports, the Company does not intend to review or
revise any particular forward-looking statement referenced in this report in
light of future events.

ITEM
7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company does not believe that it has material
exposure to interest rate, foreign currency exchange rate or other relevant
market risks.

Interest
Rate Risk.  The Company's
exposure to market risk for a change in interest rates relates primarily to the
Company's debt obligations. The table below provides information about the
Companys debt obligations and interest rates:



March 31, 2001
  Expected Maturity Date2002
  2003
  2004
  2005
  2006
  Thereafter
  Total
  Fair
  Value(dollars in
  millions)Fixed rate ($US)
  $85.0
  -
  -
  -
  -
  -
  $85.0
  
  (1)Average interest rate
  9.63%
  -
  -
  -
  -
  -Variable rate ($US)
  $248.9
  -
  -
  -
  -
  -
  $248.9
  $248.9Average interest rate
  10.92%
  -
  -
  -
  -
  -Variable rate ($CAN)
  $29.0
  -
  -
  -
  -
  -
  $29.0
  $29.0Average interest rate
  8.38%
  -
  -
  -
  -
  -





(1)
  The Company's fixed rate debt,
  represented by the Subordinated Notes, are not actively traded. Consequently,
  the fair value of such debt is not readily determinable. However, considering
  the liquidity issues discussed in Item 7 "Managements Discussion and
  Analysis of Finanancial Condition and Results of Operations", management
  believes that the fair value of the Subordinated Notes is substantially less
  than its carrying value.

Foreign
Currency Risk.  The Company
transacts business in various foreign currencies, primarily in Canada. The
Company does not have hedging or similar foreign currency contracts.
Approximately 12.7% of the revenues are denominated in foreign currencies.
Significant currency fluctuations could adversely impact foreign revenues;
however, the Company does not expect any significant changes in foreign
currency exposure in the near future.

ITEM
8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The consolidated financial statements of the Company,
including an index thereto and the report of Ernst & Young LLP, the
Company's independent auditors, begin on page F-1.

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



None.

PART IIIITEM 10
DIRECTORS AND EXECUTIVE OFFICERS

Management of the business of
Leiner is vested in its Board of Directors (the "Board"). Currently,
Leiner does not pay any compensation for services as a director on its Board.
The Board is currently comprised of Messrs. Baird, Kaminski, and Bensussen. The
Board of Directors of Leiner Group, the Company's indirect corporate parent, is
currently comprised of Mr. Baird, who serves as Chairman, Messrs. Kaminski,
Bensussen, and Gorchow, who were appointed as members of such Board in
September 1997, Mr. Heine, who was appointed as a member of such Board in
December 1997, Mr. Carnwath, who was appointed as a member of such Board in
March 1999, and Messrs. Shabecoff, James and Morgan, who were appointed as
members of such Board in April 2001.

The following table sets forth with respect to each of
the directors and executive officers of the Company, their respective years of
employment with the Company, ages and positions.



Name
  Years with
  Company
  Age
  PositionRobert M.
  Kaminski
  23
  50
  Chief
  Executive Officer and DirectorGale K.
  Bensussen
  27
  54
  President
  and DirectorRobert J. La Ferriere
  4
  52
  Executive
  Vice PresidentMarketingKevin J.
  Lanigan
  28
  54
  Executive
  Vice President and Corporate General ManagerEric P.
  Schick
  20
  41
  Executive
  Vice PresidentSales and MerchandisingRobert O. Cavenah
  20
  48
  Senior
  Vice PresidentStrategic Cost ManagementJuan A. Guerrero
  2
  41
  Senior
  Vice President and Chief Operations OfficerRobert A.
  Kay
  5
  49
  Senior
  Vice President and Chief Science OfficerJohn L.
  Kelly
  4
  57
  Senior
  Vice PresidentHuman ResourcesStephen P.
  Miller
  4
  42
  Senior
  Vice President and Chief Financial OfficerCharles F. Baird, Jr.
  4
  48
  Director

Robert M. Kaminski has been the Chief Executive Officer
of Leiner since May 1992 and a Director of Leiner since June 1992. He has been
Chief Executive Officer of Leiner Group since March 1994 and Vice Chairman of
Leiner Group since July 1996. From 1988 to 1992, Mr. Kaminski was Chief
Operating Officer of the Predecessor Company and from 1982 to 1988, he was Vice
President-Sales of
the Predecessor Company. Mr. Kaminski joined the Predecessor Company in 1978.

Gale K. Bensussen has been a Director of Leiner since
June 1992 and President of Leiner since May 1992. He has been a Director of
Leiner Group since June 1992 and President of Leiner Group since March 1994.
Mr. Bensussen was Senior Vice PresidentMarketing
and Corporate Development of the Predecessor Company from May 1991 to May 1992.
From July 1988 to May 1991, Mr. Bensussen was Senior Vice PresidentSales and Marketing of the Predecessor Company. Mr.
Bensussen joined the Predecessor Company in 1974.

Robert J. La Ferriere became Senior Vice PresidentMarketing of Leiner in
February 1997 and was a
consultant to Leiner from 1996 to 1997. From 1992 to 1996, Mr. La Ferriere was
President and Chief Executive Officer of Slim Fast Foods and was a Vice
President, then Senior Vice PresidentPurchasing,
at Thrifty Drug and Discount Stores from 1984 until 1990.

Kevin J. Lanigan became Corporate General Manager and
Executive Vice President of Leiner in January 2000. Mr. Lanigan served as
Executive Vice President and Chief Operations Officer of Leiner from 1992 to
1999 and of Leiner Group from 1994 to 1999. From 1986 to 1992, Mr. Lanigan was
Senior Vice PresidentOperations
Planning of the Predecessor Company, and from 1979 to 1986, was Vice PresidentOperations. Before joining the Predecessor Company in
1973, he held various engineering positions in the aerospace industry.

Eric P. Schick became Executive Vice President-Sales and Merchandising in
January 2000. Mr. Schick served as Executive Vice PresidentSales from June 1999 to December 1999. From December
1997 to June 1999, Mr. Schick was Senior Vice PresidentSales, and from April 1997 to December 1997, he was Vice
PresidentSales. From 1994 to 1997 Mr. Schick was National Sales Manager
of the Predecessor Company. Mr. Schick joined the Predecessor Company in 1981.
Mr. Schick is no longer employed with the Company effective April 30, 2001.

Robert O. Cavenah became Senior Vice PresidentStrategic Cost Management in
March 1999. From 1992 to
1999, Mr. Cavenah was Vice President-Supply
Chain Management. From 1986 to 1992, Mr. Cavenah was Vice President-Operations for the
Predecessor Company. Prior to joining the Predecessor Company in 1981, Mr.
Cavenah held several operational positions within the pharmaceutical industry.

Juan A. Guerrero became Chief Operations Officer and
Senior Vice PresidentSupply
Chain Management in April 2000. Mr. Guerrero became Senior Vice President,
Purchasing in July 1999 after joining Leiner in December 1998, as Vice
President, Purchasing. From 1981 until November 1998, Mr. Guerrero held various
engineering and purchasing positions with Merck & Co., Inc. Mr. Guerrero is
no longer employed with the Company effective June 22, 2001.

Robert A. Kay joined Leiner in 1996 as Director of
Nutritional Research and was promoted to Vice PresidentScience Center in 1997. Mr. Kay became Senior Vice
President and Chief Science Officer in July 1997. From 1995 to 1996, he served
as Vice President for Metagenics, Inc. From 1992 to 1995, Mr. Kay served as
Chief Operations and Senior Vice PresidentResearch and Development for Earthrise Company. Mr. Kay
is no longer employed with the Company effective June 27, 2001

John L. Kelly became Senior Vice PresidentHuman Resources of Leiner in
November 1998. Mr. Kelly
joined Leiner in March 1997 from Eveready Battery Company. From 1990 to 1997,
Mr. Kelly was Area Chairman for Eveready Battery Company, subsidiary of Ralston
Purina, with responsibilities for the commercial and manufacturing, packaging
and distribution operations in Latin America and the Caribbean. From 1969 to
1990, Mr. Kelly worked for Ralston Purina Company where he held key
international positions in finance, operations, human resources and business
development.

Stephen P. Miller became Senior Vice President and Chief
Financial Officer in January 2000. Mr. Miller joined Leiner in 1997, as Vice
President FinancePlanning. Prior to joining Leiner, Mr. Miller worked for
PepsiCo from 1985 to 1997, where he held various key finance positions within
its domestic and international divisions. Mr. Miller served as Director of
Finance-Florida/South
Georgia, Director of PlanningPepsi
Cola International, Austria, Area Finance DirectorPepsi Cola International, Chile and Area Chief Financial
Officer, Indiana.

Charles F. Baird, Jr. has been a Director of Leiner
since October 1997 and was elected Chairman in June 1998. He is the managing
member of Baird Investment Group, L.L.C., the managing member of North Castle.
From 1989 until May 1997, Mr. Baird served as a Managing Director of AEA
Investors Inc. From 1979 to 1989, Mr. Baird worked as a management consultant
with Bain & Company.

ITEM 11EXECUTIVE COMPENSATION



The following table sets forth the
compensation of each of the Company's chief executive officer and the four most
highly paid executive officers (other than the chief executive officer)
(collectively, the "named executive officers") for the fiscal year
ended March 31, 2001.

Summary
Compensation Table

Annual
  Compensation (1)
  Long-Term
  CompensationName and Principal Position
  Salary
  Bonus
  Securities
  Underlying
  Options (#) (2)
  All Other
  Compensation(3)Robert M.
  KaminskiChief
  Executive Officer
  $494,453
  $150,000
  5,000
  $30,271Gale K.
  BensussenPresident
  $325,648
  $100,000
  3,000
  $7,024Kevin J.
  LaniganExecutive
  Vice President
  $263,100
  $75,000
  1,011
  $6,709Robert J. La FerriereSenior
  Vice President
  $265,954
  $50,000
  2,000
  $6,193Juan A. GuerreroSenior
  Vice President
  $267,066
  $50,000
  5,500
  $5,817

(1)
  The compensation described in this table does not include medical and group
  life insurance received by the named executive officers which are available
  generally to all salaried employees of the Company and certain perquisites
  and other personal benefits received by the named executive officers, the
  value of which does not exceed the lesser of $50,000 or 10% of any such
  officer's total salary and bonus disclosed in this table.(2)
  All options are for
  Leiner Group common stock and they generally vest on a pro rata basis at a
  rate of 25% per year, with 25% immediate vesting on the date of grant.(3)
  Represents Company
  contributions to its defined contribution retirement plans, the dollar value
  of term life and income replacement insurance premiums, and tax affected
  relocation expenses paid by the Company on behalf of the executive.

The following table sets forth the stock option grants
to each of the named executive officers for the fiscal year ended March 31,
2001.

Option
Grants in Last Fiscal Year (1)

Individual
  Grants
  Potential
  Realizable
  Value at Assumed
  Annual Rates of Stock
  Price Appreciation for
  Option Term (2)Name
  Number of
  Underlying
  Securities
  Options Granted
  % of Total
  Options Granted
  to Employees in
  Fiscal Year
  Exercise
  Price
  ($/Sh)
  Expiration
  Date
  5%
  10%Robert M.
  Kaminski
  5,000
  9%
  $180
  06/30/10
  -
  -Gale K.
  Bensussen
  3,000
  5%
  $180
  06/30/10
  -
  -Kevin J.
  Lanigan
  1,011
  2%
  $180
  06/30/10
  -
  -Robert J.
  La Ferriere
  2,000
  4%
  $180
  06/30/10
  -
  -Juan A.
  Guerrero
  5,500
  10%
  $140-180
  06/30/10
  -
  -

__________
  (1)
  All options are for Leiner Group common stock and they generally vest on a
  pro rata basis at a rate of 25% per year, with 25% immediate vesting on the
  date of the grant.(2)
  Sets forth potential
  option gains based on assumed annualized rates of stock price appreciation
  from the estimated price at the date of grant of 5% and 10% (compounded
  annually) over the full term of the grant with appreciation determined as of
  the expiration date. The 5% and 10% assumed rates of appreciation are
  mandated by the rules of the Securities and Exchange Commission, and do not
  represent the Company's estimate or projection of future common stock prices.The following table sets forth the stock option
exercises for the fiscal year ended March 31, 2001 and the stock option values
as of March 31, 2001, in each case, for each of the named executive officers.

