<PAGE>

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

--------------------------------------------------------------------------------
                                   FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

                                      OR

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

                         COMMISSION FILE NUMBER 1-9601

--------------------------------------------------------------------------------

                          K-V PHARMACEUTICAL COMPANY
            (Exact name of registrant as specified in its charter)

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

               2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
         (Address of principal executive offices, including ZIP code)

      Registrant's telephone number, including area code: (314) 645-6600

--------------------------------------------------------------------------------

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company
(see the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act).

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

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

As of August 4, 2008, the registrant had outstanding 37,783,875 and
12,163,482 shares of Class A and Class B Common Stock, respectively, exclusive
of treasury shares.

                                      1

<PAGE>
<PAGE>

PART I. - FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

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

<CAPTION>
                                                                    THREE MONTHS ENDED JUNE 30,
                                                                    ---------------------------
                                                                       2008              2007
                                                                    ---------         ---------

<C>                                                                 <C>               <C>
Net revenues........................................................$ 148,851         $ 114,358
Cost of sales.......................................................   45,203            39,570
                                                                    ---------         ---------
Gross profit........................................................  103,648            74,788
                                                                    ---------         ---------
Operating expenses:
    Research and development........................................   13,968             9,796
    Purchased in-process research and
        development.................................................    2,000            10,000
    Selling and administrative......................................   63,756            45,175
    Amortization of intangibles.....................................    3,401             1,185
                                                                    ---------         ---------
Total operating expenses............................................   83,125            66,156
                                                                    ---------         ---------

Operating income....................................................   20,523             8,632
                                                                    ---------         ---------

Other expense (income):
    Interest expense................................................    2,481             2,130
    Interest and other income.......................................   (1,713)           (3,415)
                                                                    ---------         ---------
Total other expense (income), net...................................      768            (1,285)
                                                                    ---------         ---------
Income before income taxes..........................................   19,755             9,917
Provision for income taxes..........................................    7,220             3,717
                                                                    ---------         ---------
Net income..........................................................$  12,535         $   6,200
                                                                    =========         =========

Earnings per share:
       Basic - Class A common.......................................$    0.26         $    0.13
       Basic - Class B common.......................................     0.22              0.11
       Diluted - Class A common.....................................     0.23              0.12
       Diluted - Class B common.....................................     0.20              0.10

Shares used in per share calculation:
       Basic - Class A common.......................................   37,428            37,007
       Basic - Class B common.......................................   12,081            12,280
       Diluted - Class A common.....................................   59,082            59,092
       Diluted - Class B common.....................................   12,147            12,362
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      2

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                       JUNE 30,        MARCH 31,
                                                                                         2008           2008(1)
                                                                                         ----           ----
                                                                                     (unaudited)

                                            ASSETS
                                            ------
<C>                                                                                  <C>             <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................$    94,173     $    86,345
Marketable securities................................................................     40,904          40,548
Receivables, less allowance for doubtful accounts of $867 and $867
   at June 30, 2008 and March 31, 2008, respectively.................................    112,814         107,070
Inventories, net.....................................................................     97,975          94,980
Prepaid and other assets.............................................................      8,360           7,792
Income taxes receivable..............................................................      8,793           9,872
Deferred tax asset...................................................................     20,935          22,812
                                                                                     -----------     -----------
   Total current assets..............................................................    383,954         369,419
Property and equipment, less accumulated depreciation of $78,733 and $74,015
    at June 30, 2008 and March 31, 2008, respectively................................    193,649         196,200
Investment securities................................................................     79,890          81,516
Intangible assets and goodwill, net..................................................    195,818         198,784
Other assets.........................................................................     19,960          23,108
                                                                                     -----------     -----------
TOTAL ASSETS.........................................................................$   873,271     $   869,027
                                                                                     ===========     ===========

                                         LIABILITIES
                                         -----------
CURRENT LIABILITIES:
Accounts payable.....................................................................$    25,813     $    32,119
Accrued liabilities..................................................................     43,657          46,516
Current maturities of long-term debt.................................................      2,051         202,020
                                                                                     -----------     -----------
   Total current liabilities.........................................................     71,521         280,655
Long-term debt.......................................................................    266,912          67,432
Other long-term liabilities..........................................................     28,950          22,359
Deferred tax liability...............................................................     40,765          39,299
                                                                                     -----------     -----------
TOTAL LIABILITIES....................................................................    408,148         409,745
                                                                                     -----------     -----------

COMMITMENTS AND CONTINGENCIES:
                                     SHAREHOLDERS' EQUITY
                                     --------------------
7% cumulative convertible Preferred Stock, $.01 par value; $25.00 stated and
   liquidation value; 840,000 shares authorized; issued and outstanding --
   40,000 shares at both June 30, 2008 and March 31, 2008
   (convertible into Class A shares on a 8.4375-to-one basis)...................              --              --
Class A and Class B Common Stock, $.01 par value; 150,000,000 and
   75,000,000 shares authorized, respectively;
     Class A - issued 40,808,716 and 40,764,603 at June 30, 2008
       and March 31, 2008, respectively..............................................        408             407
     Class B - issued 12,188,859 and 12,170,172 at June 30, 2008 and March 31,
       2008, respectively (convertible into Class A shares on a one-for-one basis)...        122             122
Additional paid-in capital...........................................................    160,966         158,742
Retained earnings....................................................................    362,407         357,714
Accumulated other comprehensive loss.................................................     (2,532)         (1,543)
Less: Treasury stock, 3,293,001 shares of Class A and 92,902 shares of Class B
   Common Stock at June 30, 2008, respectively, and 3,289,324 shares of Class A and
   92,902 shares of Class B Common Stock at March 31, 2008, respectively, at cost....    (56,248)        (56,160)
                                                                                     -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................    465,123         459,282
                                                                                     -----------     -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................$   873,271     $   869,027
                                                                                     ===========     ===========
<FN>
(1) Derived from audited financial statements.
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      3

<PAGE>
<PAGE>

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

<CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                    JUNE 30,
                                                                         ----------------------------
                                                                             2008             2007
                                                                         -----------      -----------

<C>                                                                      <C>              <C>
OPERATING ACTIVITIES:
Net income.............................................................   $   12,535      $     6,200
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Acquired in-process research and development........................        2,000           10,000
   Depreciation and amortization.......................................        8,363            5,854
   Deferred income tax provision.......................................        3,980              845
   Deferred compensation...............................................          584              558
   Stock-based compensation............................................        1,449            1,647
   Excess tax benefits associated with stock options...................         (181)            (106)
Changes in operating assets and liabilities:
   Receivables, net....................................................       (5,744)           7,612
   Inventories, net....................................................       (2,995)          (7,008)
   Income taxes........................................................        1,989           (6,023)
   Accounts payable and accrued liabilities............................       (5,695)          (5,717)
   Other assets and liabilities, net...................................         (635)          (1,003)
                                                                          ----------      -----------
Net cash provided by operating activities..............................       15,650           12,859
                                                                          ----------      -----------

INVESTING ACTIVITIES:
   Purchase of property and equipment, net.............................       (5,343)          (2,106)
   Purchase of marketable securities...................................         (356)          (3,513)
   Sale of marketable securities.......................................           --            1,125
   Product acquisition.................................................       (2,000)         (10,000)
                                                                          ----------      -----------
Net cash used in investing activities..................................       (7,699)         (14,494)
                                                                          ----------      -----------

FINANCING ACTIVITIES:
   Principal payments on long-term debt................................         (489)            (460)
   Dividends paid on preferred stock...................................          (18)             (18)
   Purchase of common stock for treasury...............................          (88)             (85)
   Excess tax benefits associated with stock options...................          181              106
   Cash deposits received for stock options............................          291              274
                                                                          ----------      -----------
Net cash used in financing activities..................................         (123)            (183)
                                                                          ----------      -----------
Increase (decrease) in cash and cash equivalents.......................        7,828           (1,818)
Cash and cash equivalents:
   Beginning of year...................................................       86,345           82,574
                                                                          ----------      -----------
   End of period.......................................................   $   94,173      $    80,756
                                                                          ==========      ===========

SUPPLEMENTAL INFORMATION:
   Interest paid.......................................................   $    3,876      $     3,122
   Income taxes paid...................................................        1,250            8,789
   Stock options exercised (at expiration of two-year
      forfeiture period)...............................................          594              249
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      4

<PAGE>
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                 (Amounts in thousands, except per share data)

1.   BASIS OF PRESENTATION

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

The Company was notified during the week of August 4, 2008, that the Audit
Committee of its Board of Directors has recently commenced an independent
inquiry into allegations made by sources not identified to management
regarding alleged misconduct by management of the Company. Since 1995, the
Company has had in place a Standard of Business Ethics Policy. As part of this
policy, an employee is allowed to report, independent of management and for
any reason, any action the employee suspects to be contrary to this code of
ethics. Management has not been advised as to the specifics of the allegations
and is not in a position to make an informed determination as to whether the
allegations have any merit. Management is not aware of and does not believe
that there has been any misconduct that would have a material impact on the
Company's financial results. Management is cooperating fully with the Audit
Committee inquiry. As a result of the inquiry, the Company's independent
registered public accounting firm, KPMG LLP ("KPMG"), has advised the Company
that they will be unable to complete their SAS 100 review of the accompanying
unaudited consolidated financial statements prior to reviewing the results of
the completed Audit Committee inquiry. Accordingly, the accompanying unaudited
consolidated financial statements have not been reviewed by KPMG, as required
by Rule 10-01(d) of Regulation S-X. The Company will have the unaudited
consolidated financial statements reviewed immediately after completion of the
Audit Committee's inquiry. If the review results in any material change to the
unaudited consolidated financial statements, the Company will file an
amendment to this report reflecting such change.

The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with U.S. Generally Accepted Accounting
Principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations and cash flows for the three-month period ended June 30, 2008 are
not necessarily indicative of the results of operations and cash flows that
may be expected for the fiscal year ending March 31, 2009. The interim
consolidated financial statements and accompanying notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2008. The balance sheet information as of March 31, 2008 has been
derived from the Company's audited Consolidated Balance Sheet as of that date.

2.  RECENTLY ISSUED ACCOUNTING STANDARDS

Effective April 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), for all financial assets and liabilities and any
other assets and liabilities that are recognized or disclosed at fair value on
a recurring basis. This pronouncement clarifies the principle that fair value
should be based on the assumptions that market participants would use when
pricing an asset or liability, provides a framework for measuring fair value
under GAAP and expands disclosure requirements about fair value measurements.
Although the Company's adoption of SFAS No. 157 did not have a material effect
on the Company's financial condition, results of operations or cash flows,
additional disclosures were required (see Note 8).

In February 2008, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157"
("FSP 157-2"), which defers the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least
an annual basis, to fiscal years beginning after November 15, 2008. The
Company has adopted the deferral of SFAS 157 with respect to the items listed
in FSP 157-2. The Company does not expect that the remaining provisions of
this statement will have a material effect on its financial statements.

Effective April 1, 2008, the Company adopted SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities". This standard allows
an entity the irrevocable option to measure many financial instruments and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis (the fair value option), with changes in fair
value reported in earnings. The Company did not elect fair value as an
alternative, as provided under SFAS 159, for any of its financial instruments
or any other assets and liabilities that are not currently recorded at fair
value. Therefore, short-term and long-term debt obligations and trade accounts
receivable and payable are still reported at their carrying values.

                                      5

<PAGE>
<PAGE>

In March 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force ("EITF") in Issue No. 06-10, "Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements" ("Issue 06-10"). Issue 06-10
requires companies with collateral assignment split-dollar life insurance
arrangements that provide a benefit to an employee that extends to
postretirement periods to recognize a liability for future benefits based on
the substantive agreement with the employee. The provisions of Issue 06-10
also require an employer to recognize and measure the asset in a collateral
assignment split-dollar life insurance arrangement based on the nature and
substance of the arrangement. The Company adopted the provisions of Issue
06-10 effective April 1, 2008. As a result of the adoption, the Company
recognized a liability of $5,340 which represented the present value of the
future premium payments to be made under the existing policies. The Company
also recognized a decrease in the related asset of $2,484 based on the nature
and substance of the arrangements. In accordance with the transition
provisions of EITF No. 06-10, a direct decrease of $7,824 was recorded to
retained earnings,effective April 1, 2008.

In June 2007, the FASB ratified the consensus reached by the EITF on Issue No.
07-3, "Accounting for Advance Payments for Goods or Services Received for Use
in Future Research and Development Activities" ("Issue 07-3"), which is
effective for fiscal years beginning after December 15, 2007 and is applied
prospectively for new contracts entered into on or after the effective date.
Issue 07-3 addresses nonrefundable advance payments for goods or services for
use in future research and development activities. Issue 07-3 will require
that these payments that will be used or rendered for future research and
development activities be deferred and capitalized and recognized as an
expense as the related goods are delivered or the related services are
performed. If an entity does not expect the goods to be delivered or the
services to be rendered, the capitalized advance payments should be expensed.
The Company's adoption of Issue 07-3 at the beginning of fiscal 2009 did not
have a material effect on its financial condition, results of operations or
cash flows.

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

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

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements" ("SFAS 160") an amendment of ARB No. 51,
which will affect only those entities that have an outstanding non-controlling
interest in one or more subsidiaries or that deconsolidate a subsidiary by
requiring all entities to report non-

                                      6

<PAGE>
<PAGE>

controlling (minority) interests in subsidiaries in the same way as equity in
the consolidated financial statements. In addition, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an
entity and non-controlling interests by requiring they be treated as equity
transactions. SFAS 160 is effective for fiscal years beginning after December
15, 2008. The Company plans to adopt SFAS 160 at the beginning of fiscal 2010
and is evaluating the impact of SFAS 160 on its financial condition and
results of operations.