Aggregated Option Exercise in
Last Fiscal Year
and Option Values as of March 31, 2001(1)

Number of
  Securities
  Underlying Unexercised
  Options at Fiscal Year End
  Value of
  Unexercised
  In-the-Money Options at
  Fiscal Year End (2)Name
  Shares Acquired
  on Exercise
  Value
  Realized
  Exercisable
  Unexercisable
  Exercisable
  UnexercisableRobert M.
  Kaminski
  $             -
  $ 
          -
  $24,072
  $3,750
  $           -
  $          -Gale K.
  Bensussen
  -
  -
  15,583
  2,250
  -
  -Kevin J.
  Lanigan
  -
  -
  7,242
  758
  -
  -Robert J.
  La Ferriere
  -
  -
  6,320
  1,680
  -
  -Juan A.
  Guerrero
  -
  -
  3,125
  3,375
  -
  -

__________
  (1)
  All options are for Leiner Group common stock.(2)
  Sets forth values for
  "in-the-money" options that represent the positive spread between
  the respective exercise prices of outstanding stock options and the value of
  Leiner Group's common stock as of March 31, 2001.

Compensation Committee Interlocks and Insider Participation

The Board of Directors of Leiner Group established a
Compensation Committee to review all compensation arrangements for executive
officers of Leiner Group and its subsidiaries. The individuals serving on the
Leiner Group Compensation Committee during the fiscal year ended March 31, 2001
were Mr. Baird and Mr. Heine.

Severance Arrangements

Over time, the Company has entered into certain
severance agreements with certain members of Leiner's senior management, pursuant
to which Leiner will pay severance benefits if the individual's employment is
terminated by Leiner other than for cause or if the individual resigns his or
her employment with Leiner for good reason.

At March 31, 2001, the severance benefits that the
Company has agreed to provide to each of Robert M. Kaminski, Gale K. Bensussen,
Robert LaFerriere, Juan Guerrero, and each of the remaining 8 executive
officers residing in the U.S. include (a) a lump-sum severance payment equal to
the sum of (i) one year's base salary, plus (ii) any annual individual
performance bonus or targeted commission, both as in effect at the time of the
termination or resignation; (b) outplacement assistance at the Company's
expense, up to a maximum cost to the Company of $20,000; and (c) any rights
under applicable Company plans or programs, including but not limited to stock
option and incentive plans, as may be determined pursuant to the terms of such
plans or programs. These severance agreements are all substantially similar to
the severance agreement filed as Exhibit 10.14 in Part IV Item 14
"Exhibits, Financial Statement Schedules and Reports on Form
8-K".  The severance benefits
provided to Kevin J. Lanigan include a lump-sum severance payment equal to
three times the sum of one year's base salary plus any annual individual
performance bonus or targeted commission, both as in effect at the time of
termination or resignation, as well as the benefits described in clauses (b)
and (c) above, subject to certain limitations to the extent that the Company
determines that the foregoing benefits would not be deductible by the Company
because such payments constitute an "excess parachute payment" (as
defined in section 280G of the Internal Revenue Code of 1986, as amended, (the
"Internal Revenue Code").  In
June 2001, severance benefits were paid to Mssrs. Guerrero and Kay under the
provisions of their individual severance agreements.

In August 1999, the Company entered into a
non-competition and severance agreement with William B. Towne, former Executive
Vice President and Chief Financial Officer, pursuant to which, among other
things, the Company agreed to pay Mr. Towne: (a) salary and benefits through
and including August 1, 2001; (b) bonus for the fiscal year 2000 in the amount
of $125,000 to be paid on or about July 1, 2000; and (c) outplacement
assistance up to a maximum cost to the company of $20,000.

Stock Option Plan

Leiner Group authorized options for issuance to members
of management and employees ("Management Options") representing the
right to acquire an additional 10% of Leiner Group's common stock on a
fully-diluted basis immediately after the Recapitalization (giving effect to
the exercise of such options but without giving effect to the exercise of the
Warrants referred to under "The Recapitalization" in Item 1.
Business), exercisable at a price equal to the greater of the purchase price
paid by North Castle in the Recapitalization or the fair market value of such
shares at the time of grant.

During the current fiscal year, Leiner Group authorized
an additional 125,000 Management Options for issuance over a three-year period,
with 45,000 available in the current fiscal year and 40,000 available in each
of the fiscal years ending March 31, 2002 and 2003, respectively. Options
granted in the current fiscal year were given an exercise price of $180.00 per
share. Generally, Management Options vest on a pro rata basis at a rate of 25%
per year, with 25% immediate vesting on the date of the grant.

Management Options were granted as follows: 88,300 on
June 30, 1997; 22,556 on November 1, 1997; 2,950 on December 31, 1997; 9,666 on
June 11, 1998; 1,400 on August 1, 1998; 1,500 on August 3, 1998; 1,000 on
December 1, 1998; 500 on January 4, 1999; 50,278 on June 30, 2000; and 4,500 on
October 2, 2000.

ITEM
12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



All of the shares of common stock of Leiner are owned by
PLI Holdings and all of the shares of common stock of PLI Holdings are owned by
Leiner Group.

The following table sets forth information regarding
beneficial ownership of common stock of Leiner Group as of June 29, 2001, by
(i) each person who is known by the Company to beneficially own more than 5% of
voting Leiner Group common stock, (ii) each director of Leiner Group, (iii)
each named executive officer of the Company listed on the Summary Compensation
Table previously, and (iv) by all directors and executive officers as a group.



Percentage of ClassName
  Shares of
  Voting
  Leiner Group
  Common Stock
  Beneficially Owned
  
  Shares of
  Non-Voting
  Leiner Group
  Common Stock
  Beneficially Owned
  
  Voting
  Non-VotingNorth Castle Partners I, L.L.C. (1)
  606,978
  
  -
  
  56.5%
  -North Castle Partners Sub I, L.P. (1)
  202,020
  
  -
  
  18.8%
  -North Castle Partners II, L.P. (1)
  57,392
  
  -
  
  5.3%
  -North Castle Partners I-A, L.P. (1)
  49,697
  
  -
  
  4.6%
  -Baird Investment Group, L.L.C. (2)
  920,584
  
  -
  
  85.7%
  -Charles F. Baird, Jr.(2)
  945,454
  (3)
  -
  
  88.0%
  -AEA Investors Inc
  76,357
  (4)
  26,793
  (4)
  7.1%
  41.5%Bruce Gorchow
  -
  
  -
  
  -
  -John Heine
  1,000
  
  1,125
  
  0.1%
  1.7%Peter Carnwath
  -
  
  -
  
  -
  -Robert M. Kaminski
  4,146
  (5)
  25,322
  
  0.4%
  28.2%Gale K. Bensussen
  8,490
  (5)
  16,333
  (5)
  0.8%
  20.2%Kevin J. Lanigan
  1,000
  (5)
  24,077
  (5)
  0.1%
  33.4%Robert J. LaFerriere
  1,000
  (5)
  7,000
  (5)
  0.1%
  9.8%Juan A. Guerrero
  -
  (5)
  1,500
  (5)
  -
  2.3%Executive officers and directors as a group (19 persons)
  966,856
  (5)
  102,324
  (5)
  90.0%
  68.1%

__________(1)
  The address for North Castle is 183 East Putnam Avenue, Greenwich,
  Connecticut 06830.(2)
  North Castle is an investment fund formed as a limited liability company.
  Baird Investment Group, L.L.C. ("Baird Investment") is the sole
  managing member of North Castle. Mr. Charles F. Baird, Jr. is the sole
  managing member of Baird Investment. The address for Baird Investment is 183
  East Putnam Avenue, Greenwich, Connecticut 06830.(3)
  Includes 24,870 shares of voting Leiner Group common stock owned by Mr. Baird
  and the shares of Leiner Group common stock owned by North Castle which Mr.
  Baird may be deemed to have beneficial ownership of by virtue of his status
  as the managing member of Baird Investment. Mr. Baird expressly disclaims
  such beneficial ownership. Does not include 3,255 shares of voting Leiner
  Group common stock held by a trust in favor of Mr. Baird's children. Mr.
  Baird expressly disclaims beneficial ownership of such shares.(4)
  Pursuant to an agreement between AEA and the other members of the AEA Group,
  AEA has voting power over the shares of Leiner Group common stock held by the
  members of the AEA Group, and accordingly may be deemed to beneficially own
  such shares.

(5)
  Does not reflect Equity
  Rights owned by Messrs. Kaminski, Bensussen, and Lanigan reflecting the right
  to receive 24,067 shares, 18,484 shares, and 4,938 shares of Leiner Group
  common stock, respectively, as such Equity Rights are not exercisable within
  60 days of the date hereof.

ITEM
13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Exchange
Agreement:  In order to
become eligible for pooling accounting treatment in merger and acquisition
transactions, on November 13, 1998, Leiner Group entered into an Exchange
Agreement with North Castle, pursuant to which North Castle exchanged 712,000
shares of voting Leiner Group common stock for an equal number of shares of
non-voting Leiner Group class B common stock (the "Pooling
Restructuring"). During the current fiscal year these non-voting Leiner
Group class B common stocks reverted to 712,000 shares of voting Leiner Group
common stock.

Stockholders
Agreement.  On June 30, 1997
(the "Recapitalization Closing Date"), Leiner Group and the
stockholders of Leiner Group entered into the stockholders agreement, which was
subsequently amended on September 28, 1998, and again on December 17, 1999 (the
"Stockholders Agreement"), which contains, among other terms and
conditions, provisions relating to corporate governance, certain restrictions
with respect to transfers of Recapitalized Common Stock (as defined) by certain
parties thereunder, certain rights and obligations with respect to transfers of
Recapitalized Common Stock and certain registration rights granted by the
Company with respect to shares of Recapitalized Common Stock. The Stockholders
Agreement gives the AEA Group the power to elect one member of Leiner Group's
Board of Directors, and for as long as North Castle, North Castle Partners I-A,
L.P. ("NCP I-A") and North Castle Partners II, L.P.
("NCP-II") collectively own at least 40% of the common stock of
Leiner Group, each of NCP I-A and NCP-II shall be entitled to nominate one
person for election of the Board of Directors of Leiner Group and North Castle
shall be entitled to nominate all other persons for election to the Board of
Directors. If North Castle ownership of Leiner Group equity falls below 40%, it
may elect the number of directors that is proportionate to its shareholdings.
Accordingly, North Castle controls the Company and has the power to appoint new
management and approve any action requiring the approval of the holders of
Leiner Group common stock, including adopting amendments to Leiner Group's
certificate of incorporation and approving mergers or sales of substantially
all of the Company's assets.

The Stockholders Agreement also restricts the ability of
existing shareholders to transfer their Leiner Group equity to third parties
prior to June 30, 2002, and gives certain of these shareholders a right of
first refusal after that date. These restrictions either do not apply or change
if there is a public offering, or if North Castle sells more than 5% of all
outstanding Leiner Group equity. If North Castle seeks to sell more than 5% of
the outstanding Leiner Group equity, other existing shareholders have the right
to sell their shares at the same time. The Agreement also gives North Castle
rights to require Leiner Group to register Leiner Group equity under the
Securities Act, subject to certain limitations and conditions.

Management
Agreements.  Following its
acquisition of Leiner on May 4, 1992, AEA entered into a management agreement
with Leiner Group, pursuant to which AEA provided management, consulting and
financial services to the Company for an annual fee of $0.4 million plus
expenses. In connection with the Vita Health Acquisition in fiscal 1997, the
Company paid to AEA an additional transaction fee of $0.3 million for services
in arranging, structuring, and negotiating the terms of the Vita Health
Acquisition and related refinancing, and reimbursed it for certain related
expenses. AEA received a transaction fee of $3.5 million for similar services
rendered in connection with the Recapitalization.

Upon consummation of the Recapitalization, Leiner
Group's management agreement with AEA was terminated, and Leiner Group and
Leiner entered into a consulting agreement with North Castle Partners, L.L.C.
(the "Sponsor"), an affiliate of North Castle, to provide the Company
with certain business, financial and managerial advisory services. Mr. Baird
acts as the managing member of the Sponsor through Baird Investment. In
exchange for such services, Leiner Group and Leiner have agreed to pay the
Sponsor an annual fee of $1.5 million, payable semi-annually in advance, plus
the Sponsor's reasonable out-of-pocket expenses, and to indemnify the Sponsor
and certain affiliates against certain liabilities. This fee may be reduced
upon completion of an initial public offering of Leiner's shares. The agreement
also terminates on June 30, 2007, unless Baird Investment Group ceases to be
the managing member of North Castle or North Castle terminates before that
date. Leiner Group and Leiner also paid the Sponsor a transaction fee of $3.5
million for services relating to arranging, structuring and financing the
Recapitalization in fiscal 1998. In connection with the notification of
non-compliance in January 2001, further payments of the management fee are not
allowed during the waiver period.

Management.  As part of the Recapitalization, the current
managers and employees of the Company were afforded the opportunity to choose
the amount of their existing equity they wished to retain in Leiner Group in
the form of Leiner Group equity. Managers and employees, who retained their
equity in Leiner Group as a result of the increased leverage on the Company
incurred as part of the Recapitalization, acquired a greater percentage equity
ownership. Under the Stockholders Agreement, current managers have the right,
upon their death or permanent disability, to require Leiner Group to purchase
their Leiner Group common stock for its then fair market value.

In connection with the Recapitalization, the Company
paid senior managers transaction bonuses of $5.2 million in the aggregate in
fiscal 1998. In addition, Leiner Group amended the stock option plan, which
currently provides for the Board of Leiner Group to grant options to acquire 127,222
shares of Leiner Group common stock. A total of 65,023 of these options were
granted to executive officers as of June 30, 1997 and an additional 11,456, 750
and 722 of these Management Options were granted to executive officers on
November 1, 1997, December 31, 1997 and June 11, 1998, respectively, in each
case subject to a vesting schedule.

The Board of Leiner Group and management of the Company
instituted a stock purchase plan pursuant to which certain managers and
employees of the Company were afforded the opportunity to purchase Leiner Group
common stock. The gross proceeds of such offering were $1.9 million, recorded
in fiscal 1998.

On June 25, 1997, Baird Investment, the managing member
of North Castle, entered into separate agreements with three of the principal
investors in North Castle, Electra Fleming Inc. ("Electra"), Moore
Capital Management, Inc. ("Moore") and PPM America, Inc.
("PPM"). As part of these agreements, Baird Group caused North Castle
to exercise its rights under the Stockholders Agreement to nominate one person
designated by Electra, Moore and PPM to serve on the Board of Directors of
Leiner Group. In connection with these agreements, Leiner Group paid Electra,
Moore and PPM a one-time board representation fee of $100,000, $75,000 and
$75,000, respectively, in fiscal 1998.

Capital
Contribution.  In connection
with the Acquisition, as of December 17, 1999, the Company received $20.0
million, which was funded by a subscription by affiliates of certain
shareholders to the capital of Leiner Group. Leiner Group made a capital
contribution in the same amount to the Company through PLI Holdings. Leiner
Group issued 111,112 shares of common stock to certain affiliates.

PART IVITEM 14EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)Documents filed as part of this Report:

1.Financial Statements.
The following financial statements of the Company are
included in a separate section of this Annual Report on Form 10-K commencing on
the pages referenced below:



PageIndex to Consolidated Financial Statements
  F–1Report of Independent Auditors
  F–2Consolidated Balance Sheets as of March 31,
  2001 and 2000
  F–3Consolidated Statements of Operations for
  the years ended March 31, 2001, 2000 and 1999
  F–4Consolidated Statements of Shareholder's
  Equity (Deficit) for the years ended March 31, 2001, 2000 and 1999
  F–5Consolidated Statements of Cash Flows for
  the years ended March 31, 2001, 2000 and 1999
  F–6Notes to Consolidated Financial Statements
  F–72.Financial Statement Schedules.The following financial statement schedule of the
Company is included in a separate section of this Annual Report on Form 10-K
commencing on the page referenced below. All other schedules have been omitted
because they are not applicable, not required, or the information is included
in the Consolidated Financial Statements or notes thereto.

Schedule IIConsolidated Valuation and Qualifying Accounts
  S–1

3.List of Exhibits.



Exhibit
  Number
  
  Exhibit
  Description
  
  Cross Reference2.1
  
  Stock Purchase Agreement and Agreement and Plan of
  Merger, dated as of May 31, 1997, by and among Leiner Group, North Castle
  Partners I, L.L.C. and LHP Acquisition Corp.
  
  Filed as Exhibit 2.1 to the Registration Statement on
  Form S-4 (Registration No. 333-33121) of Leiner Health Products Inc. under
  the Securities Act of 1933, as amended (the Registration Statement on Form
  S-4), and incorporated herein by reference.2.2
  
  Amendment No. 1 to Stock Purchase Agreement and
  Agreement and Plan of Merger, dated as of June 30, 1997, by and among Leiner
  Group, North Castle Partners I, L.L.C. and LHP Acquisition Corp.
  
  Filed as Exhibit 2.2 to the Registration Statement on
  Form S-4 and incorporated herein by reference.2.3
  
  Amended and Restated Asset Purchase Agreement, dated
  as of December 17, 1999, among Leiner Health Products Inc., Granutec
  Acquirco, Inc., Vita Health Products Inc., and Granutec, Inc., Granutec
  Holding Corporation, Stanley Pharmaceuticals Ltd., and Novopharm Limited.
  
  Filed as Exhibit 2.1 to the Report on Form 8-K dated
  December 30, 1999, and incorporated herein by reference.3.1
  
  Amended and Restated Certificate of Incorporation of
  Leiner Health Products Inc. ("LHP").
  
  Filed as Exhibit 3.1 to the Registration Statement on
  Form S-4 and incorporated herein by reference.3.2
  
  Amended and Restated By-Laws of LHP (formerly known as
  Amended and Restated By-Laws of LHP Funding Corp.).
  
  Filed as Exhibit 3.2 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.1
  
  Indenture, dated as of June 30, 1997, between Leiner
  Group and United States Trust Company of New York (the "Trustee").
  
  Filed as Exhibit 4.1 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.2
  
  First Supplemental Indenture, dated as of June 30,
  1997, among Leiner Group, LHP and the Trustee.
  
  Filed as Exhibit 4.2 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.3
  
  Purchase Agreement, dated as of June 19, 1997, among
  Leiner Group, LHP, Merrill Lynch & Co., Salomon Brothers Inc and Scotia
  Capital Markets (USA) Inc. (the "Initial Purchasers").
  
  Filed as Exhibit 4.3 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.4
  
  Registration Rights Agreement, dated as of June 30,
  1997, among Leiner Group, LHP and the Initial Purchasers.
  
  Filed as Exhibit 4.4 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.5
  
  Amended and Restated Credit Agreement, dated as of May
  15, 1998 (the "Credit Agreement"), among LHP, Vita Health Products
  Inc. (formerly Vita Health Company (1985) Ltd.), a Canadian corporation
  ("Vita Health"), the banks and other financial institutions party
  thereto, as lenders, The Bank of Nova Scotia, as U.S. Agent and Canadian
  Agent (the "Agents"), Merrill Lynch Capital Corporation, as
  documentation agent, and Salomon Brothers Holding Company Inc, as syndication
  agent.
  
  Filed as Exhibit 4.5 to the Company's annual report on
  Form 10-K for the year ended March 31, 1998.4.6
  
  Affirmation and Consent, dated May 15, 1998, by PLI
  Holdings Inc., VH Holdings Inc., 64804 Manitoba Ltd. and Westcan
  Pharmaceuticals Ltd. to the Bank of Nova Scotia as U.S. Agent under the
  Credit Agreement and each of the lenders party to the Credit Agreement.
  
  Filed as Exhibit 4.6 to the Company's annual report on
  Form 10-K for the year ended March 31, 1998.4.7
  
  Assumption Agreement, dated as of June 30, 1997,
  between Leiner Group and LHP and accepted and acknowledged by the Agents on
  behalf of the lenders that are party to the Credit Agreement.
  
  Filed as Exhibit 4.7 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.8
  
  U.S. Borrower Security Agreement, dated as of June 30,
  1997, between LHP and The Bank of Nova Scotia, as collateral agent.
  
  Filed as Exhibit 4.8 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.9
  
  U.S. Borrower Pledge Agreement, dated as of June 30,
  1997, made by LHP in favor of the Agents for the secured parties, as defined
  therein. Filed as
  
  Filed as Exhibit 4.9 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.10
  
  Parent Pledge Agreement, dated as of June 30, 1997,
  made by PLI Holdings Inc. in favor of the Agents for the secured parties, as
  defined therein.
  
  Filed as Exhibit 4.10 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.11
  
  Canadian Holdings Pledge Agreement, dated as of June
  30, 1997, made by VH Holdings Inc. in favor of The Bank of Nova Scotia, as
  agent for each of the secured parties, as defined therein.
  
  Filed as Exhibit 4.11 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.12
  
  Canadian Borrower Pledge Agreement, dated as of June
  30, 1997, made by Vita Health in favor of The Bank of Nova Scotia, as agent
  for each of the secured parties, as defined therein.
  
  Filed as Exhibit 4.12 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.13
  
  U.S. Borrower Guaranty, dated as of June 30, 1997,
  made by LHP in favor of the Agents for the secured parties, as defined
  therein.
  
  Filed as Exhibit 4.13 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.14
  
  Parent Guaranty, dated as of June 30, 1997, made by
  PLI Holdings in favor of the Agents for the secured parties, as defined
  therein.
  
  Filed as Exhibit 4.14 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.15
  
  Canadian Holdings Guaranty, dated as of June 30, 1997,
  made by VH Holdings Inc. in favor of The Bank of Nova Scotia as agent for the
  secured parties, as defined therein.
  
  Filed as Exhibit 4.15 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.16
  
  Canadian Subsidiary Guaranties, each dated as of June
  30, 1997, made by each of 64804 Manitoba Ltd. and Westcan Pharmaceuticals
  Ltd. in favor of The Bank of Nova Scotia as agent for the secured parties, as
  defined therein.
  
  Filed as Exhibit 4.16 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.17
  
  Canadian Borrower Debenture, each dated as of June 30,
  1997, made by Vita Health in favor of The Bank of Nova Scotia on its own
  behalf and as agent for the Canadian secured parties as defined therein in
  the amount of $75,000,000.
  
  Filed as Exhibit 4.17 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.18
  
  Canadian Holdings Debenture, dated as of June 30,
  1997, made by VH Holdings Inc. in favor of The Bank of Nova Scotia, on its
  own behalf and as agent for the Canadian secured parties, as defined therein
  in the amount of $75,000,000.
  
  Filed as Exhibit 4.18 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.19
  
  Canadian Subsidiary Debenture, dated as of June 30,
  1997, made by 64804 Manitoba Ltd. in favor of The Bank of Nova Scotia, on its
  own behalf and as agent for the Canadian secured parties, as defined therein
  in the amount of $75,000,000.
  
  Filed as Exhibit 4.19 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.20
  
  Canadian Subsidiary Debenture, dated as of June 30,
  1997, made by Westcan Pharmaceuticals Ltd. in favor of The Bank of Nova
  Scotia, on its own behalf and as agent for the Canadian secured parties, as
  defined therein in the amount of $75,000,000.
  
  Filed as Exhibit 4.20 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.21
  
  Mortgage, Assignment of Leases and Rents, Security
  Agreement and Fixture Filing, dated as of June 30, 1997 from LHP, as
  Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property
  located at 3532 West 47th Place, Chicago, Illinois, as amended by the First
  Amendment to the Mortgage, Assignment of Leases and Rents, Security Agreement
  and Fixture Filing dated as of July 31, 1997.
  
  Filed as Exhibit 4.21 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.22
  
  Mortgage, Assignment of Leases and Rents, Security
  Agreement and Fixture Filing, dated as of August 20, 1997 from LHP, as
  Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property
  located at 3308 Covington, Kalamazoo, Michigan.
  
  Filed as Exhibit 4.22 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.23
  
  Mortgage, Assignment of Leases and Rents, Security
  Agreement and Fixture Filing, dated as of June 30, 1997 from LHP, as
  Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property
  located at 2300 Badger Lane, Madison, Wisconsin.
  
  Filed as Exhibit 4.23 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.24
  
  Leasehold Deed of Trust, Assignment of Leases and
  Rents, Security Agreement and Fixture Filing, dated June 30, 1997 from LHP,
  as Trustor, in favor of Lawyers Title Company of California as Trustee, for
  the benefit of The Bank of Nova Scotia, as agent, relating to the property
  located at 7366 Orangewood Avenue, Garden Grove, California.
  
  Filed as Exhibit 4.24 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.25
  
  Trademark Security Agreement, dated as of June 30,
  1997, between LHP and The Bank of Nova Scotia as collateral agent for the
  secured parties.
  