In May 2008, the FASB issued FASB Staff Position ("FSP") No. APB 14-a,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement.") Under the new rules for
convertible debt instruments that may be settled entirely or partially in cash
upon conversion, an entity should separately account for the liability and
equity components of the instrument in a manner that reflects the issuer's
economic interest cost. The effect of the proposed new rules is that the
equity component would be included in the paid-in-capital section of
shareholders' equity on an entity's consolidated balance sheet and the value
of the equity component would be treated as original issue discount for
purposes of accounting for the debt component of convertible debt. The FSP
will be effective for fiscal years beginning after December 15, 2008, and for
interim periods within those fiscal years, with retrospective application
required. Early adoption is not permitted. The Company is currently evaluating
the proposed new rules and the impact on its financial condition and results
of operations.

3.  ACQUISITIONS

In January 2008, the Company entered into a definitive asset purchase
agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to acquire
the U.S. and worldwide rights to Gestiva(TM) (17-alpha hydroxyprogesterone
caproate). The New Drug Application ("NDA") for Gestiva(TM) is currently
before the U.S. Food and Drug Administration ("FDA"), pending approval for use
in the prevention of preterm birth in certain categories of pregnant women.
The proposed indication is for women with a history of at least one
spontaneous preterm delivery (i.e., less than 37 weeks), who are pregnant with
a single fetus. Under the terms of the asset purchase agreement, the Company
agreed to pay $82,000 for Gestiva(TM). In accordance with the agreement, the
Company made a $7,500 cash payment in January 2008 at closing and a $2,000
cash payment in May 2008 upon achievement of a milestone. Since the product
had not yet obtained FDA approval when these payments were made, the Company
recorded in-process research and development charges of $7,500 and 2,000
during the three months ended March 31, 2008 and June 30, 2008, respectively.
The remaining purchase price of $72,500 is payable upon FDA approval of a
Gestiva(TM) NDA, transfer of all rights in the NDA to the Company and receipt
by the Company of defined launch quantities of finished Gestiva(TM) suitable
for commercial sale.

In May 2007, the Company acquired the U.S. marketing rights to Evamist(TM), a
new estrogen replacement therapy product delivered with a patented
metered-dose transdermal spray system, from VIVUS, Inc. Under terms of the
asset purchase agreement, the Company paid $10,000 in cash at closing and
agreed to make an additional cash payment of $141,500 upon final approval of
the product by the FDA. The agreement also provides for two future
payments upon achievement of certain net sales milestones. If Evamist(TM)
achieves $100,000 of net sales in a fiscal year, a one-time payment of $10,000
will be made, and if net sales levels reach $200,000 in a fiscal year, a
one-time payment of up to $20,000 will be made. Because the product had not
obtained FDA approval when the initial payment was made at closing, the
Company recorded $10,000 of in-process research and development expense during
the three months ended June 30, 2007. In July 2007, FDA approval for
Evamist(TM) was received and a payment of $141,500 was made to VIVUS, Inc. The
final purchase price allocation completed during the quarter ended June 30,
2008, resulted in estimated identifiable intangible assets of $44,078 for
product rights; $12,774 for trademark rights; $82,542 for rights under a
sublicense agreement; and, $2,106 for a covenant not to compete. Upon FDA
approval in July 2007, the Company began amortizing the product rights,
trademark rights and rights under the sublicense agreement over 15 years and
the covenant not to compete over nine years.

                                      7

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<PAGE>

4.   EARNINGS PER SHARE

The Company has two classes of common stock: Class A Common Stock and Class B
Common Stock that is convertible into Class A Common Stock. With respect to
dividend rights, holders of Class A Common Stock are entitled to receive cash
dividends per share equal to 120% of the dividends per share paid on the Class
B Common Stock. For purposes of calculating basic earnings per share,
undistributed earnings are allocated to each class of common stock based on
the contractual participation rights of each class of security.

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

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period except that it does not include
unvested common shares subject to repurchase. Diluted earnings per share is
computed using the weighted average number of common shares and, if dilutive,
potential common shares outstanding during the period. Potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options, unvested common shares subject to repurchase, convertible preferred
stock and convertible notes. The dilutive effects of outstanding stock options
and unvested common shares subject to repurchase are reflected in diluted
earnings per share by application of the treasury stock method. Convertible
preferred stock and convertible notes are reflected on an if-converted basis.
The computation of diluted earnings per share for Class A Common Stock assumes
the conversion of the Class B Common Stock, while the diluted earnings per
share for Class B Common Stock does not assume the conversion of those shares.

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

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED JUNE 30,
                                                        --------------------------------------
                                                               2008                2007
                                                        ------------------  ------------------
                                                        CLASS A   CLASS B   CLASS A   CLASS B
                                                        --------  --------  --------  --------

<C>                                                     <C>       <C>       <C>      <C>
Basic earnings per share:
    Numerator - allocation of undistributed earnings    $  9,864  $  2,653  $  4,843  $  1,339
                                                        ========  ========  ========  ========
    Denominator:
      Weighted average shares outstanding                 37,760    12,165    37,445    12,379
      Less - weighted average unvested
        common shares subject to repurchase                 (332)      (84)     (438)      (99)
                                                        --------  --------  --------  --------
      Number of shares used in per
        share computations                                37,428    12,081    37,007    12,280
                                                        ========  ========  ========  ========

Basic earnings per share                                $   0.26  $   0.22  $   0.13  $   0.11
                                                        ========  ========  ========  ========
</TABLE>

                                      8

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED JUNE 30,
                                                        --------------------------------------
                                                               2008                2007
                                                        ------------------  ------------------
                                                        CLASS A   CLASS B   CLASS A   CLASS B
                                                        --------  --------  --------  --------
<C>                                                     <C>       <C>       <C>       <C>
Diluted earnings per share:
    Numerator:
      Allocation of undistributed earnings
        for basic computation                           $  9,864  $  2,653  $  4,843  $  1,339
      Reallocation of undistributed earnings as a
        result of conversion of Class B to
        Class A shares                                     2,653         -     1,339         -
      Reallocation of undistributed earnings to
        Class B shares                                         -      (252)        -       (45)
      Add - preferred stock dividends                         18         -        18         -
      Add - interest expense on convertible notes          1,000         -       963         -
                                                        --------  --------  --------  --------
      Allocation of undistributed earnings
        for diluted computation                         $ 13,535  $  2,401  $  7,163  $  1,294
                                                        ========  ========  ========  ========

Diluted earnings per share:
    Denominator:
      Number of shares used in basic computation          37,428    12,081    37,007    12,280
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares           12,081         -    12,280         -
        Employee stock options                               543        66       775        82
        Convertible preferred stock                          338         -       338         -
        Convertible notes                                  8,692         -     8,692         -
                                                        --------  --------  --------  --------
      Number of shares used in per share
        computations                                      59,082    12,147    59,092    12,362
                                                        ========  ========  ========  ========

Diluted earnings per share (1)                          $   0.23  $   0.20  $   0.12  $   0.10
                                                        ========  ========  ========  ========

<FN>
----------------------
(1)      Excluded from the computation of diluted earnings per share were
         outstanding stock options whose exercise prices were greater than the
         average market price of the common shares for the period reported.
         For the three months ended June 30, 2008 and 2007, excluded from the
         computation were options to purchase 1,815 and 52 shares of Class A
         and Class B Common Stock, respectively.
</TABLE>

5.   STOCK-BASED COMPENSATION

On August 30, 2002, the Company's shareholders approved KV's 2001 Incentive
Stock Option Plan (the "2001 Plan"), which allows for the issuance of up to
4,500 shares of common stock. Under the Company's stock option plan, options
to acquire shares of common stock have been made available for grant to all
employees. Each option granted has an exercise price of not less than 100% of
the market value of the common stock on the date of grant. The contractual
life of each option is generally ten years and the options generally vest at
the rate of 10% per year from the date of grant.

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

                                      9

<PAGE>
<PAGE>

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

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

When an employee exercises stock options, the exercise proceeds received by
the Company are recorded as a deposit and classified as a current liability
for the two-year forfeiture period. The shares issuable upon exercise of these
options are accounted for as issued when the two-year forfeiture period
lapses. Until the two-year forfeiture requirement is met, the underlying
shares are not considered outstanding and are not included in calculating
basic earnings per share.

The Company recognized stock-based compensation of $1,449 and $1,647,
respectively, and related tax benefits of $311 and $484, respectively, for the
three months ended June 30, 2008 and 2007. There was no stock-based employee
compensation cost capitalized at June 30, 2008 and March 31, 2008. Cash
received from stock option deposits was $291 and $274 for the three months
ended June 30, 2008 and 2007, respectively. The actual tax benefit realized
from tax deductions associated with stock option exercises (at expiration of
the two-year forfeiture period) was $211 and $123 for the three months ended
June 30, 2008 and 2007, respectively.


The following weighted average assumptions were used for stock options granted
during the three months ended June 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                    JUNE 30,
                                                            -----------------------
                                                               2008          2007
                                                               ----          ----

<C>                                                         <C>           <C>
Dividend yield...........................................        None          None
Expected volatility......................................         39%           43%
Risk-free interest rate..................................       3.80%         4.93%
Expected term ...........................................   9.0 years     9.0 years
Weighted average fair value per share
  at grant date..........................................   $   10.39     $   15.39
</TABLE>

                                      10

<PAGE>
<PAGE>

A summary of the changes in the Company's stock option plans during the three
months ended June 30, 2008 is presented below:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                                  WEIGHTED         AVERAGE
                                                                  AVERAGE         REMAINING        AGGREGATE
                                                                  EXERCISE       CONTRACTUAL       INTRINSIC
                                                  SHARES           PRICE            TERM             VALUE
                                                  ------           -----            ----             -----

<C>                                            <C>               <C>                <C>           <C>
Balance, March 31, 2008....................          3,933       $    18.84
Options granted............................            148            19.42
Options exercised..........................            (74)            7.66                       $      862
Options canceled...........................           (184)           23.02
                                               -----------
Balance, June 30, 2008.....................          3,823            18.88          5.9          $   12,495
                                               ===========

Expected to vest at
     June 30, 2008.........................          2,951       $    18.88          5.9          $    9,646

Options exercisable at June 30, 2008
   (excluding shares in the two-year
    forfeiture period).....................          1,303       $    16.66          4.7          $    5,737
</TABLE>


As of June 30, 2008, the Company had $41,675 of total unrecognized
compensation expense, related to stock option grants, which will be recognized
over the remaining weighted average period of 4.9 years.


6.   REVENUE RECOGNITION

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

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

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

Accruals for sales provisions are presented in the Consolidated Financial
Statements as reductions to net revenues and accounts receivable. Sales
provisions totaled $80,284 and $40,919 for the three months ended June 30,
2008 and 2007, respectively. The reserve balances related to the sales
provisions totaled $47,207 and $46,646 at June 30, 2008 and March 31, 2008,
respectively, and are deducted from "Receivables, less allowance for doubtful
accounts" in the accompanying Consolidated Balance Sheets.

                                      11

<PAGE>
<PAGE>

7.   INVESTMENT SECURITIES

The carrying amount of available-for-sale investment securities and their
approximate fair values at June 30, 2008 and March 31, 2008 were as follows.

<TABLE>
<CAPTION>
                                                                        JUNE 30, 2008
                                                    -----------------------------------------------------
                                                                     GROSS         GROSS
                                                                  UNREALIZED    UNREALIZED        FAIR
                                                       COST          GAINS        LOSSES          VALUE
                                                       ----          -----        ------          -----

<C>                                                 <C>           <C>           <C>            <C>
         Short-term marketable securities.....      $   40,894    $       10    $        -     $   40,904
         Non-current auction rate
           securities.........................          83,900             -        (4,010)        79,890
                                                    ----------    ----------    -----------    ----------
              Total...........................      $  124,794    $       10    $   (4,010)    $  120,794
                                                    ==========    ==========    ==========     ==========


<CAPTION>
                                                                        MARCH 31, 2008
                                                    -----------------------------------------------------
                                                                     GROSS        GROSS
                                                                  UNREALIZED    UNREALIZED        FAIR
                                                       COST          GAINS        LOSSES          VALUE
                                                       ----          -----        ------          -----

<C>                                                 <C>           <C>           <C>            <C>
         Short-term marketable securities.....      $   40,538    $       10    $        -     $   40,548
         Non-current auction rate
              securities......................          83,900             -        (2,384)        81,516
                                                    ----------    ----------    ----------     ----------
                Total.........................      $  124,438    $       10    $   (2,384)    $  122,064
                                                    ==========    ==========    ==========     ==========
</TABLE>

The Company accounts for its investment securities in accordance with SFAS
115, "Accounting for Certain Investments in Debt and Equity Securities," and
classifies them as "available for sale." The Company's marketable securities
at June 30, 2008 and March 31, 2008 are recorded at fair value based on quoted
market prices using the specific identification method and consisted of mutual
funds comprised of U.S. government investments. These marketable securities
are classified as current assets as the Company has the ability to use them
for current operating and investing purposes. There were no realized gains or
losses for the three months ended June 30, 2008 and 2007.