  Filed as Exhibit 4.25 to the Registration Statement on
  Form S-4 and incorporated herein by reference.4.26
  
  First Amendment, dated June 30, 1999 to the Amended
  and Restated Credit Agreement, among Leiner Health Products Inc., Vita Health
  Products Inc., and the banks and other financial institutions party thereto,
  as Lenders.
  
  Filed as Exhibit 4.1 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter ended June 30, 1999 and
  incorporated herein by reference.4.27
  
  Second Amendment, dated December 16, 1999, to the
  Restated Credit Agreement, among Leiner Health Products Ind., Vita Health
  Products Inc., and the banks and other financial institutions party thereto,
  as Lenders.
  
  Filed Exhibit 4.1 to the Quarterly Report on Form 10-Q
  of Leiner Health Products Inc. for the Quarter ended December 31, 1999 and
  incorporated herein by reference.4.28
  
  Third Amendment, dated February 11, 2000 to the
  Existing Credit Agreement among Leiner Health Products Inc., Vita Health
  Products Inc., and the bank and other financial institutions party thereto,
  as Lenders.
  
  Filed as Exhibit 4.3 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter ended December 31, 1999
  and incorporated herein by reference.4.29
  
  Loan Agreement, dated May 1, 1994 by and between The
  Wilson County Industrial Facilities and Pollution Control Financing
  Authority, and Granutec, Inc.
  
  Filed as Exhibit 4.2 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter ended December 31, 1999
  and incorporated herein by reference.4.30
  
  Notice of Events of Default and Reservation of Rights,
  dated January 22, 2001, presented by the Bank of Nova Scotia
  
  Filed as Exhibit 4.26 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter ended December 31, 2000
  and incorporated herein by reference.4.31
  
  Waiver letter, dated February 14, 2001 pursuant to the
  Amended and Restated Credit Agreement between the Company and other financial
  institutions party thereto, or Lenders.
  
  Filed as Exhibit 4.27 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter ended December 31,2000 and
  incorporated herein by reference.4.32
  
  Fourth Amendment to Waiver Letter, dated as of May 31,
  2001, among Leiner Health Products Inc., Vita Health Products Inc. and the
  banks and other financial institutions party thereto, as Lenders.
  
  Filed as Exhibit 4.31 to the Companys annual report
  Form 10-K for the year ended March 31, 2001.4.33
  
  Fifth Amendment to Waiver Letter, dated as of June 15,
  2001, among Leiner Health Products Inc., Vita Health Products Inc. and the
  banks and other financial institutions party thereto, as Lenders.
  
  Filed as Exhibit 4.32 to the Companys annual report
  Form 10-K for the year ended March 31, 2001.10.1
  
  Consulting Agreement, dated as of June 30, 1997, among
  Leiner Group, LHP and North Castle.
  
  Filed as Exhibit 10.1 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.2
  
  Restated Standard Indemnity Agreement, dated September
  1, 1992 between Showa Denko America Inc. and LHP Holdings Corp. (now LHP).
  
  Filed as Exhibit 10.2 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.3
  
  Guaranty Agreement, dated September 1, 1992, between
  Showa Denko K.K. and LHP Holdings Corp. (now LHP).
  
  Filed as Exhibit 10.3 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.4
  
  Leiner Group Stock Option Plan (formerly known as PLI
  Investors Inc. Stock Option Plan).
  
  Filed as Exhibit 10.4 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.5
  
  First Amendment to the Leiner Group Stock Option Plan,
  effective as of June 30, 1997.
  
  Filed as Exhibit 10.5 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.6
  
  Leiner Group Stock Incentive Plan, adopted and
  effective as of June 30, 1997.
  
  Filed as Exhibit 10.6 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.9
  
  Lease, dated as of October 4, 1993, by and between
  Watson Land Company ("Watson") and LHP, related to a premise
  located at 810 East 233rd Street, Carson, California.
  
  Filed as Exhibit 10.9 to the Registration Statement on
  Form S-4 and incorporated herein by reference.10.10
  
  Lease, dated as of October 4, 1993, by and between
  Watson and LHP, related to a premise located at 901 East 233rd Street,
  Carson, California.
  
  Filed as Exhibit 10.10 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.11
  
  Sublease, dated as of October 8, 1993 by and between
  Teledyne, Inc. and LHP, related to a premise located at 901 East 233rd
  Street, Carson, California.
  
  Filed as Exhibit 10.11 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.12
  
  Standard Industrial Lease, dated February 19, 1988
  between Richard F. Burns, J. Grant Monahan and Lawrence W. Doyle, as Trustees
  of AEW #113 Trust established under Declaration of Trust dated January 19,
  1988 and Vita-Fresh Vitamin Co. Inc. and Vital Industries, Inc., as amended
  by the First Lease Amendment, dated as of June 12, 1997, between Sierra
  Pacific California LP and LHP, related to a premise located in Garden Grove,
  California.
  
  Filed as Exhibit 10.12 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.14
  
  Severance Benefit Agreement, dated as of November 21,
  1991, by and between LHP and Robert M. Kaminski.
  
  Filed as Exhibit 10.14 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.15
  
  Severance Benefit Agreement, dated as of November 21,
  1991, by and between LHP and Gale K. Bensussen.
  
  Filed as Exhibit 10.15 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.16
  
  Severance Benefit Agreement, dated as of May 30, 1997,
  by and between LHP and William B. Towne.
  
  Filed as Exhibit 10.16 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.18
  
  Non-Competition and Severance Benefit Agreement, dated
  as of August 26, 1999, by and between LHP and William B. Towne.
  
  Filed as Exhibit 10.18 to the Companys annual report
  Form 10-K for the year ended March 31, 2000.10.19
  
  Net Lease, dated as of October 14, 1997, by and
  between MIT Unsecured, L.P. and LHP, related to a premise located in York
  County, South Carolina.
  
  Filed as Exhibit 10.19 to the Registration Statement
  on Form S-4 and incorporated herein by reference.10.20
  
  Stockholders Agreement, dated as of June 30, 1997,
  among Leiner Health Products Group Inc., North Castle Partners I, L.L.C., AEA
  Investors Inc., and each other person who is or becomes a party thereto.
  
  Filed as Exhibit 10.1 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter Ended December 31, 1997,
  and incorporated herein by reference.10.21
  
  Amended and Restated Stockholders Agreement, dated as
  of September 28, 1998, among Leiner Health Products Group Inc., North Castle
  Partners I, L.L.C., AEA, and each other person who is or becomes a party
  thereto.
  
  Filed as Exhibit 10.21 to the Companys annual report
  Form 10-K for the year ended March 31, 2000.10.22
  
  Amended and Restated Stockholders Agreement, dated as
  of December 17, 1999, among Leiner Health Products Group Inc., North Castle
  Partners I, L.L.C., North Castle Partners I-A, L.P., North Castle Partners
  II, L.P., AEA, NCP Co- Investment Fund, L.P., Squam Lake Investors IV, L.P.,
  and each other person who is or becomes a party thereto.
  
  Filed as Exhibit 10.22 to the Companys annual report
  Form 10-K for the year ended March 31, 2000.10.23
  
  Stock Purchase Plan of Leiner Health Products Group
  Inc. as adopted by the Board of Directors of Leiner Health Products Group
  Inc. on November 17, 1997.
  
  Filed as Exhibit 10.2 to the Quarterly Report on Form
  10-Q of Leiner Health Products Inc. for the Quarter Ended December 31, 1997,
  and incorporated herein by reference.10.24
  
  Second
  Amended and Restated Stockholders Agreement, dated as of November 14, 2000,
  among Leiner Health Products Group Inc., North Castle Partners I,
  L.L.C., NCP I Sub, L.P., North Castle Partners I-A, L.P., North Castle
  Partners II, L.P., AEA Investors Inc., NCP Co-Investment Fund, L.P., Squam Lake
  Investors IV, L.P., and each other person who is or becomes party thereto.
  
  Filed as Exhibit 10.24 to the Companys annual report
  Form 10-K for the year ended March 31, 2001.

(c)Reports on Form 8-K:1
  
  Amendment to Waiver Letter, dated as of February 23, 2001
  among Leiner Health Products, Inc., Vita Health Products, Inc., and the banks
  and other financial institutions party thereto, as Lenders.
  
  Filed as Exhibit 4.28 to the Report on Form 8-K dated
  March 5, 2001, and incorporated herein by reference.2
  
  Second Amendment to Waiver Letter, dated as of March
  28, 2001, among Leiner Health Products Inc., Vita Health Products Inc. and
  the banks and other financial institutions party thereto, as Lenders.
  
  Filed as Exhibit 4.29 to the Report on Form 8-K dated
  April 6, 2001, and incorporated herein by reference.3
  
  Third Amendment to Waiver Letter, dated as of April
  12, 2001, among Leiner Health Products Inc., Vita Health Products Inc. and
  the banks and other financial institutions party thereto, as Lenders.
  
  Filed as Exhibit 4.30 to the Report on Form 8-K dated
  April 20, 2001, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Leiner Health Products Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Carson, State of California, on the 29th day of
June, 2001.

LEINER HEALTH PRODUCTS INC.By:
  /s/ STEPHEN P. MILLERName: Stephen P. MillerTitle: Senior
  Vice President andChief Financial Officer

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



/s/ ROBERT M. KAMINSKI
Robert
  M. Kaminski
  
  Chief Executive Officer, Director(Principal Executive Officer)
  June 29, 2001STEPHEN P. MILLER
Stephen
  P. Miller
  
  Senior Vice President, Chief Financial Officer
  (Principal Financial and Accounting Officer)
  June
  29, 2001GALE K. BENSUSSEN
Gale
  K. Bensussen
  
  President and Director
  June
  29, 2001


LEINER
HEALTH PRODUCTS INC.INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS  Report of Independent Auditors
  F–2Consolidated Balance Sheets as of March 31,
  2001 and 2000
  F–3Consolidated Statements of Operations for
  the years ended March 31, 2001, 2000 and 1999
  F–4Consolidated Statements of Shareholder's
  Equity (Deficit) for the years ended March 31, 2001, 2000 and 1999
  F–5Consolidated Statements of Cash Flows for
  the years ended March 31, 2001, 2000 and 1999
  F–6Notes to Consolidated Financial Statements
  F–7  REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholder
Leiner Health Products Inc.

We have audited the accompanying consolidated balance
sheets of Leiner Health Products Inc. as of March 31, 2001 and 2000, and the
related consolidated statements of operations, shareholder's equity (deficit)
and cash flows for each of the three years in the period ended March 31, 2001.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing
standards generally accepted in the 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 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Leiner Health Products Inc. at March 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Companys
noncompliance with long-term debt covenants, together with its net loss in
fiscal 2001 and its deficit in shareholder's equity, raise substantial doubt
about its ability to continue as a going concern. Managements plans concerning
these matters are described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ ERNST &
YOUNG LLP

Orange County, California
May 31, 2001, except for Note 1,
as to which the date is June 29, 2001

LEINER HEALTH PRODUCTS INC.CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data)



March 31,2001
  2000ASSETSCurrent
  assets:Cash and cash equivalents
  $       27,788
  $         3,008Accounts receivable, net of allowances of
  $7,611 and $4,566 at March 31, 2001 and 2000, respectively
  80,009
  127,881Inventories
  113,009
  175,529Prepaid expenses and other current assets
  13,071
  15,049Total
  current assets
  233,877
  321,467Property,
  plant and equipment, net
  74,303
  87,093Goodwill
  and other intangibles, net
  73,006
  76,744Other noncurrent assets
  25,287
  24,156Total assets
  $     406,473
  $     509,460LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)Current
  liabilities:Bank checks outstanding, less cash on
  deposit
  $              64
  $       13,581Accounts payable
  94,099
  103,815Accrued compensation and benefits
  16,490
  15,380Customer allowances payable
  12,491
  7,085Other accrued expenses
  19,798
  15,018Current portion of long-term debt
  373,425
  5,006Total current liabilities
  516,367
  159,885Long-term
  debt
  957
  339,066Other noncurrent liabilities
  3,598
  4,894Commitments
  and contingencies (Notes 1, 9 and 10)Shareholder's
  equity (deficit):Common stock, $1 par value: 1,000 shares
  authorized, issued and outstanding
  1
  1Capital in excess of par value
  21,851
  21,851Accumulated deficit, including charges
  from June 1997 recapitalization of parent of $31,543
  (135,327)
  (16,425)Accumulated other comprehensive income
  (loss)
  (974)
  188Total shareholder's equity (deficit)
  (114,449)
  5,615Total liabilities and shareholder's
  equity (deficit)
  $     406,473
  $     509,460See
accompanying notes to consolidated financial statements.

LEINER HEALTH PRODUCTS INC.CONSOLIDATED STATEMENTS OF
OPERATIONS(dollars in thousands)



Years Ended March
  31,2001
  2000
  1999Net sales
  $    612,134
  $   662,259
  $   626,916Cost of
  sales
  559,551
  495,693
  463,607Gross
  profit
  52,583
  166,566
  163,309Marketing,
  selling and distribution expenses
  81,230
  78,731
  72,260General
  and administrative expenses
  48,755
  38,920
  36,896Research
  and development expenses
  9,382
  7,311
  5,158Amortization
  of goodwill and other intangibles
  5,610
  2,666
  1,670Restructuring
  charges
  9,761
  608
  380Other
  operating income
  (18,426)
  (918)
  (128)Operating
  income (loss)
  (83,729)
  39,248
  47,073Loss from
  investment in joint venture
  713
  155
  -Interest
  expense, net
  35,947
  31,123
  28,732Income
  (loss) before income taxes
  (120,389)
  7,970
  18,341Provision
  for (benefit from) income taxes
  (1,487)
  3,098
  8,034Net income
  (loss)
  $   (118,902)
  $     4,872
  $    10,307See
accompanying notes to consolidated financial statements.

LEINER HEALTH PRODUCTS INC.CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY (DEFICIT)(dollars in thousands)



Common
  StockShares
  Amount
  Capital
  in Excess
  of Par Value
  Accumulated
  Deficit
  Accumulated
  Other
  Comprehensive
  Income (Loss)
  Total
  Shareholder's
  Equity (Deficit)Balance at
  March 31, 1998
  1,000
  $   1
  $     1,825
  $     (31,604)
  $   (138)
  $     (29,916)Net income
  -
  -
  -
  10,307
  -
  10,307Translation
  adjustment
  -
  -
  -
  -
  85
  85Comprehensive income
  
  
  
  
  
  10,392Capital
  contribution from parent
  -
  -
  26
  -
  -
  26Balance at
  March 31, 1999
  1,000
  1
  1,851
  (21,297)
  (53)
  (19,498)Net income
  -
  -
  -
  4,872
  -
  4,872Translation
  adjustment
  -
  -
  -
  -
  241
  241Comprehensive income
  
  
  
  
  
  5,113Capital
  contribution from parent
  -
  -
  20,000
  -
  -
  20,000Balance at
  March 31, 2000
  1,000
  1
  21,851
  (16,425)
  188
  5,615Net loss
  -
  -
  -
  (118,902)
  -
  (118,902)Translation
  adjustment
  -
  -
  -
  -
  (1,162)
  (1,162)Comprehensive loss
  
  
  
  
  
  (120,064)Balance at
  March 31, 2001
  1,000
  $   1
  $   21,851
  $   (135,327)
  $   (974)
  $   (114,449)See accompanying notes to
consolidated financial statements.

LEINER HEALTH PRODUCTS INC.CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)



Years Ended March 31,2001
  2000
  1999Operating activitiesNet income
  (loss)
  ($118,902)
  $      4,872
  $   10,307Adjustments
  to reconcile net income (loss) to net cash provided by (used in) operating
  activities:Depreciation
  16,252
  10,910
  8,281Amortization
  16,136
  10,650
  7,896Provision for doubtful accounts
  9,919
  8,788
  10,022Provision for excess and obsolete
  inventory
  60,951
  21,811
  6,666Deferred income taxes
  7,613
  (1,638)
  123Loss on disposition of property, plant
  and equipment
  2,449
  -
  -Translation adjustment
  1,162
  (241)
  (85)Changes in operating assets and
  liabilities, net of effects of acquisition:Accounts receivable
  37,002
  10,739
  (48,012)Inventories
  (109)
  (22,342)
  (21,056)Bank checks outstanding, less cash on
  deposit
  (13,416)
  6,961
  2,868Accounts payable
  (8,984)
  3,613
  (10,791)Accrued compensation and benefits
  (2,051)
  (3,949)
  1,015Customer allowances payable
  5,465
  (2,521)
  (4,438)Other accrued expenses
  4,912
  2,643
  (488)Other
  (6,424)
  (1,413)
  (649)Net cash
  provided by (used in) operating activities
  11,975
  48,883
  (38,341)Investing activitiesAdditions
  to property, plant and equipment, net
  (8,083)
  (15,629)
  (17,491)Acquisition
  of business, net of cash acquired
  808
  (52,681)
  -Increase
  in other noncurrent assets
  (11,344)
  (8,259)
  (4,161)Net cash
  used in investing activities
  (18,619)
  (76,569)
  (21,652)Financing activitiesNet
  borrowings (payments) under bank revolving credit facility
  38,057
  (16,252)
  4,114Borrowings
  under bank term credit facility
  -
  30,000
  59,763Payments
  under bank term credit facility
  (1,744)
  (1,672)
  (1,444)Increase
  in other long-term debt
  439
  1,340
  -Payments
  on other long-term debt
  (3,894)
  (1,066)
  (1,511)Capital
  contribution from parent
  -
  20,000
  26Increase
  in deferred financing charges
  -
  (1,614)
  (995)Repurchase
  of minority interest
  -
  -
  (947)Net cash
  provided by financing activities
  32,858
  30,736
  59,006Effect of
  exchange rate changes
  (1,434)
  (119)
  38Net
  increase (decrease) in cash and cash equivalents
  24,780
  2,931
  (949)Cash and
  cash equivalents at beginning of year
  3,008
  77
  1,026Cash and
  cash equivalents at end of year
  $ 
  27,788
  $      3,008
  $          77See
accompanying notes to consolidated financial statements.

LEINER HEALTH PRODUCTS INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



1. Formation and Operations

Leiner Health Products Inc. (the "Company") is
primarily involved in a single business segment, the manufacture and distribution
of vitamins, over-the-counter drugs and other health and beauty aid products to
mass market retailers and through other channels, primarily in the United
States and Canada. The Company is a wholly owned subsidiary of PLI Holdings
Inc. ("PLI Holdings"), which operates solely as a holding company and
which is itself a wholly owned subsidiary of Leiner Health Products Group Inc.
("Leiner Group"). Leiner Groups majority shareholder is North Castle
Partners (North Castle) and affiliates.

In June 1997, the Company entered
into the Amended Credit Agreement with the Senior Lenders (Note 5), and as a
result the Company is highly leveraged. The Amended Credit Agreement contains a
number of covenants that significantly restrict the operations of the Company.In
addition, the Company is required to comply with specified financial ratios and
tests, including minimum net worth requirements, maximum leverage ratios,
minimum fixed charge coverage ratios and minimum EBITDA to cash interest
expense ratios. Since December 31, 2000, the Company has not been, and as of
March 31, 2001, the Company was not in compliance with certain of these
financial covenants. Such covenant violations constitute events of default
under the terms of the Amended Credit Agreement. As a result, all borrowings
under the Amended Credit Agreement, aggregating $277,969,000 at March 31, 2001,
have been classified as a current liability in the accompanying consolidated
balance sheet to reflect the Senior Lenders right to accelerate maturity of the
loans.

The
Company entered into a waiver letter, as well as subsequent amendments (the
Amended Waiver) with the Senior Lenders. Under the latest amendment, dated as
of June 15, 2001, the Senior Lenders agreed to waive such events of
default and to forbear exercising any of their rights or remedies under the
Amended Credit Agreement for a limited period ending on June 27, 2001. The
Amended Waiver expired on June 27, 2001, and on June 28, 2001, the Company
received a formal notice of default from its Senior Lenders.

The
Company is currently in active discussions with the Senior Lenders regarding a
forebearance agreement that would provide the Company a period of time during
which the Senior Lenders would agree not to exercise the remedies available to
them while a long-term restructuring solution is pursued.

Both
prior to and during the waiver period, the Company made all scheduled principal
and interest payments on a timely basis. The Company has retained financial and
legal advisors to assist it in evaluating its restructuring and financing
alternatives. The Company and its financial advisors have provided the Senior
Lenders with a business plan that reflects the effects of the operational
restructuring and reengineering initiatives discussed in Note 3 and serves as a
basis for discussions regarding a forebearance agreement and long-term
restructuring alternatives.

There
can be no assurance that the Company and the Senior Lenders will agree upon the
terms of or enter into a forbearance agreement.

An
outstanding event of default under the Amended Credit Agreement would permit
the Senior Lenders to declare all amounts outstanding thereunder to be
immediately due and payable, together with accrued and unpaid interest, and to
terminate their commitments to make further extensions of credit thereunder.

The
Amended Waiver provided for a one percent increase in the applicable margin
effective through the end of the waiver period. The Amended Waiver required,
among other things, the payment to the Senior Lenders of total fees of
$750,000, that the management fee and additional expense reimbursement paid to
North Castle and/ or its Affiliates pursuant to the terms of the Management
Services Agreement on January 2, 2001 in the amount $785,000 be returned to the
Company and that an amount equal to $785,000 be paid to the Senior Lenders as a
prepayment of the loans under the Amended Credit Agreement. Additionally,
further payments of the management fee were not allowed during the waiver
period (Note 8).

The
Amended Waiver also required that during the waiver period, and concurrently
with the receipt by the Company of any judgment, settlement or other proceeds
or amounts, however characterized, arising from or in connection with any
antitrust claims (including the Antitrust Lawsuit, with all the foregoing
collectively referred to as the Proceeds) (Note 10), the Company shall make,
or cause to be made, a mandatory prepayment of the loans outstanding in the
amount of the Proceeds to be applied pro rata to the outstanding principal
amount of all term loans, the cash collateralization of $1,600,000 of letters
of credit, and a corresponding reduction of each revolving loan commitment
amount.

Certain
conditions to the Amended Waiver survive the expiration of the Amended Waiver
including the Companys agreement that: (a) interest and letter of credit fees
will be paid monthly instead of quarterly, (b) commitments to make further
credit extensions are suspended, and (c) outstanding amounts under the Amended
Credit Agreement cannot be continued as or converted into LIBOR or bankers
acceptance rate loans.

Should
the Senior Lenders accelerate the maturity of the loans under the Amended
Credit Agreement, all amounts due under the indenture (the Indenture)
governing the $85,000,000 of Senior Subordinated Notes (the Subordinated
Notes) may also be accelerated. As a result of this uncertainty, the
Subordinated Notes have been classified as a current liability in the
accompanying consolidated balance sheet as of March 31, 2001. On June 28, 2001,
the Senior Lenders delivered a notice (the Blockage Notice) to the Company
and the trustee under the Indenture prohibiting payments on account of any
principal or interest obligation related to the Subordinated Notes or the
purchase or redemption of such obligations. The Blockage Notice will be
effective for 179 days.   If the
Blockage Notice remains in effect on August 1, 2001, the 30 day grace period
with respect to payment defaults on the Subordinated Notes will expire and
failure to pay will constitute an event of default under the Indenture and 25%
in the aggregate principal amount of the holders of the Subordinated Notes may
accelerate the amounts due under the Indenture.  The Company has initiated negotiations with several major holders
of the Subordinated Notes regarding such a long-term restructuring alternative.

The
Company also has an outstanding balance of $6,600,000 under an Industrial
Development Revenue Bond (the IRB Loan). The IRB Loan is secured by a letter
of credit issued under the Amended Credit Agreement. Under the terms of the
Amended Credit Agreement, if an event of default were continuing, upon notice
from the Senior Lenders, the Company would be obligated to reimburse the issuer
for the amount equal to the outstanding letter of credit. Accordingly, the IRB
Loan has been classified as a current liability in the accompanying
consolidated balance sheet as of March 31, 2001.

During
fiscal 2000, Vita Health entered into a loan agreement with the Manitoba
Industrial Opportunities Program (the MIOP Loan) to fund the expansion and
upgrading of Vita Health's manufacturing facility in Canada. As of March 31,
2001, Vita Health has received approximately $1,636,000 in advances on the
loan, which also has been classified as a current liability in the accompanying
consolidated balance sheet.