At June 30, 2008 and March 31, 2008, the Company had $83,900 of principal
invested in auction rate securities ("ARS"). These securities all have a
maturity in excess of 10 years. The Company's investments in ARS primarily
represent interests in collateralized debt obligations supported by pools of
student loans, the principal of which is guaranteed by the U.S. Government.
ARS backed by student loans are viewed as having low default risk and
therefore very low risk of credit downgrade. The ARS held by the Company are
AAA-rated securities with long-term nominal maturities for which the interest
rates are reset through a dutch auction at pre-determined intervals, up to 35
days. The auctions historically have provided a liquid market for these
securities.

With the liquidity issues experienced in global credit and capital markets,
the ARS held by the Company at June 30, 2008 and March 31, 2008 experienced
multiple failed auctions beginning in February 2008 as the amount of
securities submitted for sale exceeded the amount of purchase orders. Given
the failed auctions, the Company's ARS are illiquid until a successful auction
for them occurs.

The estimated fair values of the Company's ARS holdings at June 30, 2008 and
March 31, 2008 were $79,890 and $81,516, respectively, which reflects a
difference of $4,010 and $2,384, respectively, from the principal value of
$83,900. Although the ARS continue to pay interest according to their stated
terms, the Company has recorded unrealized losses of $2,539 and $1,550, net of
tax, as reductions to shareholders' equity in accumulated other comprehensive
loss at June 30, 2008 and March 31, 2008, respectively, reflecting adjustments
to the ARS holdings that the Company has concluded have a temporary decline in
value.

The ARS are valued based on a discounted cash flow model that considers, among
other factors, the time to work out

                                      12

<PAGE>
<PAGE>

the market disruption in the traditional trading mechanism, the stream of cash
flows (coupons) earned until maturity, the prevailing risk free yield curve,
credit spreads applicable to a portfolio of student loans with various tenures
and ratings and an illiquidity premium. These factors were used in a Monte
Carlo simulation based methodology to derive the estimated fair value of the
ARS.

Given the failed auctions, the Company's ARS are illiquid until there is a
successful auction for them. Accordingly, the $79,890 and $81,516 of ARS at
June 30, 2008 and March 31, 2008, respectively, were classified as non-current
assets and are included in the line item "Investment securities" in the
accompanying Consolidated Balance Sheets.

8.   FAIR VALUE MEASURES

As stated in Note 2, the Company adopted SFAS 157 effective April 1, 2008 for
all financial assets and liabilities and any other assets and liabilities that
are recognized or disclosed at fair value on a recurring basis. SFAS 157
defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In order to increase consistency and
comparability in fair value measurements, SFAS 157 established a fair value
hierarchy that ranks the quality and reliability of the information used to
measure fair value. Financial assets and liabilities carried at fair value are
classified and disclosed in one of the following three categories:

     *    Level 1 - Primarily consists of financial assets and liabilities
          whose values are based on unadjusted quoted prices for identical
          assets or liabilities in an active market that the Company has the
          ability to access.

     *   Level 2 - Includes financial instruments measured using significant
          other observable inputs that are valued by reference to similar
          assets or liabilities, such as: quoted prices for similar assets or
          liabilities in active markets; quoted prices for identical or
          similar assets or liabilities in markets that are not active; inputs
          other than quoted prices that are observable for the asset or
          liability; and inputs that are derived principally from or
          corroborated by observable market data by correlation or other
          means.

     *    Level 3 - Comprised of financial assets and liabilities whose values
          are based on prices or valuation techniques that require inputs that
          are both unobservable and significant to the overall fair value
          measurement. These inputs reflect management's own assumptions about
          the assumptions a market participant would use in pricing the asset
          or liability.

The following table presents the Company's fair value hierarchy as of June 30,
2008 for those financial assets measured at fair value on a recurring basis:

<TABLE>
<CAPTION>
                                                           FAIR VALUE MEASUREMENTS AT JUNE 30, 2008
                                                    -----------------------------------------------------

                                                       TOTAL        LEVEL 1       LEVEL 2        LEVEL 3
                                                       -----        -------       -------        -------

C>                                                 <C>           <C>           <C>            <C>
         Short-term marketable securities.....      $   40,904    $   40,904    $        -     $        -
         Non-current auction rate
            securities........................          79,890             -             -         79,890
                                                    ----------    ----------    ----------     ----------
             Total assets at fair value.......      $  120,794    $   40,904    $        -     $   79,890
                                                    ==========    ==========    ==========     ==========
</TABLE>

The Company's marketable securities consisted of mutual funds comprised of
U.S. government investments for which market prices were readily available.
The Company's investments in ARS primarily represent interests in
collateralized debt obligations supported by pools of student loans, the
principal of which is guaranteed by the U.S. Government. The ARS held by the
Company are AAA-rated securities with long-term nominal maturities for which
the interest rates are reset through a dutch auction at pre-determined
intervals, up to 35 days. Due to the lack of observable market quotes and an
illiquid market for the Company's ARS portfolio, the Company utilized a
valuation model that relied exclusively on Level 3 inputs, including those
that are based on expected cash flow streams and collateral values (see Note
7).

The contingent interest feature of the $200,000 principal amount of Contingent
Convertible Subordinated Notes (see

                                      13

<PAGE>
<PAGE>

Note 12) meets the criteria of and qualifies as an embedded derivative.
Although this feature represents an embedded derivative financial instrument,
based on its de minimis value at the time of issuance and at June 30, 2008, no
value has been assigned to this embedded derivative.

The following table presents the changes in fair value for financial assets
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):

<TABLE>
<CAPTION>
                                                                NON-CURRENT AUCTION
                                                                  RATE SECURITIES
                                                                     (LEVEL 3)
                                                                -------------------

<C>                                                                 <C>
           Balance at April 1, 2008..................               $    81,516
           Unrealized losses included in other
               comprehensive loss....................                    (1,626)
                                                                    -----------
           Balance at June 30, 2008..................               $    79,890
</TABLE>                                                            ===========

9.   INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                    JUNE 30, 2008        MARCH 31, 2008
                                                                    -------------        --------------

<C>                                                                  <C>                  <C>
                  Finished goods.....................                $    33,513          $    27,654
                  Work-in-process....................                     17,948               15,925
                  Raw materials......................                     46,514               51,401
                                                                     -----------          -----------
                                                                     $    97,975          $    94,980
                                                                     ===========          ===========
</TABLE>

Management establishes reserves for potentially obsolete or slow-moving
inventory based on an evaluation of inventory levels, forecasted demand, and
market conditions.

10.   INTANGIBLE ASSETS AND GOODWILL

     Intangible assets and goodwill consist of the following:

<TABLE>
<CAPTION>
                                                   JUNE 30, 2008                     MARCH 31, 2008
                                           ----------------------------       ----------------------------
                                              GROSS                              GROSS
                                             CARRYING       ACCUMULATED        CARRYING         ACCUMULATED
                                              AMOUNT        AMORTIZATION        AMOUNT         AMORTIZATION
                                              ------        ------------        ------         ------------
<C>                                        <C>              <C>               <C>              <C>
Product rights acquired:
     Micro-K(R)............................$    36,140      $   (16,769)      $    36,140      $   (16,318)
     PreCare(R)............................      8,433           (3,760)            8,433           (3,654)
     Evamist(TM)...........................     44,078           (2,733)           52,446           (2,378)
Trademarks acquired:
     Niferex(R)............................     14,834           (3,894)           14,834           (3,709)
     Chromagen(R)/StrongStart(R)...........     27,642           (7,256)           27,642           (6,910)
     Evamist(TM)...........................     12,774             (792)           15,166             (688)
License agreements:
     Evamist(TM)...........................     82,542           (5,118)           66,417           (3,011)
     Other.................................      2,300               --             2,300               --
Covenants not to compete
     Evamist(TM)...........................      2,106             (218)            7,471             (565)
     Other.................................        375             (119)              375             (109)
Trademarks and patents.....................      5,753           (1,057)            5,317             (972)
                                           -----------      -----------       -----------      -----------
  Total intangible assets..................    236,977          (41,716)          236,541          (38,314)
Goodwill...................................        557               --               557               --
                                           -----------      -----------       -----------      -----------
                                           $   237,534      $   (41,716)      $   237,098      $   (38,314)
                                           ===========      ===========       ===========      ===========
</TABLE>

                                      14

<PAGE>
<PAGE>

The final purchase price allocation related to Evamist(TM) was completed
during the three months ended June 30, 2008, resulting in adjustments to the
gross carrying amounts for intangible assets related to Evamist(TM) during the
quarter ended June 30, 2008.

As of June 30, 2008, the Company's intangible assets have a weighted average
useful life of approximately 17 years. Amortization expense for intangible
assets was $3,401 and $1,185 for the three months ended June 30, 2008 and
2007, respectively.

Assuming no additions, disposals or adjustments are made to the carrying
values and/or useful lives of the intangible assets, annual amortization
expense on product rights, trademarks acquired and other intangible assets is
estimated to be approximately $10,701 for the remainder of fiscal 2009 and
approximately $14,265 in each of the four succeeding fiscal years.

11.   REVOLVING CREDIT AGREEMENT

The Company has a credit agreement with ten banks that provides for a
revolving line of credit for borrowing up to $320,000. This credit facility
also includes a provision for increasing the revolving commitment, at the
lenders' sole discretion, by up to an additional $50,000. The credit agreement
is unsecured unless the Company, under certain specified circumstances,
utilizes the facility to redeem part or all of its outstanding Convertible
Subordinated Notes. Interest is charged under the credit facility at the lower
of the prime rate or LIBOR plus 62.5 to 150 basis points depending on the
ratio of senior debt to EBITDA. The credit facility has a five-year term
expiring in June 2011. The credit agreement contains financial covenants that
impose limits on dividend payments, require minimum equity, a maximum senior
leverage ratio and minimum fixed charge coverage ratio. At June 30, 2008, the
Company had $30,000 of borrowings outstanding under the credit facility (see
Note 12).

12.   LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                           JUNE 30, 2008        MARCH 31, 2008
                                                           -------------        --------------

<C>                                                         <C>                   <C>
         Building mortgages..........................       $    38,963           $   39,452
         Line of credit..............................            30,000               30,000
         Convertible notes...........................           200,000              200,000
                                                            -----------           ----------
                                                                268,963              269,452
         Less current portion........................            (2,051)            (202,020)
                                                            -----------           ----------
                                                            $   266,912           $   67,432
                                                            ===========           ==========
</TABLE>

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

In May 2003, the Company issued $200,000 principal amount of 2.5% Contingent
Convertible Subordinated Notes due 2033 (the "Notes") that are convertible,
under certain circumstances, into shares of Class A Common Stock at an initial
conversion price of $23.01 per share. The Notes, which are due May 16, 2033,
bear interest that is payable on May 16 and November 16 of each year at a rate
of 2.50% per annum. The Company also is obligated to pay contingent interest
at a rate equal to 0.5% per annum during any six-month period from May 16 to
November 15 and from November 16 to May 15, with the initial six-month period
commencing May 16, 2006, if the average trading price of the Notes per $1,000
principal amount for the five trading day period ending on the third trading
day immediately preceding the first day of the applicable six-month period
equals $1,200 or more. In November 2007, the average trading price of the
Notes reached the threshold for the five-day trading period that resulted in
the payment of contingent interest and for the period from November 16, 2007
to May 15, 2008 the Notes paid interest at a rate of 3.00% per annum. In May
2008, the average trading price of the Notes fell below the contingent
interest threshold for the five-day trading period and beginning May 16, 2008
the Notes began to pay interest at a rate of 2.50% per annum.

                                      15

<PAGE>
<PAGE>

The Company may redeem some or all of the Notes at any time on or after May
21, 2006, at a redemption price, payable in cash, of 100% of the principal
amount of the Notes, plus accrued and unpaid interest, including contingent
interest, if any. Holders may require the Company to repurchase all or a
portion of their Notes on May 16, 2013, 2018, 2023 and 2028 or upon a change
in control, as defined in the indenture governing the Notes, at a purchase
price, payable in cash, of 100% of the principal amount of the Notes, plus
accrued and unpaid interest, including contingent interest, if any. Holders
had the right to require the Company to repurchase all or a portion of their
Notes on May 16, 2008 and, accordingly, the Company classified the Notes as a
current liability as of March 31, 2008. Since no holders required the Company
to repurchase all or a portion of their Notes on this date and because the
next occasion holders may require the Company to repurchase all or a portion
of their Notes is May 16, 2013, the Notes were classified as a long-term
liability as of June 30, 2008. The Notes are subordinate to all of the
Company's existing and future senior obligations.

The Notes are convertible, at the holders' option, into shares of the
Company's Class A Common Stock prior to the maturity date under the following
circumstances:

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

The Company has reserved 8,692 shares of Class A Common Stock for issuance in
the event the Notes are converted.