If
the Senior Lenders were to accelerate maturity of amounts due under the Amended
Credit Agreement, or if the holders of the Subordinated Notes were to
accelerate the amounts due under the Indenture, and other long-term debt became
immediately payable as a result of such action, the Company would not have
sufficient funds to repay its outstanding debt, and no assurance can be given
that alternative sources of sufficient financing would be available on
acceptable terms, or at all. These conditions, together with the Companys net
loss in fiscal 2001 and its deficit in shareholders equity, raise substantial
doubt about the Companys ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.

2. Summary of Significant Accounting Policies

Principles
of Consolidation

The accompanying consolidated financial statements
include the accounts of the Company and its direct and indirect subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Use of Estimates

The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of sales and expenses during
the reporting periods. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include valuation allowances for accounts receivable, inventories and deferred
tax assets, cash flows used to evaluate the recoverability of long-lived
assets, and certain accrued liabilities for restructuring activities.



Cash Equivalents

The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.

Fair Values of Financial Instruments

Fair values of cash and cash equivalents approximate
cost due to the short period of time to maturity. Fair values of the Companys
debt instruments have been determined based on borrowing rates currently
available to the Company for loans with similar terms or maturity. The table
below provides information about the fair value of the Companys debt
obligations (in thousands):



March 31, 2001Total
  Fair ValueFixed rate ($US)
  $     85,000
  -
  (1)Variable rate ($US)
  $   248,963
  $  248,963Variable rate ($CAN)
  $     29,006
  $    29,006

(1)
  The Company's fixed
  rate debt, represented by the Subordinated Notes, are not actively traded.
  Consequently, the fair value of such debt is not readily determinable.
  However, considering the liquidity issues discussed in Note 1, management
  believes that the fair value of the Subordinated Notes is substantially less
  than its carrying value.Revenue Recognition

The Company recognizes revenue from product sales at the
time of shipment. Provisions are made currently for estimated returns and
allowances.

Inventories

Inventories are stated at the lower of cost or market,
with cost being determined by the first-in, first-out method.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
provided using the straight-line method, at rates designed to distribute the
cost of assets over their estimated service lives or, for leasehold
improvements, the shorter of their estimated service lives or their remaining
lease terms. Amortization of assets recorded under capital leases is included
in depreciation expense.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price
over the fair values of the net assets of acquired entities. Other intangibles
are comprised principally of the estimated fair value of the customer lists,
assembled workforce and accelerated new drug applications acquired in December
1999 (Note 4). Goodwill and other intangibles are being amortized on the
straight-line method at rates designed to distribute the cost of the assets
over their estimated lives.

Other Noncurrent Assets

Deferred financing charges are being amortized based on
the principal balance outstanding using the effective interest method.
Incentives provided to customers to secure long-term sales agreements
(primarily cash advances and credit memos to be applied against purchases under
the contract) are amortized over the terms of the agreements or as related
sales are recognized. Amounts deferred under such agreements totaled $8,062,000
and $7,484,000 as of March 31, 2001 and 2000, respectively.

Recoverability of Long-Lived Assets

The Company reviews for impairment of long-lived assets
and certain intangibles held and used whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is performed at the lowest level at which
undiscounted net cash flows can be directly attributable to long-lived assets.
Goodwill that is not associated with specific assets that are impaired is
assessed for impairment when impairment indicators are present and reduced to
its estimated fair value if less than its carrying value. Recoverability of
long-lived assets could be affected by the outcome of the uncertainty discussed
in Note 1.

Investment in Joint Venture

The Company owns a 40% interest in HerbaLife Leiner,
LLC, a joint venture engaged in selling health products to the Chinese market.
The Company's investment in the joint venture is accounted for using the equity
method of accounting. At March 31, 2001, the amount at which the investment is
carried on the books of the Company is equal to the Company's portion of the
underlying equity in the net assets of the joint venture.

Foreign Currency Translation

The Company translates the foreign currency financial
statements of its Canadian subsidiary by translating balance sheet accounts at
the year-end exchange rate and income statement accounts at the weighted
monthly average exchange rate for the year. Translation gains and losses are
recorded in shareholder's equity, and realized gains and losses are reflected
in results of operations. Transaction gains and losses were not material in the
years ended March 31, 2001, 2000 and 1999.

Stock-Based Compensation

The Company has elected to account for its stock-based
compensation plans using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", and related interpretations.
Under the provisions of APB 25, compensation expense is measured at the grant
date for the difference between the estimated fair value of the stock, less the
exercise price of the option.

Shipping and Handling Fees and Costs

The
Company classifies shipping and handling costs as marketing, selling and
distribution expenses in the accompanying consolidated statement of operations.
Shipping and handling expenses for the years ended March 31, 2001, 2000 and
1999 were $12,671,000, $13,023,000, and $13,241,000, respectively.

Advertising Costs

Advertising costs are expensed as incurred. Advertising
expense for the years ended March 31, 2001, 2000 and 1999 was $13,129,000,
$13,566,000 and $8,127,000, respectively.

Reporting
Comprehensive Income (Loss)

Statement
of Financial Accounting Standards No. 130, establishes standards for reporting
and displaying comprehensive income (loss) and its components in the
consolidated financial statements. For the Company, the only component of other
accumulated comprehensive income (loss) is the cumulative foreign currency
translation adjustment recorded in shareholders equity (deficit).

Recently
Issued Accounting Pronouncements

The
Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has issued EITF 00-25, Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer, which is effective for
fiscal quarters beginning after December 15, 2001. The consensus of the EITF is
that consideration paid by a vendor to a retailer, such as slotting fees and
cooperative advertising, should be classified as a reduction in revenue in the
vendors income statement rather than as an operating expense, unless certain
criteria are met. The Company has not yet determined the impact of such a
change in classification on its presentation of the accompanying consolidated
statement of operations. The Company will adopt this change in classification
prior to the end of fiscal 2002.

The Financial Accounting Standards Board has issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("Statement 133"), which is required to be
adopted in years beginning after June 15, 2000. The Company has not yet
determined the impact of the adoption of the Statement 133 on its consolidated
financial position or consolidated results of operations. The Company will
adopt Statement 133 in its fiscal year beginning April 1, 2001.

In March 2000, the Financial Accounting Standards Board
issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensationan
interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the definition of employee for purposes of applying Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
the criteria for determining whether a plan qualifies as a noncompensatory
plan, the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the accompanying consolidated financial position or results
of operations.

Reclassifications

Certain reclassifications have been made to the fiscal
2000 and 1999 consolidated financial statements to conform to the fiscal 2001
presentation.

3. Restructuring Charges

In fiscal 2001, the Company initiated a number of
operational restructuring actions focused on eliminating operational
complexities and reducing operating costs. The initiatives include workforce
reductions, facility consolidation, product line simplification, and customer
rationalization.

During
fiscal 2001, the Company reduced its workforce in its Carson, Garden Grove and
Valencia, California locations, as well as in Kalamazoo, Michigan. Severance
and other costs related to such reductions totaled $5,511,000 and is being paid
to the terminated employees on a weekly basis through February 2002. When added
to the reduction in force related to the Acquisition (Note 4) the worldwide
workforce has been reduced by approximately 500 full time employees.

Facility
consolidations include the consolidation of the Kalamazoo, Michigan and Largo,
Florida facilities into the Companys Fort Mill, South Carolina location, the
consolidation of the Vancouver, British Columbia facility into the Winnipeg,
Manitoba facility, and the closure of auxiliary warehouses in Carson,
Kalamazoo, Largo and Vancouver. Such consolidations are expected to be
completed during the first quarter of fiscal 2002.

The following table summarizes the
activities in the Companys restructuring reserves (in thousands):



Costs for
  Employees
  Terminated
  Facility
  Consolidation
  and Other
  TotalRestructuring
  charges
  $   5,511
  $   4,250
  $   9,761Cash
  payments
  (1,758)
  (1,639)
  (3,397)Accrued
  restructuring charges at March 31, 2001
  $   3,753
  $   2,611
  $   6,364

In
addition to the workforce reductions and facility consolidations discussed
above, the Company has undertaken product line simplification and customer
rationalization initiatives. In connection with its product line simplification
initiative, the Company plans to discontinue certain low margin vitamin and OTC
pharmaceutical product lines, as well as a health food product line at Vita
Health. Under its customer rationalization initiative, as of March 31, 2001,
the Company has identified 47 unprofitable or overly complex customers for
discontinuation.

In
connection with these initiatives, the Company recorded certain reserves and
wrote-off certain other assets totaling $67,357,000. The table below summarizes
these reserves and write-offs and where those charges have been reflected in
the accompanying consolidated statement of operations for the period ended
March 31, 2001 (in thousands):



Net
  Sales
  Cost of
  Sales
  Marketing,
  Selling &
  Distribution
  General &
  Administrative
  TotalInventory
  reserve provisions
  $           -
  $   52,453
  $        -
  $           -
  $   52,453Return
  reserves
  7,020
  -
  -
  -
  7,020Allowance
  for receivables and write-off of customer advances
  -
  1,302
  -
  3,224
  4,526Other
  -
  -
  639
  2,719
  3,358Total
  related charges
  $   7,020
  $   53,755
  $   639
  $   5,943
  $   67,357

During
the fourth quarter of fiscal 2001, the Company reserved or wrote-off inventory
in the amount of $52,453,000, the most significant component of which related
to additional reserves of $24,827,000 established for slow moving or obsolete
inventory, calculated based on a new demand-based estimation methodology. An
additional $17,017,000 of inventory was reserved and $10,609,000 was
written-off in connection with the Companys product line simplification and
customer rationalization initiatives and facility consolidations.

In
addition, the Company established a reserve of $7,020,000 for anticipated sales
returns from discontinued customers or for discontinued products expected to be
returned by continuing customers. The Company also recorded $3,224,000 in
additional reserves for estimated uncollectible accounts receivable and
wrote-off $1,302,000 in customer advances related to the customer
rationalization initiative. Finally, the Company recorded other charges of
$3,358,000 primarily related to consulting expenses for its restructuring
initiatives and the write-off of certain fixed assets.

The
Companys efforts to restructure its operations and rationalize its customer
base will continue into fiscal 2002. In connection with those continuing
efforts, the Company expects to incur during the first two quarters of fiscal
2002, additional costs of approximately $7,500,000 related to legal,
accounting, banking and consulting fees. These amounts will be charged to the
Companys results of operations when incurred.

In
fiscal 2000, the Company closed its Madison, Wisconsin and Sherburne, New York
facilities. The Company incurred approximately $1,179,000 for severance and
other costs related to the closures, which were offset by a gain of approximately
$230,000 from the sale of the Madison facility. Additionally, the Company
recorded a gain of approximately $341,000 from the sale of its Chicago
facility, which the Company had previously closed and written down to estimated
fair market value in fiscal 1999.

4. Acquisition

On December 17, 1999, Leiner Health Products Inc.
acquired substantially all of the assets of Granutec, Inc.
("Granutec"), a manufacturer and distributor of private label,
over-the-counter pharmaceutical drugs in the United States, and Vita Health
acquired substantially all of the assets of Stanley Pharmaceuticals Ltd.
("Stanley"), a manufacturer and distributor of private label,
over-the-counter pharmaceutical drugs and vitamin supplement products in
Canada, both of which were subsidiaries of Novopharm Limited of Ontario, Canada
("Novopharm"). The Company also acquired certain related assets of
Novopharm (collectively, the "Acquisition"). The purchase price of
approximately $59,369,000, which included the assumption of debt of $7,496,000,
was funded in part by a $20,000,000 capital contribution from the Company's
ultimate parent, Leiner Group, and borrowings on the Company's revolving credit
facility. The Acquisition was accounted for as a purchase under Accounting
Principles Board Opinion No. 16, Business Combinations ("APB 16"). In
accordance with APB 16, the Company allocated the purchase price based on the
fair value of the assets acquired and liabilities assumed. Portions of the
purchase price, including intangible assets, were identified by independent
appraisers utilizing proven valuation procedures and techniques. Acquired
intangibles totaling $9,327,000 included the fair value of customer base,
acquired workforce and accelerated new drug applications. These intangibles are
being amortized over their estimated useful lives of three to five years.
Goodwill resulting from the Acquisition is being amortized over 15 years.

On June 29, 2000, the Company
reached a final settlement agreement with Novopharm on the working capital adjustment
provided for in the acquisition agreement and, as a result, Novopharm paid the
Company $1,553,000.  The Company
recorded the final adjustments to the purchase price allocation during the
second quarter of fiscal year 2001.