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

The aggregate maturities of long-term debt as of June 30, 2008 are as follows:

               Due in one year...............         $   2,051
               Due in two years..............             2,177
               Due in three years............            32,311
               Due in four years.............             2,448
               Due in five years.............           202,603
               Thereafter....................            27,373
                                                      ---------
                                                      $ 268,963
                                                      =========

13. TAXABLE INDUSTRIAL REVENUE BONDS

In December 2005, the Company entered into a financing arrangement with St.
Louis County, Missouri related to expansion of its operations in St. Louis
County. Up to $135,500 of industrial revenue bonds may be issued to the
Company by St. Louis County relative to capital improvements made through
December 31, 2009. This agreement provides that 50% of the real and personal
property taxes on up to $135,500 of capital improvements will be abated for a
period of 10 years subsequent to the property being placed in service.
Industrial revenue bonds totaling $120,407 were outstanding at June 30, 2008.
The industrial revenue bonds are issued by St. Louis County to the Company
upon its payment of qualifying costs of capital improvements, which are then
leased by the Company for a period ending December 1, 2019, unless earlier
terminated. The Company has the option at any time to discontinue the
arrangement and regain full title to the abated property. The industrial
revenue bonds bear interest at 4.25% per annum and are

                                      16

<PAGE>
<PAGE>

payable as to principal and interest concurrently with payments due under the
terms of the lease. The Company has classified the leased assets as property
and equipment and has established a capital lease obligation equal to the
outstanding principal balance of the industrial revenue bonds. Lease payments
may be made by tendering an equivalent portion of the industrial revenue
bonds. As the capital lease payments to St. Louis County may be satisfied by
tendering industrial revenue bonds (which is the Company's intention), the
capital lease obligation, industrial revenue bonds and related interest
expense and interest income, respectively, have been offset for presentation
purposes in the Consolidated Financial Statements.

14.   COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except
those that resulted from investments by or distributions to the Company's
shareholders. Other comprehensive income refers to revenues, expenses, gains
and losses that, under generally accepted accounting principles, are included
in comprehensive income, but excluded from net income as these amounts are
recorded directly as an adjustment to shareholders' equity. For the Company,
comprehensive income is comprised of net income and the net changes in
unrealized gains and losses on available for sale marketable securities, net
of applicable income taxes. Total comprehensive income was $11,546 and $6,174
for the three months ended June 30, 2008 and 2007, respectively.

15.   SEGMENT REPORTING

The reportable operating segments of the Company are branded products,
specialty generic/non-branded and specialty materials. The branded products
segment includes patent-protected products and certain trademarked off-patent
products that the Company sells and markets as brand pharmaceutical products.
The specialty generics segment includes off-patent pharmaceutical products
that are therapeutically equivalent to proprietary products. The Company sells
its branded and generic/non-branded products primarily to pharmaceutical
wholesalers, drug distributors and chain drug stores. The specialty materials
segment is distinguished as a single segment because of differences in
products, marketing and regulatory approval when compared to the other
segments.

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

                                      17

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The following represents information for the Company's reportable operating
segments for the three months ended June 30, 2008 and 2007.

<TABLE>
<CAPTION>
                                  THREE MONTHS
                                      ENDED     BRANDED      SPECIALTY   SPECIALTY     ALL
                                     JUNE 30,   PRODUCTS     GENERICS    MATERIALS    OTHER   ELIMINATIONS CONSOLIDATED
                                     --------   --------     --------    ---------    -----   ------------ ------------

   --------------------------------------------------------------------------------------------------------------------
<C>                                    <C>     <C>         <C>           <C>       <C>         <C>          <C>
   NET REVENUES
                                       2008    $  50,910   $  92,310     $  5,470  $      161  $        -   $ 148,851
                                       2007       50,053      60,501        3,614         190           -     114,358
   --------------------------------------------------------------------------------------------------------------------
   SEGMENT PROFIT (LOSS)
                                       2008       15,572      47,240        2,344     (45,401)          -      19,755
                                       2007       22,177      30,800          661     (43,721)          -       9,917
   --------------------------------------------------------------------------------------------------------------------
   IDENTIFIABLE ASSETS
                                       2008       37,317     112,108        9,491     715,513      (1,158)    873,271
                                       2007       32,239      78,417        7,980     603,525      (1,158)    721,003
   --------------------------------------------------------------------------------------------------------------------
   PROPERTY AND EQUIPMENT ADDITIONS
                                       2008            -           -           52       5,291           -       5,343
                                       2007            -           -           47       2,059           -       2,106
   --------------------------------------------------------------------------------------------------------------------
   DEPRECIATION AND AMORTIZATION
                                       2008          186          80           45       8,052           -       8,363
                                       2007          177          80           44       5,553           -       5,854
   --------------------------------------------------------------------------------------------------------------------
</TABLE>

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

16.  CONTINGENCIES - LITIGATION

The Company and its subsidiaries Drugtech Corporation and Ther-Rx Corporation
were named as defendants in a declaratory judgment case filed in the U.S.
District Court for the District of Delaware by Lannett Company, Inc. on June
6, 2008 and styled Lannett Company Inc. v. KV Pharmaceuticals et. al. Lannett
subsequently amended its complaint. The action seeks a declaratory judgment of
patent invalidity, patent non-infringement, and patent unenforceability for
inequitable conduct with respect to five patents owned by, and two patents
licensed to, the Company or its subsidiaries and pertaining to the PrimaCare
ONE(R) product marketed by Ther-Rx Corporation; unfair competition; deceptive
trade practices; and antitrust violations. No specific amount of damages was
stated in the complaint or amended complaint. On June 17, 2008, the Company
filed suit against Lannett in the form of a counterclaim, asserting
infringement of three of our patents, infringement of our trademarks
(PrimaCare(R) and PrimaCare ONE(R)), and various other claims. The Company
also filed a motion seeking a temporary restraining order and a preliminary
injunction in which the Company focused on infringement of our trademarks and
infringement of one of the Company's composition patents. The Court set an
expedited briefing schedule and a hearing for the motion. At the hearing on
June 25, 2008, the Court ruled in the Company's favor with respect to
Lannett's use of PrimaCare(R) on its product's label and Lannett agreed to
stop shipping bottles with the existing label and to work with KV on a new,
non-infringing label. Ultimately, Lannett agreed to discontinue the use of
both the PrimaCare ONE(R) trademark and the associated "compare to the
ingredients in" language. On July 17, 2008, the Court issued an order with
respect to the approximately 400,000 bottles that Lannett had shipped with the
old, infringing label. Lannett has been ordered to contact its distributors in
writing and advise the distributors that the Court has ruled that the existing
labeling infringes Ther-Rx's trademark. Lannett was also ordered to provide to
its distributors material adequate to cover the PrimaCare ONE(R) trademark

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<PAGE>

on the existing bottles. The order requires the distributors to cover the
PrimaCare ONE(R) trademark on bottles in their possession but does not extend
to bottles at pharmacies. The Court, having considered the respective proposed
scheduling orders, has set a trial date in January 2009 as proposed by KV. The
Company is proceeding with discovery. The Company intends to vigorously defend
its interests; however, it cannot give any assurance that it will prevail.

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

The Company was named as a defendant in two related patent infringement cases
filed on December 14, 2007 in the U.S. District Courts in New Jersey and
Delaware by Janssen, L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil
Neurologics, Inc. (collectively, "Janssen") and styled Janssen, L.P. et al. v.
KV Pharmaceutical Company. After the Company filed an ANDA with the FDA
seeking permission to market a generic version of the 8 mg and 16 mg strengths
of Razadyne(R) ER (formerly Reminyl(R)) galantaminE hydrobromide
extended-release capsules, Janssen filed these lawsuits for patent
infringement under a patent owned by Janssen. In the Company's Paragraph IV
certification, KV contended that its proposed generic versions do not infringe
Janssen's patent and/or that the patent is invalid. Pursuant to the
Hatch-Waxman Act, the filing of the suit against the Company instituted an
automatic stay of FDA approval of the Company's ANDA until the earlier of a
judgment or 30 months from the date of the suit. The Company has filed an
answer and counterclaim for declaratory judgment of non-infringement and
patent invalidity in the New Jersey case. In light of our answer in the New
Jersey case, the Delaware suit was voluntarily dismissed by Janssen. Following
receipt of the Company's subsequent notice letter to Janssen for the 24 mg
strength of this drug, Janssen filed an additional suit against the Company
based on the ANDA filing for the 24 mg strength. We expect this case to be
consolidated with the earlier suit against the Company. Janssen also sought to
have the lawsuits against the Company consolidated with separate lawsuits
against Barr and Sandoz pertaining to this product, which the Court has denied
except for consolidation of the Company's case with Barr's case for discovery
purposes and that there will be one Markman hearing for all three cases, which
delays the previously scheduled Markman hearing by one month. Janssen is
deferring depositions and is seeking a protective order from the Court to
allow it not to proceed with depositions. The court has instructed the parties
to agree on new deposition dates. The Company intends to vigorously defend its
interests; however, it cannot give any assurance that it will prevail.

The Company is named as a defendant in a patent infringement case filed in the
U.S. District Court for the District of New Jersey by Celgene Corporation
("Celgene") and Novartis Pharmaceuticals Corporation and Novartis Pharma AG
(collectively, "Novartis") on October 4, 2007 and styled Celgene Corporation
et al. v. KV Pharmaceutical Company. After the Company filed an ANDA with the
FDA seeking permission to market a generic version of the 10 mg, 20 mg, 30 mg,
and 40 mg strengths of Ritalin LA(R) methylphenidate hydrochloride
extended-release capsules, Celgene and Novartis filed this lawsuit for patent
infringement under the provisions of the Hatch-Waxman Act with respect to two
patents owned by Celgene and licensed to Novartis. In the Company's Paragraph
IV certification, KV contended that its proposed generic versions do not
infringe Celgene's patents. Pursuant to the Hatch-Waxman Act, the filing date
of the suit against the Company instituted an automatic stay of

                                      19

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FDA approval of the Company's ANDA until the earlier of a judgment, or 30
months from the date of the suit. The Company has been served with this
complaint and has filed its answer and a counterclaim in the case, seeking a
declaratory judgment of non-infringement, patent invalidity, and inequitable
conduct in obtaining the patents. Celgene moved to disqualify the Company's
counsel in the case for an alleged conflict of interest, and the Court granted
this motion in July 2008. The Company, in anticipation of this ruling,
selected another firm which will now assume the defense of this lawsuit. The
Company filed a motion for sanctions against plaintiffs pursuant to Rule 11 of
the Federal Rules of Civil Procedure for bringing an action without proper
basis, seeking an order dismissing the patent infringement complaint and
awarding the Company its costs and attorneys' fees. This motion was denied by
the Court in July 2008, and the Company is evaluating an appeal. No trial date
has yet been set. The Company intends to vigorously defend its interests;
however, it cannot give any assurance that it will prevail.

The Company is named as a defendant in a patent infringement case brought by
Purdue Pharma L.P., The P.F. Laboratories, Inc., and Purdue Pharmaceuticals
L.P. ("Purdue") on January 17, 2007 against it and an unrelated third party
and styled Purdue Pharma L.P. et al. v. KV Pharmaceutical Company et al. filed
in the U.S. District Court for the District of Delaware. After the Company
filed an ANDA with the FDA seeking permission to market a generic version of
the 10 mg, 20 mg, 40 mg, and 80 mg strengths of OxyContin(R) in
extended-release tablet form, Purdue filed a lawsuit against KV for patent
infringement under the provisions of the Hatch-Waxman Act with respect to
three Purdue patents. In the Company's Paragraph IV certification, KV
contended that Purdue's patents are invalid, unenforceable, or will not be
infringed by KV's proposed generic versions. On February 12, 2007, a second
patent infringement lawsuit was filed in the same court against the Company by
Purdue, asserting patent infringement under the same three patents with
respect to the Company's filing of an amendment to its ANDA with FDA to sell a
generic equivalent of Purdue's OxyContin(R), 30 mg and 60 mg strengths,
products. On June 6, 2007, a third patent infringement lawsuit was filed
against the Company by Purdue in the U.S. District Court for the Southern
District of New York, asserting patent infringement under the same three
patents with respect to the Company's filing of an amendment to its ANDA with
FDA to sell a generic equivalent of Purdue's OxyContin(R), 15 mg strength,
product. The two lawsuits filed in federal court in Delaware have been
transferred to the federal court in New York for multi-district litigation
purposes together with an additional lawsuit by Purdue against another
unrelated company, also in federal court in New York. Purdue currently has
similar lawsuits pending against additional unrelated companies in federal
court in New York.

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

Pursuant to the Hatch-Waxman Act, the filing date of the suit against the
Company instituted an automatic stay of FDA approval of the Company's ANDA
until the earlier of a judgment, or 30 months from the date of the suit. The
Court initially stayed all proceedings pending determining whether Purdue
committed inequitable conduct in its dealings with the U.S. Patent and
Trademark Office with respect to the issuance of its patents, which would
render such patents unenforceable, and the Court's subsequent decision on the
issue. On January 7, 2008, the Court issued its decision finding that Purdue
had not committed inequitable conduct with respect to the patents in suit. The
Company, among others, has asked the Court to lift the stay so that the
remainder of the case may resume but the stay has not yet been lifted.
Discovery in the suit has not yet commenced but is expected to commence
shortly after the stay is lifted on the case. No trial date has yet been set.
The Company intends to vigorously defend its interests; however, it cannot
give any assurance that it will prevail.

The Company and ETHEX are named as defendants in a case brought by CIMA LABS,
Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et. al. v. KV
Pharmaceutical Company et. al. filed in U.S. District Court for the District
of Minnesota. CIMA alleged that the Company and ETHEX infringed on a CIMA
patent in connection with the manufacture and sale of Hyoscyamine Sulfate
Orally Dissolvable Tablets, 0.125 mg. The Court has entered a stay pending the
outcome of the U.S. Patent and Trademark Office's reexamination of a patent at
issue in the suit. The Patent and Trademark Office has, to date, issued a
final office action rejecting all existing and proposed new claims by CIMA
with respect to this patent. CIMA has certain rights of appeal of this
rejection of its claims and has exercised those rights.

                                      20

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<PAGE>

The Company intends to vigorously defend its interests in this litigation if
the stay is lifted; however, it cannot give any assurance it will prevail or
that the stay will be lifted.

The Company and its subsidiaries Ther-Rx Corporation and Drugtech Corporation,
together with Albion International Inc., have filed a patent infringement case
against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the
Eastern District of Missouri on July 17, 2008, styled KV Pharmaceutical

Company and its subsidiaries; (13) risks that we may not ultimately prevail
plaintiffs allege that Breckenridge has infringed a patent owned by Albion
which has been exclusively licensed to KV and its subsidiaries in the field of
oral prescription products for prenatal products and hematinic products
(including the Company's Chromagen(R) and Chromagen(R) Forte hematinic
products), among others, with respect to Breckenridge's Multigen(R) and
Multigen(R) Plus caplet products. The Company and other plaintiffs are seeking
injunctive relief and damages from Breckenridge. The plaintiffs moved for a
temporary restraining order against the continued launch of Breckenridge's
products, which was denied by the Court on July 28, 2008. At the direction of
the Court, the parties are discussing potential scheduling for the trial on
the merits. The Company and its subsidiaries intend to vigorously defend their
interests; however, the Company cannot give any assurance they will prevail.

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

On July 24, 2008, a federal action was filed against certain unapproved drug
products manufactured by the Company, in the U.S. District Court for the
Eastern District of Missouri, styled United States v. Various Quantities of
Articles of Drug et. al. The Company received the complaint on July 29, 2008.
In March 2008, representatives of the Missouri Department of Health and Senior
Services, accompanied by representatives of the FDA, notified the Company of a
hold on our inventory of certain unapproved drug products, restricting our
ability to remove or dispose of those inventories without permission. The hold
related to a misinterpretation about the intended scope of certain FDA notices
setting limits on the marketing of unapproved guaifenesin products, under
which we had timely discontinued a number of guaifenesin products and believed
that, by doing so, had complied with those notices. The agency action to place
a hold on certain of our products indicated that additional guaifenesin
products should also have been discontinued. In addition, the FDA expanded the
hold to include other products that did not contain guaifenesin but were being
marketed without FDA approval under certain "grandfather clauses" and
statutory and regulatory exceptions to the pre-market approval requirement for
"new drugs" under the FDCA. (FDA approval is not required in all instances for
drugs to be sold in the marketplace, such as pre-1938 "grandfathered" products
or certain drugs reviewed under the so-called DESI process). The court action
is the process by which the FDA takes control of the products subject to the
hold that are to be destroyed. The Company was not named in the complaint as a
defendant.

The Company's subsidiary, ETHEX Corporation, was named as a defendant in a
product liability case filed in the U.S. District Court for the District of
Louisiana by Rebecca Michelle Manguno in June 2008 and styled Manguno v. ETHEX
Corporation. Manguno alleges that she has taken ETHEX's morphine sulfate
extended-release tablets since January 2007 and that she may have taken
oversized tablets of such products, which she alleges caused medical problems.
The time has not yet run to respond to the complaint. The Company intends to
vigorously defend its interests in this litigation; however, it cannot give
any assurance it will prevail. In addition to this litigation, the Company has
received multiple adverse event reports from other individuals concerned as to
whether they may have taken oversized tablets of this drug prior to the recent
recall of ETHEX's morphine sulfate tablets in the United States and Canada.


                                      21

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The Company and ETHEX were named as co-defendants in a suit in the U.S.
District Court for the Southern District of Florida filed by the personal
representative of the estate of Joyce Hoyle and her children in connection
with Ms. Hoyle's death in 2003, allegedly from oxycodone toxicity styled
Thomas Hoyle v. Purdue Pharma et al. The suit alleged that between June 2001
and May 2003 Ms. Hoyle was prescribed and took three different opiate pain
medications manufactured and sold by the defendants, including one product,
oxycodone, that was manufactured by the Company and marketed by ETHEX, and
that such medications were promoted without sufficient warnings about the side
effect of addiction. The causes of action were strict liability for an
inherently dangerous product, negligence, breach of express and implied
warranty and breach of implied warranty of fitness for a particular purpose.
The discovery process had not yet begun, and the court had set the trial to
commence in July 2007. The plaintiff and the Company agreed, however, to a
tolling agreement, under which the plaintiff dismissed the case without
prejudice in return for the Company's agreement to toll the statute of
limitations in the event the plaintiff refiled its case in the future. The
case was dismissed without prejudice. On January 18, 2008, the Company and
ETHEX were served with a new complaint, substantially similar to the earlier
law suit. KV and ETHEX filed an answer to the new complaint, as well as a
motion to dismiss the lawsuit based on expiration of the statute of
limitations. With the agreement of the plaintiff, this motion to dismiss has
been granted with prejudice by the court in the Company's favor.

The Company has been advised that one of its former distributor customers is
being sued in Florida state court in a case captioned Darrian Kelly v. K-Mart
et. al. for personal injury allegedly caused by ingestion of K-Mart diet
caplets that are alleged to have been manufactured by the Company and to
contain phenylpropanolamine, or PPA. The distributor has tendered defense of
the case to the Company and has asserted a right to indemnification for any
financial judgment it must pay. The Company previously notified its product
liability insurer of this claim in 1999 and again in 2004, and the Company has
demanded that the insurer assume the Company's defense. The insurer has stated
that it has retained counsel to secure additional factual information and will
defer its coverage decision until that information is received. The Company
intends to vigorously defend its interests; however, it cannot give any
assurance that it will not be impleaded into the action, or that, if it is
impleaded, that it would prevail.

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

The Company was named as a defendant in a case filed in U.S. District Court
for the Eastern District of Missouri by AstraZeneca AB, Aktiebolaget Hassle
and AstraZeneca LP (collectively, "AstraZeneca") and styled AstraZeneca AB et.
al. v. KV Pharmaceutical Company. After the Company filed ANDAs with the FDA
seeking permission to market a generic version of the 25 mg, 50 mg, 100 mg,
and 200 mg strengths of Toprol-XL(R) in extended-release capsule form,
AstraZeneca filed lawsuits against KV for patent infringement under the
provisions

                                      22

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of the Hatch-Waxman Act. In the Company's Paragraph IV certification, KV
contended that its proposed generic versions do not infringe AstraZeneca's
patents. Pursuant to the Hatch-Waxman Act, the filing date of the suit against
the Company instituted an automatic stay of FDA approval of the Company's ANDA
until the earlier of a judgment, or 30 months from the date of the suit. The
Company filed motions for summary judgment with the District Court in Missouri
alleging, among other things, that AstraZeneca's patent is invalid and
unenforceable. These motions were granted and AstraZeneca appealed. On July
23, 2007, the Court of Appeals for the Federal Circuit affirmed the decision
of the District Court below with respect to the invalidity of AstraZeneca's
patent but reversed and remanded with respect to inequitable conduct by
AstraZeneca. AstraZeneca filed for rehearing by the Federal Circuit, which was
denied and the time has now run with respect to any petition for certiorari to
the United States Supreme Court. As a result, the Company no longer faces the
prospect of any liability to AstraZeneca in connection with this lawsuit. KV
continued to proceed with its counterclaim against AstraZeneca for inequitable
conduct in obtaining the patents that have been ruled invalid, in order to
recover the Company's defense costs, including legal fees. In May 2008, the
Company entered into a settlement agreement with AstraZeneca and settled its
remaining counterclaims against AstraZeneca in exchange for a payment of $2.7
million. This payment is reflected as a reduction of selling and
administrative expense in the Consolidated Statements of Income for the
quarter ended June 30, 2008. This case has now been resolved.

The Company and/or ETHEX have been named as defendants in certain
multi-defendant cases alleging that the defendants reported improper or
fraudulent pharmaceutical pricing information, i.e., Average Wholesale Price,
or AWP, and/or Wholesale Acquisition Cost, or WAC, information, which caused
the governmental plaintiffs to incur excessive costs for pharmaceutical
products under the Medicaid program. Cases of this type have been filed
against the Company and/or ETHEX and other pharmaceutical manufacturer
defendants by the States of Massachusetts, Alabama, Mississippi, Utah and
Iowa, New York City, and approximately 45 counties in New York State. The
State of Mississippi effectively voluntarily dismissed the Company and ETHEX
without prejudice on October 5, 2006 by virtue of the State's filing an
Amended Complaint on such date that does not name either the Company or ETHEX
as a defendant. In the remaining cases, only ETHEX is a named defendant. On
August 13, 2007, ETHEX settled the Massachusetts lawsuit for $575 in cash and
pharmaceutical products valued at $150, both of which are to be paid or
delivered over the next two years, and received a general release; no
admission of liability was made. The New York City case and all New York
county cases (other than the Erie, Oswego and Schenectady County cases) have
been transferred to the U.S. District Court for the District of Massachusetts
for coordinated or consolidated pretrial proceedings under the Average
Wholesale Price Multidistrict Litigation. The cases pertaining to the State of
Alabama, Erie County, Oswego County, and Schenectady County were removed to
federal court by a co-defendant in October 2006, but all of these cases have
since been remanded to the state courts in which they originally were filed. A
motion is pending in New York state court to coordinate the Oswego, Erie and
Schenectady Counties cases. Each of these actions is in the early stages, with
fact discovery commencing or ongoing in the Alabama case and the federal cases
involving New York City and 42 New York counties. On October 24, 2007, ETHEX
was served with a complaint filed in Utah state court by the State of Utah
naming it and nine other pharmaceutical companies as defendants in a pricing
suit. On November 19, 2007, the State of Utah filed an amended complaint. The
Utah suit has been removed to federal court and a motion has been filed to
transfer the case to the MDL litigation for pretrial coordination. The State
is seeking to remand the case to state court, and the decision is pending
before the court. The time for ETHEX to answer or respond to the Utah
complaint has not yet run. On October 9, 2007, the State of Iowa filed a
complaint in federal court in Iowa naming ETHEX and 77 other pharmaceutical
companies as defendants in a pricing suit. ETHEX and the other defendants have
filed a motion to dismiss the Iowa complaint, which motion has been brief by
the parties and is awaiting resolution by the Court. The Company intends to
vigorously defend its interests in the actions described above; however, it
cannot give any assurance it will prevail.

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

On September 15, 2006, a shareholder derivative suit, captioned Fuhrman v.
Hermelin et al., was filed in state court in St. Louis, Missouri against the
Company, as nominal defendant, and seven present or former officers and
directors, alleging that defendants had breached their fiduciary duties and
engaged in unjust enrichment

                                      23

<PAGE>
<PAGE>

in connection with the granting, dating, expensing and accounting treatment of
past grants of stock options between 1995 and 2002 to six current or former
directors or officers. Relief sought included damages, disgorgement of
backdated stock options and their proceeds, attorneys' fees, and equitable
relief. On February 26, 2007, the Fuhrman lawsuit was dismissed without
prejudice by the plaintiff in state court, and a lawsuit, captioned Krasick v.
Hermelin et al., was filed in the U.S. District Court for the Eastern District
of Missouri by the same law firms as in the Fuhrman lawsuit, with a different
plaintiff. The Krasick lawsuit was also a shareholder derivative suit filed
against the Company, as nominal defendant, and 19 present or former officers
and directors. The complaint asserted within its fiduciary duties claims
allegations that the officers and/or directors of KV improperly (including
through collusion and aiding and abetting) backdated stock option grants in
violation of shareholder-approved plans, improperly recorded and accounted for
the allegedly backdated options in violation of GAAP, improperly took tax
deductions under the Internal Revenue Code, disseminated and filed false
financials and false SEC filings in violation of federal securities laws and
rules thereunder, and engaged in insider trading and misappropriation of
information. Relief sought included damages, a demand for accounting and
recovery of the benefits allegedly improperly received, rescission of the
allegedly backdated stock options and disgorgement of their proceeds, and
reasonable attorney's fees, in addition to equitable relief, including an
injunction to require the Company to change certain of its corporate
governance and internal control procedures. On May 11, 2007, the Company
learned of the filing of another lawsuit, captioned Gradwell v. Hermelin et
al., also in the U.S. District Court for the Eastern District of Missouri. The
complaint was brought by the same law firms that brought the Krasick
litigation and was substantively the same as in the Krasick litigation, other
than being brought on behalf of a different plaintiff and eliminating one
individual defendant from the suit. On July 18, 2007, the Krasick and Gradwell
suits were refiled as a consolidated action in U.S. District Court for the
Eastern District of Missouri, styled In re K-V Pharmaceutical Company
Derivative Litigation, which was substantively the same as the Krasick and
Gradwell suits. The Company moved to terminate the litigation based on a
determination by members of a Special Committee of the Board of Directors that
continuation of the litigation was not in the best interest of KV and its
shareholders. All individual officer and director defendants joined in that
motion. Plaintiffs filed a motion for rule to show cause why the defendants'
motion to terminate the lawsuit should not be stricken and dismissed. On
February 15, 2008, the Court stayed proceedings in the case until April 9,
2008, to permit mediation pursuant to the parties' stipulation. Mediation
occurred on April 2, 2008. On May 23, 2008, all remaining parties to the
litigation filed a proposed settlement with the court which, if approved by
the court, would resolve all claims asserted in the Action. The proposed
settlement provides for a payment of fees and expenses to plaintiffs' counsel
not to exceed $1,650, which amount is expected to be covered by insurance. The
proposed settlement received preliminary approval by the Court on June 3,
2008. Notice of the terms of the settlement has been mailed to all
shareholders of record as of May 23, 2008 and a final fairness hearing has
been scheduled by the Court to be conducted on August 26, 2008.