The components of the purchase
price and the purchase price allocation are as follows (in thousands):



Consideration
  and acquisition costs:Cash paid
  to Novopharm
  $   50,000Acquisition
  costs
  3,426Debt
  assumed
  7,496Working
  capital adjustment
  (1,553)$   59,369Allocation
  of purchase price:Current
  assets
  $   43,083Property,
  plant and equipment
  20,805Acquired
  intangibles
  9,327Goodwill
  18,179Debt and
  other liabilities assumed
  (32,025)$   59,369

In connection with the Acquisition and the finalization
of managements integration plan, the Company recorded approximately
$11,472,000 for employee severance and facility closure costs. As a component
of the purchase price allocation, the integration plan includes initiatives to
integrate the operations of Granutec and Stanley, with those of the Company,
and reduce overhead, primarily through the consolidation of certain acquired
manufacturing activities to existing facilities. The Company expects the
majority of these actions to be completed in fiscal 2002.

The following table summarizes the
activity in the Companys reserves associated with the integration plan (in
thousands):



Separation
  Costs for
  Terminated
  Employees
  Facilities
  Closing &
  Downsizing
  TotalReserves
  recorded in connection with preliminary purchase price allocation at March
  31, 2000
  $   5,400
  $   1,615
  $   7,015Additions
  to reserve
  3,468
  989
  4,457Cash
  payments
  (3,588)
  (92)
  (3,680)Balance at
  March 31, 2001
  $   5,280
  $   2,512
  $   7,792

The following unaudited pro forma financial information
presents the consolidated results of operations as if the Acquisition had
occurred at the beginning of the fiscal year presented, and does not purport to
be indicative of the results that would have occurred had the Acquisition
occurred at such date or of results which may occur in the future (in
thousands).



Year Ended
  March 31,
  2000Net sales
  $760,079Operating
  income
  50,574Net income
  10,233

5.
Long-term Debt

Long-term debt consists of (in thousands):



Years Ended March
  31,2001
  2000Credit Facility:Revolving facility
  $      109,535
  $ 
  72,918Term facility
  168,434
  171,107Total credit facility
  277,969
  244,025Senior subordinated notes
  85,000
  85,000Capital lease obligations
  3,177
  6,607Industrial development revenue bond loan
  6,600
  7,100Industrial opportunities program loan
  1,636
  1,340374,382
  344,072Less current portion
  (373,425)
  (5,006)Total long-term debt
  $             957
  $339,066

Credit Facility

On May 15, 1998, the Company entered into an Amended and
Restated Credit Agreement ("Credit Agreement", and together with the
amendments described below, the "Amended Credit Agreement"), which
was amended, (i) on June 30, 1999, to include an additional U.S. term loan in
the amount of $30,000,000 as described below, (ii) on December 16, 1999, to
waive certain limitations that would have prohibited the Acquisition and to
raise the applicable margins (as defined in the Amended Credit Agreement), and
(iii) on February 11, 2000, effective December 16, 1999, principally to modify
the Company's covenant requirements to reflect the financial statement impact
of the Acquisition.  The Amended Credit
Agreement provides for one U.S. term loan due December 30, 2004 in the amount
of $68,000,000, two U.S. term loans due December 30, 2005 in the amounts of
$65,000,000 and $30,000,000, respectively, and a Canadian dollar denominated
term loan due December 30, 2004 in the amount of approximately U.S. $12,000,000
(collectively, the "Term Facility"), and a revolving credit facility
in the amount of U.S. $125,000,000 (the "Revolving Facility"), a
portion of which is made available to Vita Health in Canadian dollars. The
unpaid principal amount outstanding on the Revolving Facility is due and
payable on June 30, 2003.

Borrowings under the Amended Credit Agreement bear
interest at floating rates that were based on the lender's base rate (8.0% at
March 31, 2001), the lender's Canadian prime rate (6.75% at March 31, 2001), or
LIBOR (4.88% at March 31, 2001), as the case may be, plus an applicable margin
that is itself based on the Company's leverage ratio (as defined in the Amended
Credit Agreement). The leverage ratio is defined generally as the ratio of
total funded indebtedness to the consolidated earnings before interest, taxes,
depreciation, amortization expense and other special charges and its effect on
the applicable margin and varies as follows: (a) for U.S. and Canadian
revolving credit borrowings, from 1.0% to 2.5% for LIBOR or banker's
acceptance-based loans, and from zero to 1.5% for alternate base rate or
Canadian prime rate-based loans, (b) for the loans under the Term Facility,
from 2.625% to 3.25% for LIBOR-based loans, and from 1.625% to 2.25% for
alternate-base rate loans. As of March 31, 2001, the Company's weighted average
interest rates were 10.92% for U.S. borrowings and 8.38% for Canadian
borrowings. In addition to certain agent and up-front fees, the Amended Credit
Agreement requires a commitment fee of up to 0.5% of the average daily unused
portion of the revolving credit facility based on the Company's leverage ratio.
During the period covered by the Amended Waiver (Note 1), the applicable
margins increased by 1%.

The obligations of the Company under the U.S. portion of
the Revolving Facility and Term Facility are guaranteed by the direct parent of
the Company, PLI Holdings, and by any direct or indirect U.S subsidiaries of
the Company. The obligations of Vita Health under the Canadian portion of the
Revolving Facility and Term Facility are guaranteed by the Company, PLI
Holdings, the Company's direct or indirect U.S. subsidiaries and direct or
indirect subsidiaries of Vita Health. The Amended Credit Agreement is also
secured by substantially all the assets of the Company and any of its direct or
indirect U.S. subsidiaries, all of the stock of the Company and any such direct
or indirect U.S. subsidiaries, and 65% of the common stock of any direct
non-U.S. subsidiaries of the Company and its U.S. subsidiaries. The Canadian
portion of the Revolving Facility and Term Facility is also secured by
substantially all the assets of Vita Health, its direct and indirect Canadian
parents and any direct or indirect non-U.S. subsidiaries of the Company, and
all of the common stock of any such direct or indirect non-U.S. subsidiaries.
The Revolving Facility also allows the Company to issue up to $35,000,000 in
letters of credit in lieu of borrowing on the Revolving Facility. As of March
31, 2001, the Company had $11,425,000 of letters of credit outstanding.

Covenants and Minimum Payments

The Amended Credit Agreement imposes certain
restrictions on the Company, including restrictions on its ability to incur
additional debt, enter into sale-leaseback transactions, incur contingent
liabilities, pay dividends or make distributions, incur or grant liens, sell or
otherwise dispose of assets, make investments or capital expenditures,
repurchase or prepay the Subordinated Notes or other subordinated debt, or
engage in certain other activities. The Company must also comply with certain
financial ratios and tests. As of March 31, 2001, the Company was not in
compliance with these financial covenants and is currently in default (Note 1).

Senior Subordinated Notes

The Senior Subordinated Notes (the Subordinated Notes)
accrue interest at the rate of 9.625% per annum and are due on June 30, 2007.
Interest on the Subordinated Notes is payable semiannually on January 1 and
July 1 of each year. Pursuant to the terms of the Amended Credit Agreement and in
light of the continuing events of default under the Amended Credit Agreement,
the Senior Lenders issued a Blockage Notice on June 28, 2001 prohibiting the
Company from making any payments related to the Subordinated Notes.

Capital Lease Obligations

The capital lease obligations are payable in variable
monthly installments through December 2005, bear interest at effective rates
ranging from 4.42% to 17.19% and are secured by equipment with a net book value
of approximately $6,620,000 and $8,031,000 at March 31, 2001 and 2000,
respectively.

Industrial Development Revenue Bond Loan

In connection with the Acquisition, the Company assumed
an industrial development revenue bond loan ("IRB Loan"), with an
outstanding principal amount of $6,600,000 at March 31,2001. The interest on
the IRB Loan is variable. The rate was 4.0% as of March 31, 2001, and
fluctuates on a weekly basis. Principal is due and payable in annual
installments of $500,000, with the remaining outstanding principal amount due
and payable on May 1, 2014.

Industrial Opportunities Program Loan

During fiscal 2000, the Company entered into a loan
agreement with the Manitoba Industrial Opportunities Program to fund the
expansion and upgrading of the Company's manufacturing facility in Canada. As
of March 31, 2001, the Company received approximately $1,636,000 in advances on
the loan. Interest on the loan may be waived contingent upon the Company's
compliance with certain obligations, including meeting certain financial
ratios. Principal repayments are scheduled to be made in two equal payments of
50% of the final loan amount. The first payment is to be made on September 30,
2004 and the second on September 30, 2005.

6. Income Taxes

The Company is included in the consolidated Federal
income tax return of Leiner Group. Under a tax sharing agreement, the Federal
income tax provision is computed on a consolidated return basis and provides
that the Company, by participating in the consolidated filing, shall be liable
and make payment to Leiner Group for its proportionate share of the total tax
liability. The agreement also provides that the Company shall receive benefit
to the extent that its losses and other credits result in a reduction of the
consolidated tax liability. In the event that a combined or consolidated state,
local or foreign tax return is filed, the tax sharing arrangement for the
Federal provision shall apply in a similar manner in computing the state, local
and foreign tax liability or benefit.

Deferred income taxes are computed using the liability
method and reflect the effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Valuation allowances are established,
when necessary, to reduce deferred tax assets to estimated realizable amounts.
Because of the losses experienced in fiscal 2001, a valuation allowance of
$30,112,000 has been recorded at March 31, 2001 to offset the related net
deferred assets due to the uncertainty regarding their future realization. Any
future reductions in the valuation allowance will reduce tax expense in future
years. The provision for income taxes reflects the taxes to be paid (or refunds
to be received) for the period and the change during the period in the deferred
tax assets and liabilities.

Significant components of the Company's deferred tax
assets and liabilities are (in thousands):



March 31,2001
  2000Deferred
  tax assets:Compensation accruals
  $6,127
  $4,956Allowances for doubtful accounts and
  sales returns
  2,646
  996Inventory obsolescence reserves
  19,802
  2,276Inventory capitalization
  289
  674Restructuring reserves
  1,806
  -Other
  24
  -Total
  deferred tax assets
  30,694
  8,902Valuation
  allowance
  (30,112)
  -Net
  deferred tax assets
  582
  8,902Deferred
  tax liabilities:Fixed assets book versus tax basis
  difference
  (491)
  (1,040)Other
  (210)
  (368)Total
  deferred tax liabilities
  (701)
  (1,408)Net
  deferred tax assets (liabilities)
  $(119)
  $7,494

At March 31, 2001 and 2000, prepaid expense and other
current assets in the accompanying consolidated balance sheets include deferred
tax assets of $24,000 and $8,841,000, respectively, and other noncurrent
liabilities include deferred tax liabilities of $143,000 and $1,347,000,
respectively.

The following is a reconciliation of the statutory
Federal income tax rate to the Company's effective income tax rate:

Years Ended March
  31,2001
  2000
  1999Tax at
  U.S. statutory rates
  (35)%
  35%
  35%State income
  taxes, net of federal tax benefit
  (4)
  3
  5Goodwill
  amortization
  1
  6
  3Tax
  credits
  -
  (5)
  -Higher
  effective income taxes of other countries
  -
  -
  1Valuation
  reserve
  37
  -
  -Income tax rate
  (1)%
  39%
  44%

United States and foreign income (loss) before taxes is
as follows (in thousands):

Years Ended March
  31,2001
  2000
  1999U.S
  $(120,248)
  $5,883
  $16,133Foreign
  (141)
  2,087
  2,208$(120,389)
  $7,970
  $18,341

Significant components of the provision for income taxes
are (in thousands):



Years Ended March
  31,2001
  2000
  1999Current:Federal
  $(8,479)
  $   3,448
  $5,641State
  (495)
  648
  1,306Foreign
  (126)
  640
  964Total current
  (9,100)
  4,736
  7,911Deferred:Federal
  6,382
  (1,402)
  147State
  1,245
  (321)
  3Foreign
  (14)
  85
  (27)Total deferred
  7,613
  (1,638)
  123Total provision for income taxes
  $(1,487)
  $   3,098
  $8,034

7. Employee Benefits

Stock
Option Plan

Leiner Group's Stock Option Plan, as amended in 1997,
provided for the issuance of nonqualified stock options to certain key
employees and directors to purchase up to 127,222 shares of Leiner Group's
common stock. Options granted are at exercise prices as determined by Leiner
Group's Board of Directors, but not less than $100 per share.During
fiscal year 2001, Leiner Groups Board of Directors provided for the issuance
of an additional 125,000 nonqualified stock options under this Stock Option
Plan. The additional shares are to be made available for grant over a three
year period, with 45,000 available in fiscal year 2001 and 40,000 available in
each of the fiscal years ending March 31, 2002 and 2003, respectively. Options generally vest on a pro rata basis at a
rate of 25% per year, with 25% immediate vesting on the date of grant, and
expire no later than ten years from the date of grant.