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

The Company has received a subpoena from the Office of Inspector General of
the Department of Health and Human Services, seeking documents with respect to
two of ETHEX's nitroglycerin products. Both are unapproved products, that is,
they have not received FDA approval. (FDA approval is not necessarily required
for all drugs to be sold in the marketplace, such as pre-1938 "grandfathered"
products or certain drugs reviewed under the so-called DESI process. The
Company believes that its two products come within these exceptions.) The
subpoena states that it is in connection with an investigation into potential
false claims under Title 42 of the U.S. Code, and appears to pertain to
whether these products are eligible for reimbursement under federal health
care programs, such as Medicaid and VA programs. On July 2, 2008, the Company
received a supplementary subpoena in this matter, seeking additional documents
and information.

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

                                      24

<PAGE>
<PAGE>

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

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

17.  INCOME TAXES

The Company adopted FASB Interpretation 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"),
effective April 1, 2007. FIN 48 prescribes accounting for and disclosure of
uncertainty in tax positions.

The consolidated balance sheets reflect liabilities for unrecognized tax
benefits of $12,116 and $11,657 as of June 30, 2008 and March 31, 2008,
respectively. Accrued interest and penalties included in the Consolidated
Balance Sheets were $2,422 and $2,152 as of June 30, 2008 and March 31, 2008,
respectively.

The Company recognizes interest and penalties associated with uncertain tax
positions as a component of income tax expense in the consolidated statements
of income.

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

The Company is subject to taxation in the U.S. and various states and is
subject to examinations by those authorities. The Company's federal statute of
limitations has expired for fiscal years prior to 2005 and the relevant state
statutes vary. The Company currently is being audited by the IRS for its March
31, 2006 and 2007 tax years. The IRS is also currently auditing the employment
tax returns of the Company for calendar years 2004, 2005, 2006 and 2007.

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

The Company determined that certain options previously classified as Incentive
Stock Options ("ISO's") grants were determined to have been granted with an
exercise price below the fair market value of the Company's stock on the
revised measurement dates. Under Internal Revenue Code Section 422, ISOs may
not be granted with an exercise price less than the fair market value on the
date of grant, and therefore these grants would not qualify for ISO tax
treatment. The disqualification of ISO classification exposes the Company and
the affected employees to payroll related withholding taxes once the
underlying shares are released from the post exercise two-year forfeiture
period and the substantial risk of forfeiture has lapsed, which creates a
taxable event. The Company and the affected employees may also be subject to
interest and penalties for failing to properly withhold taxes and report the
taxable event on their respective tax returns. The Company is currently
reviewing the potential disqualification of ISO grants and the related
withholding tax implications with the IRS in an effort to reach agreement on
the resulting tax liability. As of June 30, 2008 and March 31, 2008, the
Consolidated Balance Sheets included accrued liabilities of $10,234 and
$9,765, respectively, related to this matter.

Management regularly reevaluates the Company's tax positions taken on filed
tax returns using information about recent court decisions and legislative
activities. Many factors are considered in making these evaluations, including
past history, recent interpretations of tax law, and the specific facts and
circumstances of each matter. Because tax law and regulations are subject to
interpretation and tax litigation is inherently uncertain, these evaluations
can involve a series of complex judgments about future events and can rely
heavily on estimates and assumptions. The recorded tax liabilities are based
on estimates and assumptions that have been deemed reasonable by management.
However, if our

                                      25

<PAGE>
<PAGE>

estimates are not representative of actual outcomes, recorded tax liabilities
could be materially impacted.

          CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

All statements that address expectations or projections about the future,
including without limitation, statements about our strategy or expectations
for growth or growth trends, product development, product launches, regulatory
filings or approvals, prescription trends, market position, market share
increases, acquisitions, existence and duration of regulatory exclusivities,
expected duration of ARS illiquidity, revenues, expenditures, contributions,
profitability and other financial results and expectations and beliefs
pertaining to the announced audit committee's inquiry or any allegations of
misconduct that are the subject of such inquiry, are forward-looking
statements.

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

Such factors include (but are not limited to) the following: (1) changes in
the current and future business environment, including interest rates and
capital and consumer spending; (2) the difficulty of predicting FDA approvals,
including timing, and that any period of exclusivity may not be realized; (3)
acceptance and demand for new pharmaceutical products; (4) the impact of
competitive products and pricing, including as a result of so-called
authorized-generic drugs; (5) new product development and launch, including
the possibility that any product launch may be delayed or that product
acceptance may be less than anticipated; (6) reliance on key strategic
alliances; (7) the availability of raw materials and/or products manufactured
for us under contract manufacturing arrangements with third parties; (8) the
regulatory environment, including regulatory agency and judicial actions and
changes in applicable law or regulations; (9) fluctuations in revenues; (10)
the difficulty of predicting international regulatory approval, including
timing; (11) the difficulty of predicting the pattern of inventory movements
by our customers; (12) the impact of competitive response to our sales,
marketing and strategic efforts, including the introduction or potential
introduction of generic or competing products against products sold by the
Company and its subsidiaries; (13) risks that we may not ultimately prevail in
our litigation, including challenges to our intellectual property rights by
actual or potential competitors or to our ability to market generic products
due to brand company patents and challenges to other companies' introduction
or potential introduction of generic or competing products by third parties
against products sold by the Company or its subsidiaries and including without
limitation the litigation and claims referred to in Note 16 of the Notes to
the Consolidated Financial Statements; (14) actions by the Securities and
Exchange Commission and the Internal Revenue Service with respect to our stock
option grants and accounting practices; (15) the possibility that our current
estimates of the financial effect of certain previously announced product
recalls could prove to be incorrect; (16) whether any product recalls result
in litigation, agency action or material damages; (17) the findings of the
Audit Committee inquiry referred to in this Form 10-Q could have a material
impact on the Company's financial results; and (18) the risks detailed from
time to time in our filings with the Securities and Exchange Commission.

This discussion is by no means exhaustive, but is designed to highlight
important factors that may impact the Company's outlook. We undertake no
obligation to update any of the forward-looking statements after the date of
this report.

                                      26

<PAGE>
<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
           FINANCIAL CONDITION

Except for the historical information contained herein, the following
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties, and other factors that may cause our actual
results to differ materially from those expressed or implied by those
forward-looking statements. These risks, uncertainties and other factors are
discussed in Item 1A, "Risk Factors," in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 2008 and above under the caption
"Cautionary Statement Regarding Forward-Looking Information." In addition, the
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements, the related notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2008, and the unaudited interim Consolidated Financial
Statements and related notes to unaudited interim Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

BACKGROUND

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

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

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

RESULTS OF OPERATIONS

Net revenues for the quarter increased $34.5 million, or 30.2%, to $148.9
million as we experienced sales growth of 52.6% in our specialty
generics/non-branded products segment. The increase in specialty
generic/non-branded net revenues was contributed to from sales of the 25 mg,
50 mg, 100 mg and 200 mg strengths of metoprolol succinate extended-release
tablets, which collectively generated net revenues of $35.5 million during the
three months ended June 30, 2008. There were no sales of these products in the
three months ended June 30, 2007 as they had not yet been introduced. The
overall increase in net sales resulted in a $28.9 million increase in gross
profit, which was offset in part by a $17.0 million increase in operating
expenses. The increase in operating expenses was primarily due to increases in
personnel costs, branded marketing and promotions expense, research and
development expense, and amortization of intangibles. Operating expenses for
the three months ended June 30, 2008 and 2007 also included purchased
in-process research and development expenses of $2.0 million and $10.0 million
recorded in connection with the Gestiva(TM) and Evamist(TM) acquisitions,
respectively (see Note 3 of the Notes to Consolidated FinancIal Statements).
As a result, net income for the quarter increased $6.3 million, or 102.2%, to
$12.5 million.

                                      27

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Branded products                              $     50,910   $    50,053      $      857      1.7%
   as % of net revenues                               34.2%         43.8%
Specialty generics/non-branded                      92,310        60,501          31,809     52.6%
   as % of net revenues                               62.0%         52.9%
Specialty materials                                  5,470         3,614           1,856     51.4%
   as % of net revenues                                3.7%          3.2%
Other                                                  161           190             (29)   (15.3)%
                                              ------------   -----------      ----------
   Total net revenues                         $    148,851   $   114,358      $   34,493     30.2%
</TABLE>

The increase in branded product sales was due primarily to continued sales
growth of our anti-infective brand, Clindesse(TM), coupled with increased
sales from our hematinic and cardiovascular product lines. This increase was
offset in part by lower net sales of Gynazole-1(R). Net sales of Clindesse(TM)
increased 9.5% to $5.0 million for the quarter due to improved market share
over the comparative prior quarter coupled with the impact of price increases.
The $1.3 million, or 16.5%, increase in net sales of our hematinic products
for the quarter resulted primarily from sales volume growth of Repliva
21/7(TM) coupled with price increases in our other hematinic products. Our
cardiovascular product line generated increased net sales of $0.7 million
during the quarter due to an increase both in sales volume and pricing. Net
sales of Gynazole-1(R) declined $1.6 million, or 17.3%, due primarily to a
decline in the overall demand for inter-vaginal products. Sales from our
PreCare(R) product line were consistent with the prior year comparative
quarter as the impact of price increases was offset by a $3.0 million decline
in sales volume as larger-than-normal customer purchases were made during the
comparative prior quarter in anticipation of June 2007 price increases.

The increase in specialty generic/non-branded net revenues was contributed to
from sales of the 25 mg, 50 mg, 100 mg and 200 mg strengths of metoprolol
succinate extended-release tablets, the generic version of Toprol-XL(R)
(marketed by AstraZeneca). In fiscal 2006, we received a favorable court
ruling in a Paragraph IV patent infringement action filed against us by
AstraZeneca based on our ANDA submissions to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets. Since we were the
first company to file with the FDA for generic approval of these two dosage
strengths, we were accorded the opportunity for a 180-day exclusivity period
to market them. We began shipping these two products in July 2007. We began
shipping the 25 mg and 50 mg strengths of metoprolol succinate
extended-release tablets upon approval in March 2008 and May 2008,
respectively. These four products generated net revenues of $35.5 million
during the three months ended June 30, 2008. The increase in specialty
generic/non-branded net revenues was offset in part by a reduction of $8.8
million in sales from our cough/cold product line resulting from an FDA hold
on certain unapproved generic/non-branded products (see "Government
Regulation" below). In addition, we had unshipped open orders of generic
products approximating $10.0 million of net revenues at the close of the first
quarter of 2009. The unshipped orders resulted from higher than expected
demand from our customers for certain of our generic products. Revenues were
also affected by a $5.9 million charge related to the execution of a
price increase on our generic potassium chloride capsules.

                                      28

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Branded products                              $     45,390   $    43,937      $    1,453      3.3%
   as % of net revenues                               89.2%         87.8%
Specialty generics/non-branded                      55,817        33,896          21,921     64.7%
   as % of net revenues                               60.5%         56.0%
Specialty materials                                  2,681         1,279           1,402    109.6%
   as % of net revenues                               49.0%         35.4%
Other                                                 (240)       (4,324)          4,084       NM
                                              ------------   -----------      ----------
   Total gross profit                         $    103,648   $    74,788      $   28,860     38.6%
         as % of total net revenues                   69.6%         65.4%
</TABLE>

The increase in gross profit was primarily due to the significant sales growth
experienced by our specialty generics segment. The increase in specialty
generic/non-branded net revenues was impacted by sales of the 25 mg, 50 mg,
100 mg and 200 mg strengths of metoprolol succinate extended-release tablets,
which collectively generated net revenues of $35.5 million during the three
months ended June 30, 2008. The gross profit percentages at our specialty
generic/non-branded segment and on a consolidated basis increased over the
prior year comparative quarter primarily because the four strengths of
metoprolol succinate extended-release tablets generated relatively higher
margins than our other generic/non-branded products. Impacting the "Other"
category are contract manufacturing revenues, pricing and production
variances, and changes to inventory reserves associated with production. Any
inventory reserve changes associated with finished goods are reflected in the
applicable segment. The fluctuation in the Other category was primarily due to
decreases in our inventory reserves, coupled with the impact of favorable
production variances.

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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Research and development                       $    13,968  $     9,796         $  4,172     42.6%
         as % of net revenues                          9.4%         8.6%
</TABLE>

The increase in research and development expense was primarily due to
continued active development of a growing product development pipeline of
various branded and generic/non-brand products coupled with increased
personnel expenses related to the growth of our research and development
staff. The Company expects research and development expenditures for fiscal
2009 to increase between 40% and 45% over research and development
expenditures for fiscal 2008 as a result of increased clinical trials for new
products moving through the development process.

                                      29

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Purchased in-process research and development $      2,000   $    10,000       $  (8,000)  (80.0)%
         as % of net revenues                          1.3%          8.7%
</TABLE>

In January 2008, we entered into a definitive asset purchase agreement to
acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate) (see Note 3 of the Notes to Consolidated
Financial Statements). The NDA for Gestiva(TM) is currently before the FDA,
pending approval for use in the prevention of preterm birth in certain
categories of pregnant women. Under the terms of the asset purchase agreement,
we agreed to pay $82.0 million for Gestiva(TM). In accordance with the
agreement, we made a $2.0 million cash payment in May 2008 upon achievement of
a milestone and a $7.5 million cash payment in January 2008 at closing. Since
the product had not yet obtained FDA approval when these payments were made,
we recorded in-process research and development charges of $2.0 million and
$7.5 million during the three months ended June 30, 2008 and March 31, 2008,
respectively. The remaining purchase price of $72.5 million is payable upon
FDA approval of a Gestiva(TM) NDA, transfer of all rights in the NDA to us and
receipt by us of defined launch quantities of finished Gestiva(TM) suitable
for commercial sale.

In May 2007, we completed the acquisition of the U.S. marketing rights to
Evamist(TM), a new estrogen replacement therapy product delivered with a
patented metered-dose transdermal spray system, from VIVUS, Inc. (see Note 3 of
the Notes to Consolidated Financial Statements). Under terms of the Agreement,
the Company paid $10.0 million in cash at closing and made a cash payment of
$141.5 million in July 2007 when final approval of the product was received
from the FDA. Since the product had not yet obtained FDA approval when the
initial payment was made at closing, we recorded a $10.0 million in-process
research and development charge during the three months ended June 30, 2007.

SELLING AND ADMINISTRATIVE
--------------------------

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Selling and administrative                     $    63,756   $    45,175      $   18,581     41.1%
         as % of net revenues                         42.8%         39.5%
</TABLE>


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

     *    $4.6 million related to one-time launch related marketing expenses
          for the initial launch and supply of the 25 mg and 50 mg strength of
          metoprolol succinate extended-release tablets.

     *    $1.5 million increase in expense associated with foreign currency
          transaction losses on investments denominated in the Indian Rupee.

     *    $3.8 million of launch-related marketing and promotion expenses
          related to Evamist(TM);

     *    $2.6 million increase in personnel costs due to increases in
          management, sales and other personnel of which $1.4 million related
          to the expansion of our branded sales force initiated in the third
          quarter of fiscal 2008;

     *    $1.8 million increase in branded marketing and promotions expense on
          our existing brands;

     *    $1.5 million increase in costs associated with redistribution fees
          paid to certain major wholesalers and chains for single point
          shipping services;

     *    $1.2 million increase in expenses for consulting and other
          professional services.

                                      30

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Amortization of intangible assets             $      3,401  $     1,185       $    2,216    187.0%
         s % of net revenues                           2.3%         1.0%
</TABLE>

The increase in the amortization of intangible assets was primarily due to the
purchase of Evamist(TM) in May 2007 and the impact of intangible assets that
we recorded thereon (see Note 3 of the Notes to Consolidated Financial
Statements). Under terms of the purchase agreement, we made two cash payments:
$10.0 million was paid in May 2007 and expensed as in-process research and
development and $141.5 million was paid in July 2007 when final approval of
the product was received from the FDA. The final purchase price allocation
completed during the quarter ended June 30, 2008, resulted in estimated
identifiable intangible assets of $44.1 million for product rights; $12.8
million for trademark rights; $82.5 million for rights under a sublicense
agreement; and $2.1 million for a covenant not to compete. Upon FDA approval
in July 2007, we began amortizing the product rights, trademark rights and
rights under the sublicense agreement over 15 years and the covenant not to
compete over nine years.

OPERATING INCOME
----------------

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Operating income                               $     20,523  $     8,632      $   11,891    137.8%
</TABLE>


The improvement in operating income was contributed to by sales of the 25 mg,
50 mg, 100 mg and 200 mg strengths of metoprolol succinate extended-release
tablets, which collectively generated net revenues of $35.5 million during the
three months ended June 30, 2008. The overall increase in net sales resulted
in a $28.9 million increase in gross profit, which was offset in part by a
$17.0 million increase in operating expenses. Operating expenses for the three
months ended June 30, 2008 and 2007 also included purchased in-process
research and development expenses of $2.0 million and $10.0 million recorded
in connection with the Gestiva(TM) and Evamist(TM) acquisitions, respectively
(see Note 3 of the Notes to the Consolidated Financial Statements).

INTEREST EXPENSE
----------------
<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Interest expense                              $      2,481   $     2,130      $      351     16.5%
</TABLE>

                                      31

<PAGE>
<PAGE>

The increase in interest expense resulted primarily from interest incurred on
the $30.0 million of borrowings made under our credit facility in August 2007
coupled with the impact of a higher interest rate paid on the $200,000
principal amount of Contingent Convertible Subordinated Notes (the "Notes").
In November 2007, the average trading price of the Notes reached the threshold
for the applicable five-day trading period that resulted in the payment of
contingent interest and for the period from November 16, 2007 to May 15, 2008,
and as a result, the Notes bore interest at a rate of 3.00% per annum. In May
2008, the average trading price of the Notes fell below the contingent
interest threshold for the five-day trading period and beginning May 16, 2008
the Notes began to bear interest at a rate of 2.50% per annum.

INTEREST AND OTHER INCOME
-------------------------

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Interest and other income                     $      1,713   $     3,415      $   (1,702)   (49.8)%
</TABLE>

The decrease in interest and other income was primarily due to a decrease in
the weighted average interest rate earned on short-term investments coupled
with a decline in the average balance of interest-earning assets. The decrease
in the weighted average interest rate resulted principally from a significant
decline in short-term interest rates that began in the second quarter of
fiscal 2008.

PROVISION FOR INCOME TAXES
--------------------------

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Provision for income taxes                    $      7,220   $     3,717      $    3,503     94.2%
   Effective tax rate                                 36.5%         37.5%
</TABLE>


The increase in the provision for income taxes was mainly due to higher pretax
income resulting from higher sales in our specialty generics/non-branded
segment. The effective tax rates for all periods were favorably impacted by
the domestic manufacturer's deduction.

NET INCOME AND DILUTED EARNINGS PER SHARE
-----------------------------------------
<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,
                                              ---------------------------------------------------
                                                                                    CHANGE
                                                                              -------------------
                                                  2008           2007              $          %
              ($ IN THOUSANDS):               ------------   -----------      ----------    -----
<C>                                           <C>            <C>              <C>           <C>
Net income                                        $ 12,535       $ 6,200      $    6,335    102.2%
    Diluted earnings per Class A share                0.23          0.12            0.11     91.7%
    Diluted earnings per Class B share                0.20          0.10            0.10    100.0%
</TABLE>

The improvement in net income was impacted by increases in the specialty
generics/non-branded business including sales of the 25 mg, 50 mg, 100 mg and
200 mg strengths of metoprolol succinate extended-release tablets. The
increase in net sales resulted in a $28.9 million increase in gross profit,
which was offset in part by a $17.0 million increase in operating expenses.
Operating expenses for the three months ended June 30, 2008 and 2007 also
included purchased in-process research and development expenses of $2.0
million and $10.0 million recorded in connection with the Gestiva(TM) and
Evamist(TM) acquisitions, respectively (see Note 3 of the Notes to the
Consolidated Financial Statements).

                                      32

<PAGE>
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and working capital were $94.2 million and $312.4
million, respectively, at June 30, 2008, compared to $86.3 million and $88.8
million, respectively, at March 31, 2008. The increase in working capital
resulted primarily from the $200.0 million principal amount of Notes that were
classified as a current liability as of March 31, 2008 due to the holders
having the right to require us to repurchase all or a portion of their Notes
on May 16, 2008. Since no holders required us to repurchase all or a portion
of their Notes on that date and because the next occasion holders may require
us to repurchase all or a portion of their Notes is May 16, 2013, the Notes
were classified as a long-term liability as of June 30, 2008.

The primary source of operating cash flow used in the funding of our
businesses continues to be internally generated funds from product sales. For
the three months ended June 30, 2008, our net cash flow from operations of
$15.7 million resulted primarily from net income adjusted for non-cash items.
Cash flow from operations was negatively affected by an increase in accounts
receivable as a result of customer buy-ins prior to price increases at the end
of the quarter.

Net cash flow used in investing activities included capital expenditures of
$5.3 million for the three months ended June 30, 2008 compared to $2.1 million
for the corresponding prior year period. Other investing activities during the
quarter consisted of $0.4 million in purchases of short-term marketable
securities that were classified as available for sale and the $2.0 million
milestone payment we made in conjunction with the Gestiva(TM) acquisition (see
Note 3 of the Notes to Consolidated Financial Statements).

At June 30, 2008, our investment securities included $83.9 million in
principal amount of auction rate securities ("ARS"). Our investments in ARS
represent interests in securities that have student loans guaranteed by the
U.S. Government as collateral. Accordingly, ARS that are backed by student
loans are viewed as having low default risk and very low risk of downgrade.
The interest rates on these securities are reset through an auction process
that resets the applicable interest rate at pre-determined intervals, up to 35
days. The auctions have historically provided a liquid market for these
securities. The ARS held by us all had AAA credit ratings at the time of
purchase and at the end of our fiscal 2009 first quarter. With the liquidity
issues experienced in global credit and capital markets, the ARS held by us at
June 30, 2008 experienced failed auctions beginning in February 2008. Given
the failed auctions, our ARS will continue to be illiquid until there is a
successful auction for them. We cannot predict how long the current imbalance
in the auction rate market will continue. The estimated fair value of our ARS
holdings at June 30, 2008 was $79.9 million, which reflected a $4.0 million
difference from the principal amount of $83.9 million. The estimated fair
value of the ARS was based on a discounted cash flow model that considered,
among other factors, the time to work out the market disruption in the
traditional trading mechanism, the stream of cash flows (coupons) earned until
maturity, the prevailing risk free yield curve, credit spreads applicable to a
portfolio of student loans with various tenures and ratings and an illiquidity
premium. These factors were used in a Monte Carlo simulation based methodology
to derive the estimated fair value of the ARS. Although the ARS continue to
pay interest according to their stated terms, we have recorded as of June 30,
2008 unrealized losses of $2.5 million, net of tax, as a reduction to
shareholders' equity in accumulated other comprehensive loss, reflecting
adjustments to the ARS holdings that we have concluded have a temporary
decline in value.

ARS have historically been classified as short-term marketable securities in
our consolidated balance sheet. Given the failed auctions, we reclassified the
ARS held at March 31, 2008 from current assets to non-current assets (see Note
7 of the Notes to Consolidated Financial Statements) and as of June 30, 2008
we continue to reflect the ARS as non-current assets. We believe that as of
June 30, 2008, based on our current cash, cash equivalents and marketable
securities balances of $135.1 million and our current borrowing capacity under
our credit facility of $290.0 million, the current lack of liquidity in the
auction rate market will not have a material impact on our ability to fund our
operations or interfere with our external growth plans, although we cannot
give assurance that this will continue to be the case.

Our debt balance, including current maturities, was $269.0 million at June 30,
2008 compared to $269.5 million at March 31, 2008. In March 2006, we entered
into a $43.0 million mortgage loan with one of our primary lenders, in part,
to refinance $9.9 million of existing mortgages. The $32.8 million of net
proceeds we received from the new mortgage loan was used for working capital
and general corporate purposes. The mortgage loan bears interest at a rate of
5.91% and matures on April 1, 2021.

In May 2003, we issued $200.0 million principal amount of Notes that are
convertible, under certain circumstances, into shares of our Class A Common
Stock at an initial conversion price of $23.01 per share. The Notes bear
interest at

                                      33

<PAGE>
<PAGE>

a rate of 2.50% and mature on May 16, 2033. We are also obligated to pay
contingent interest at a rate equal to 0.5% per annum during any six-month
period commencing May 16, 2006, if the average trading price of the Notes per
$1,000 principal amount for the five-trading day period ending on the third
trading day immediately preceding the first day of the applicable six-month
period equals $1,200 or more. In November 2007, the average trading price of
the Notes reached the threshold for the applicable five-day trading period
which resulted in the payment of contingent interest and beginning November
16, 2007 the Notes began to bear interest at a rate of 3.00% per annum. We may
redeem some or all of the Notes at any time on or after May 21, 2006, at a
redemption price, payable in cash, of 100% of the principal amount of the
Notes, plus accrued and unpaid interest (including contingent interest, if
any) to the date of redemption. Holders may require us to repurchase all or a
portion of their Notes on May 16, 2013, 2018, 2023 and 2028, or upon a change
in control, as defined in the indenture governing the Notes, at 100% of the
principal amount of the Notes, plus accrued and unpaid interest (including
contingent interest, if any) to the date of repurchase, payable in cash.
Holders had the right to require the Company to repurchase all or a portion of
their Notes on May 16, 2008 and, accordingly, we classified the Notes as a
current liability as of March 31, 2008. Since no holders required us to
repurchase all or a portion of their Notes on May 16, 2008 and because the
next date holders may require us to repurchase all or a portion of their Notes
is May 16, 2013, the Notes were classified as a long-term liability as of June
30, 2008. The Notes are subordinate to all of our existing and future senior
obligations.

We have a credit agreement with ten banks that provides for a revolving line
of credit for borrowing up to $320.0 million. The credit agreement also
includes a provision for increasing the revolving commitment, at the lenders'
sole discretion, by up to an additional $50.0 million. This credit facility is
unsecured unless we, under certain specified circumstances, utilize the
facility to redeem part or all of our outstanding Notes. Interest is charged
under the facility at the lower of the prime rate or one-month LIBOR plus 62.5
to 150 basis points depending on the ratio of senior debt to EBITDA. The
credit agreement contains financial covenants that impose limits on dividend
payments, require minimum equity, a maximum senior leverage ratio and minimum
fixed charge coverage ratio. The credit facility has a five-year term expiring
in June 2011. As of June 30, 2008, we were in compliance with all of our
financial covenants. At June 30, 2008, we had $30.0 million of cash borrowings
outstanding under the facility.