Pro forma information regarding net income (loss) is
required by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, which also requires that the
information be determined as if Leiner Group accounted for its employee stock
options granted subsequent to March 31, 1995 under the fair value method. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option–pricing model. The Black-Scholes model was developed
for use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected
stock price volatility. Leiner Group's employee stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair
value estimate, therefore, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

In calculating pro forma information regarding net
income (loss), the fair value of the stock options granted during the years
presented was determined using the Black-Scholes option pricing model and the
following weighted average assumptions:



2001
  2000
  1999Risk free
  interest rate
  6.5%
  N/A
  6.0%Expected
  option life
  7.0
  N/A
  8.4Volatilty
  0.0
  N/A
  0.0Dividend
  yield
  0.0
  N/A
  0.0

The pro forma net income (loss) for the years ended
March 31, 2001, 2000 and 1999 were $(119,750,000), $4,024,000 and $9,459,000,
respectively.

Activity under the Stock Option Plan for the years ended
March 31, 2001, 2000 and 1999 is set forth below:

Options
  OutstandingShares
  Available
  for Grant
  Number
  of Shares
  Price
  per Share
  Weighted
  Average
  Exercise PriceBalance at
  March 31, 1998
  11,704
  110,518
  $100
  $100Common
  shares reserved for issuance
  5,000
  -
  -
  -Options
  granted
  (14,066)
  14,066
  140
  140Options
  canceled
  1,103
  (1,103)
  100-140
  108Balance at
  March 31, 1999
  3,741
  123,481
  100-140
  104Options
  canceled
  3,414
  (3,414)
  100-140
  101Balance at
  March 31, 2000
  7,155
  120,067
  100-140
  105Common
  shares reserved for issuance
  125,000
  -
  -
  -Options
  granted
  (54,778)
  54,778
  140-180
  173Options
  canceled
  2,875
  (2,875)
  100-180
  127Balance at
  March 31, 2001
  80,252
  171,970
  100-140
  127

Options exercisable at March 31, 2001, 2000 and 1999
were 130,312, 90,502 and 58,352, respectively. The weighted-average fair value
of options granted during the years ended March 31, 2001 and 1999 were $0 and
$74, respectively. The weighted average remaining contractual life was 7.0
years as of March 31, 2001.



Contributory
Retirement Plans

The Company has contributory retirement plans that cover
substantially all of the Company's employees who meet minimum service
requirements. The Company's contributions to the plans are discretionary and
are determined and funded annually by Leiner Group's Board of Directors. The
Company recorded contributions totaling $2,353,000, $2,186,000 and $1,541,000
for the plan years ended March 31, 2001, 2000 and 1999, respectively.

8. Related Party Transactions

Upon consummation of a
recapitalization in June 1997, Leiner Group and the Company entered into a
consulting agreement with North Castle Partners, L.L.C. (the
"Sponsor"), an affiliate of North Castle, to provide the Company with
certain business, financial and managerial advisory services. Mr. Baird acts as
the managing member of the Sponsor through Baird Investment Group, L.L.C.
("Baird Investment"). In exchange for such services, Leiner Group and
the Company have agreed to pay the Sponsor an annual fee of $1,500,000, payable
semi-annually in advance, plus the Sponsor's reasonable out-of-pocket expenses.
This fee may be reduced upon completion of an initial public offering of Leiner
Group's shares. The agreement terminates on June 30, 2007, or earlier upon the
occurrence of certain specified events. During each of the three years ended
March 31, 2001, 2000 and 1999, management fees and expenses recorded were
$1,535,000, $1,500,000, and $1,735,000, respectively, and are included in other
charges in the accompanying consolidated statement of operations. The Amended
Waiver required that the fee and additional expense reimbursement paid to North
Castle and/or its Affiliates pursuant to the terms of the Management Services
Agreement on January 2, 2001 in the amount of $785,000 be returned to the
Company and that an amount equal to $785,000 be paid to the lenders as a
prepayment of the Revolving Loan. Additionally, further payments of the
management fee are not allowed during the waiver period.

During fiscal 2000, the Company received a capital
contribution of approximately $20,000,000 from Leiner Group, through its direct
parent, PLI Holdings Inc., in connection with the Acquisition (Note 4).

9. Commitments

The Company leases certain real estate for its
manufacturing facilities, warehouses, corporate and sales offices, as well as
certain equipment under operating leases (noncancelable) that expire at various
dates through June 2013 and contain renewal options. Total rents charged
to operations were $15,478,000, $12,915,000 and $9,212,000 for the years ended
March 31, 2001, 2000 and 1999, respectively.

Minimum future obligations on noncancelable operating
leases in effect at March 31, 2001 are (in thousands):



Fiscal year2002
  $14,3122003
  12,7672004
  11,1662005
  7,9302006
  6,103Thereafter
  20,290Total
  minimum lease payments
  $72,568

10. Contingencies

On September 27, 1999, the Company
filed a civil antitrust lawsuit (the "Antitrust Lawsuit") against certain
of its raw material suppliers and other alleged co-conspirators. The complaint
alleges that the defendants conspired to fix vitamin prices and allocate
vitamin production volume and vitamin customers in the United States. The
complaint seeks unspecified damages and injunctive relief. After the lawsuit
was filed, it was consolidated, for pre-trial purposes, with other similar
cases. Based on the pretrial schedule set forth by the court, the case will not
be ready for trial until approximately April 2002. At the present time,
management cannot predict the outcome of this lawsuit, nor the estimated
damages and potential recovery, if any (Note 1.)

Duringfiscal
2001 and 2000, the Company entered into settlement agreements with several of
its suppliers named in the Antitrust Lawsuit (the Settlement Agreements).
Pursuant to the terms of the Settlement Agreements, the Company agreed to
release all claims it may have against these suppliers based on the Companys
purchases of various vitamins from the suppliers and to opt out of any
settlements in connection with the Antitrust Lawsuit insofar as it pertains to
these suppliers. In exchange for the Companys release and agreement to opt out
of the settlement in connection with the Antitrust Lawsuit, the Company has
been awarded settlements in the aggregate amount of approximately $24,298,000
and $2,420,000 in the years ended March 31, 2001 and 2000, respectively, which
were offset by legal, consulting fees and other costs of approximately
$4,300,000 and $200,000, respectively. Net proceeds were recorded in other
operating (income) charges in the accompanying consolidated statement of
operations.

The Company is subject to other legal proceedings and
claims that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.

11. Concentration of Credit Risk and Significant Customers,
Suppliers and Products

Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of trade
receivables. The Company sells its products to a geographically diverse
customer base in the drug store, supermarket and discount chain industries. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for potential losses. For the years ended March 31, 2001, 2000 and
1999, two customers represented approximately 34% and 12%, 31% and 9%, and 30%
and 11%, respectively, of net sales. The Company's top ten customers in the
aggregate accounted for approximately 72%, 68% and 70% of the Company's net
sales for fiscal 2001, 2000 and 1999, respectively. For the years ended March
31, 2001, 2000, and 1999, two suppliers provided approximately 20%, 23% and
25%, respectively, of raw materials purchased. No other supplier accounted for
more than 10% of the Company's purchases. Sales of vitamins C and E, in the
aggregate, accounted for approximately 22%, 31% and 31% of the Company's sales
in fiscal 2001, 2000 and 1999, respectively. If one or more of the Company's
major customers substantially reduced their volume of purchases from the
Company, or if sales of vitamin C or E were substantially reduced, the
Company's results of operations could be materially adversely affected.

12.
Business Segment Information

The Company operates in two reportable segments. One
consists of the Company's U.S. Operations ("Leiner U.S.") and the
other is the Company's Canadian operations ("Vita Health"). The
Company's operating segments manufacture a range of vitamins, minerals and
nutritional supplements and distribute their products primarily through
mass-market retailers. The accounting policies between the reportable segments
are the same as those described in the summary of significant accounting
policies. The Company evaluates segment performance based on operating profit,
before the effect of non-recurring charges and gains, and intersegment profit.

Selected financial information for the Company's
reportable segments for the years ended March 31, 2001, 2000 and 1999 is as
follows (in thousands):



Leiner
  U.S.
  Vita
  Health
  Intersegment
  Eliminations (1)
  Consolidated
  TotalsYear ended March 31, 2001:Net sales
  $540,470
  $77,902
  $(6,238)
  $612,134Depreciation
  and amortization
  28,855
  3,533
  -
  32,388Segment
  operating income (loss)
  (86,096)
  2,217
  150
  (83,729)Interest
  expense, net
  33,412
  2,535
  -
  35,947Income tax
  benefit
  (1,347)
  (140)
  -
  (1,487)Segment
  assets
  345,208
  61,166
  99
  406,473Additions
  to property, plant and equipment, net
  7,728
  355
  -
  8,083Year ended March 31, 2000 (2):Net sales
  $606,721
  $57,372
  $(1,834)
  $662,259Depreciation
  and amortization
  20,081
  1,479
  -
  21,560Segment
  operating income
  35,390
  3,845
  13
  39,248Interest
  expense, net
  29,299
  1,824
  -
  31,123Income tax
  expense
  2,373
  725
  -
  3,098Segment
  assets
  448,187
  61,284
  (11)
  509,460Additions
  to property, plant and equipment, net
  12,120
  3,509
  -
  15,629Year ended March 31, 1999:Net sales
  $590,345
  $39,160
  $(2,589)
  $626,916Depreciation
  and amortization
  15,387
  790
  -
  16,177Segment
  operating income
  43,558
  3,528
  (13)
  47,073Interest
  expense, net
  27,344
  1,388
  -
  28,732Income tax
  expense
  7,098
  936
  -
  8,034Segment
  assets
  397,948
  28,808
  (1,218)
  425,538Additions
  to property, plant and equipment, net
  16,118
  1,373
  -
  17,491

___________(1)
  Intersegment
  eliminations relate to the intersegment sales and profit.(2)
  Leiner U.S. and Vita
  Health include the activity of Granutec and Stanley, respectively, from
  December 17, 1999 to March 31, 2000.13.        Composition of Certain Balance Sheet
Items



March 31,2001
  2000(in thousands)Inventories:Raw materials, bulk vitamins and
  packaging materials
  
  $    43,517
  $     55,819Work-in-process
  
  47,596
  48,604Finished products
  
  21,896
  71,106$ 
  113,009
  $   175,529Depreciable LivesProperty,
  plant and equipment:
  (years)Land
  
  $         759
  $          786Buildings and improvements
  31 - 40
  11,256
  12,538Leasehold improvements
  7 - 40
  28,079
  26,701Machinery and equipment
  3 - 20
  99,204
  99,376Furniture and fixtures
  3 - 10
  4,043
  5,686143,341
  145,087Less accumulated depreciation and
  amortization
  
  (69,038)
  (57,994)$    74,303
  $     87,093Depreciable LivesGoodwill
  and other intangibles:
  (years)Goodwill
  15-40
  $    82,319
  $     79,630Other intangibles:Assembled workforce
  3
  3,127
  4,023Accelerated drug applications
  3
  3,800
  3,800Customer Lists
  5
  1,681
  1,706Other
  3-15
  651
  92291,578
  90,081Less accumulated amortization
  
  (18,572)
  (13,337)$    73,006
  $     76,744

14.
Supplementary Cash Flow Information



Years Ended March
  31,2001
  2000
  1999(in thousands)Cash paid
  during the year for:Interest
  $33,837
  $29,220
  $27,188Income taxes, net of refunds received
  4,197
  3,843
  6,845SCHEDULE II

LEINER HEALTH PRODUCTS INC.
 VALUATION AND QUALIFYING ACCOUNTS(in thousands)



Beginning
  of
  Period
  Charged to Costs
  and Expenses
  Deductions
  Balance at
  End of PeriodYear ended
  March 31, 1999:Accounts Receivable Allowances
  $4,713
  $10,022
  $10,013
  $4,722Year ended
  March 31, 2000:Accounts Receivable Allowances
  4,722
  8,788
  8,944
  4,566Year ended
  March 31, 2001:Accounts Receivable Allowances
  4,566
  9,919
  6,874
  7,611