In December 2005, we entered into a financing arrangement with St. Louis
County, Missouri related to expansion of our operations in St. Louis County
(see Note 13 of the Notes to Consolidated Financial Statements). Up to $135.5
million of industrial revenue bonds may be issued to us by St. Louis County
relative to capital improvements made through December 31, 2009. This
agreement provides that 50% of the real and personal property taxes on up to
$135.5 million of capital improvements will be abated for a period of 10 years
subsequent to the property being placed in service. Industrial revenue bonds
totaling $120.4 million were outstanding at June 30, 2008. The industrial
revenue bonds are issued by St. Louis County to us upon our payment of
qualifying costs of capital improvements, which are then leased by us for a
period ending December 1, 2019, unless earlier terminated. We have the option
at any time to discontinue the arrangement and regain full title to the abated
property. The industrial revenue bonds bear interest at 4.25% per annum and
are payable as to principal and interest concurrently with payments due under
the terms of the lease. We have classified the leased assets as property and
equipment and have established a capital lease obligation equal to the
outstanding principal balance of the industrial revenue bonds. Lease payments
may be made by tendering an equivalent portion of the industrial revenue
bonds. As the capital lease payments to St. Louis County may be satisfied by
tendering industrial revenue bonds (which is our intention), the capital lease
obligation, industrial revenue bonds and related interest expense and interest
income, respectively, have been offset for presentation purposes in the
Consolidated Financial Statements.

We believe our cash and cash equivalents balance, cash flows from operations
and funds available under our credit facilities, will be adequate to fund
operating activities for the presently foreseeable future, including the
payment of short-term and long-term debt obligations, capital improvements,
research and development expenditures, product development activities and
expansion of marketing capabilities for the branded pharmaceutical business.
In addition, we continue to examine opportunities to expand our business
through the acquisition of or investment in companies, technologies, product
rights, research and development and other investments that are compatible
with our existing businesses. We intend to use our available cash to help in
funding any acquisitions or investments. As such, cash has been invested in
short-term, highly liquid instruments (see Note 7 of the Notes to Consolidated
Financial Statements for a discussion of our investments in auction-rate
securities). We also may use funds available under our credit facilities, or
financing sources that subsequently become available, including the future
issuances of additional debt or equity securities, to fund these acquisitions
or investments. If we were to fund one or more such acquisitions or
investments, our capital resources, financial condition and results of
operations could be materially impacted in future periods.

LICENSING

On August 11, 2008, the Company entered into a licensing agreement with Acrux
DDS PTY Ltd. (Acrux) for use of Acrux's metered dose transdermal spray
technology (MDTS), which is incorporated in Evamist(TM), for future development
products. Under the agreement, the Company will make milestone payments and
pay royalties to Acrux when the products are marketed.

                                      34

<PAGE>
<PAGE>

GOVERNMENT REGULATION

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

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

During most of fiscal 2008, we marketed approximately 30 products in our
generic/non-branded respiratory line, which consisted primarily of cough/cold
products. The cough/cold line accounted for $38.5 million, or 10.5%, of our
specialty generic net revenues in fiscal 2008. As a result of the FDA hold
discussed above, we are currently marketing one generic cough/cold product
with four strengths that has been approved by the FDA. This product generated
net revenues of $0.5 million during the quarter, whereas sales from our
cough/cold product line were $9.3 million for the comparative prior year
quarter.

On June 6, 2008, ETHEX initiated a voluntary recall of a single lot of
morphine sulfate 60 mg extended-release tablets due to a report that a tablet
with as much as double the appropriate thickness was identified and therefore
the possibility that other oversized tablets could have been commercially
released in the affected lot. On June 13, 2008, the recall was expanded to
include additional specific lots of morphine sulfate 60 mg extended-release
tablets and specific lots of morphine sulfate 30 mg extended-release tablets.
On July 8, 2008, a voluntary recall was initiated on specific lots of morphine
sulfate 60 mg, 30 mg and 15 mg extended-release tablets in Canada. We
accrued a liability of $0.9 million in the fourth quarter of fiscal 2008 for
the anticipated cost of the recall. No oversized tablets have been identified
in any additional distributed lot of these products and based on our
investigation, there are likely to be few, if any, oversized tablets in the
recalled lots. In addition, under ordinary pharmacy dispensing procedures, any
significantly oversized tablets would likely be identified at the time of
dispensing. However, the decision to recall the additional lots has been taken
as a responsible precaution because of the possibility that there may be
oversized tablets in the recalled lots.

INFLATION

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

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are presented on the basis of U.S.
generally accepted accounting principles. Certain of our accounting policies
are particularly important to the portrayal of our financial condition and
results of operations and require the application of significant judgment by
our management. As a result, these policies are subject to an inherent degree
of uncertainty. In applying these policies, we make estimates and judgments
that affect

                                      35

<PAGE>
<PAGE>

the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. We base our estimates and judgments on historical experience, the
terms of existing contracts, observance of trends in the industry, information
that is obtained from customers and outside sources, and on various other
assumptions that are believed to be reasonable and appropriate under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Although we believe that our estimates and assumptions are
reasonable, actual results may differ significantly from our estimates.
Changes in estimates and assumptions based upon actual results may have a
material impact on our results of operations and/or financial condition. Our
critical accounting estimates are described below.

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

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

From time to time, we provide incentives to our wholesale customers, such as
trade show allowances or stocking allowances that they in turn use to
accelerate distribution to their end customers. We believe that such
incentives are normal and customary in the industry. Sales allowances are
accrued and revenue is recognized as sales are made pursuant to the terms of
the allowances offered to the customer. Due to the nature of these allowances,
we believe we are able to accurately calculate the required provisions for the
allowances based on the specific terms in each agreement. Additionally,
customers will normally purchase additional product ahead of regular demand to
take advantage of the temporarily lower cost resulting from the sales
allowances. This practice has been customary in the industry and we believe
would be part of a customer's ordinary course of business inventory level. We
reserve the right, with our major wholesale customers, to limit the amount of
these forward buys. Sales made as a result of allowances offered on our
specialty generics product line in conjunction with trade shows sponsored by
our major wholesale customers and for other promotional programs accounted for
18.7% and 11.7% of total gross revenues for the three months ended June 30,
2008 and 2007, respectively.

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

We evaluate inventory levels at our wholesale customers, which accounted for
approximately 55% of our unit sales during the three months ended June 30,
2008, through an internal analysis that considers, among other things,
wholesaler purchases, wholesaler contract sales, available end consumer
prescription information and inventory data received from our three largest
wholesale customers. We believe that our evaluation of wholesaler inventory
levels allows us to make reasonable estimates of our reserve balances.
Further, our products are typically sold with adequate shelf life to permit
sufficient time for our wholesaler customers to sell our products in their
inventory through to the end consumer.

                                      36

<PAGE>
<PAGE>

The following table reflects the activity during the three months ended June
30, 2008 for each accounts receivable reserve:

<TABLE>
<CAPTION>
                                                           CURRENT PROVISION  CURRENT PROVISION    ACTUAL RETURNS
                                                           RELATED TO SALES    RELATED TO SALES      OR CREDITS
              (IN THOUSANDS)                  BEGINNING       MADE IN THE          MADE IN             IN THE          ENDING
                                               BALANCE      CURRENT PERIOD      PRIOR PERIODS      CURRENT PERIOD      BALANCE
                                              -----------  ------------------ ------------------- -----------------  ------------
<C>                                           <C>          <C>                <C>                 <C>                <C>
THREE MONTHS ENDED JUNE 30, 2008
  Accounts Receivable Reserves:
    Chargebacks                                 $ 17,600            $ 49,789                 $ -         $ (47,594)     $ 19,795
    Sales Rebates                                 12,584              14,187                   -           (16,054)       10,717
    Sales Returns                                  4,295               2,917                   -            (4,703)        2,509
    Cash Discounts and Other Allowances            5,667              10,275                   -            (8,717)        7,225
    Medicaid Rebates                               6,500               3,116                   -            (2,655)        6,961
                                              -----------  ------------------ ------------------- -----------------  ------------
      TOTAL                                     $ 46,646            $ 80,284                 $ -         $ (79,723)     $ 47,207
                                              ===========  ================== =================== =================  ============
</TABLE>

The increase in the reserve for chargebacks at June 30, 2008 was primarily due
to chargeback reserves established on the 50 mg strength of metoprolol
succinate extended-release tablets, which was launched upon approval by the
FDA in May 2008. The decrease in the reserve for sales rebates at June 30,
2008 was primarily due to the impact of certain rebates accrued at the end of
fiscal 2008 for customer agreements related to initial purchase orders of the
25 mg strength of metoprolol succinate extended-release tablets. We received
FDA approval to market the 25 mg strength of metoprolol succinate
extended-release tablets in March 2008 and began shipping this product at that
time. The decrease in the reserve for sales returns resulted primarily because
several returns during the three months ended June 30, 2008, that were
properly reserved at March 31, 2008, are no longer included in the reserve as
of June 30, 2008. The increase in the reserve for cash discounts and other
allowances at June 30, 2008 was principally due to the increased level of
sales made as a result of allowances offered on our specialty generic product
line in conjunction with trade shows sponsored by our major wholesale
customers.

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

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

Chargeback transactions are almost exclusively related to our specialty
generics business segment. During the three months ended June 30, 2008 and
2007, the chargeback provision reduced the gross sales of our specialty
generics segment by $49.5 million and $25.1 million, respectively. These
amounts accounted for 99.3% of the total chargeback provisions recorded during
both the three months ended June 30, 2008 and 2007.

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

     *    The amount of inventory in the wholesale distribution channel. We
          receive actual inventory information from our three major wholesale
          customers and estimate the inventory position of the remaining
          wholesalers based on historical buying patterns. During the three
          months ended June 30, 2008, unit sales to our three major wholesale
          customers accounted for 82% of our total unit sales to all
          wholesalers, and the aggregate inventory position of the three major
          wholesalers at June 30, 2008 was approximately equivalent to our
          last eight weeks of shipments during the fiscal quarter. We
          currently use the last six weeks of our shipments as an estimate of
          the inventory held by the remaining wholesalers where we do not
          receive actual inventory data, as our

                                      37

<PAGE>
<PAGE>

          experience and buying patterns indicate that our smaller wholesale
          customers carry less inventory than our large wholesale customers.
          As of June 30, 2008, each week of inventory for those remaining
          wholesalers represented approximately $0.2 million, or 0.8%, of the
          reported reserve for chargebacks.

     *    The percentage of sales to our wholesale customers that will result
          in chargebacks. Using our automated chargeback system we track, at
          the product level, the percentage of sales units shipped to our
          wholesale customers that eventually result in chargebacks to us. The
          percentage for each product, which is based on actual historical
          experience, is applied to the respective inventory units in the
          wholesale distribution channel. As of June 30, 2008, the aggregate
          weighted average percentage of sales to wholesalers for our
          generic/non-branded business assumed to result in chargebacks was
          approximately 93%, with each 1% representing approximately $0.2
          million, or 0.9%, of the reported reserve for chargebacks.

     *    Contract pricing and the resulting chargeback per unit. The
          chargeback provision is based on the difference between our invoice
          price to the wholesaler, or "WAC," and the contract price negotiated
          with either our indirect customer or with the wholesaler for sales
          by the wholesaler to the indirect customers. We calculate the price
          difference, or chargeback per unit, for each product and for each
          major wholesale customer using historical weighted average pricing,
          based on actual chargeback experience. Use of weighted average
          pricing over time compensates for changes in the mix of indirect
          customers and products from period to period. As of June 30, 2008, a
          5% shift in the calculated chargeback per unit in the same direction
          across all products and customers would result in a $0.8 million, or
          3.9%, impact on the reported reserve for chargebacks.

Shelf-Stock Adjustments - These adjustments, which are included in the
-----------------------
chargeback reserves, represent credits issued to our wholesale customers that
result from a decrease in our WAC. Decreases in our invoice prices are
discretionary decisions we make to reflect market conditions. These credits
are customary in the industry and are intended to reduce a wholesale
customer's inventory cost to better reflect current market prices. Generally,
we provide credits to customers at the time the price reduction occurs based
on the inventory that is owned by them on the effective date of the price
reduction. Since a reduction in WAC reduces the chargeback per unit, or the
difference between WAC and the contract price, shelf-stock adjustments are
typically included as part of the reserve for chargebacks because the price
reduction credits act essentially as accelerated chargebacks. Although we have
contractually agreed to provide price adjustment credits to our major
wholesale customers at the time they occur, the impact of any such price
reductions not included in the reserve for chargebacks is immaterial to the
amount of revenue recognized in any given period. As a result of WAC decreases
to certain specialty generic/non-branded products, we paid shelf-stock
adjustments of $3.3 million to our wholesale customers during the three months
ended June 30, 2008.

Sales Returns - Consistent with industry practice, we maintain a returns
-------------
policy that allows our direct and indirect customers to return product six
months prior to expiration and within one year after expiration. This policy
is applicable to both our branded and specialty generics business segments.
Upon recognition of revenue from product sales to customers, we provide for an
estimate of product to be returned. This estimate is determined by applying a
historical relationship of customer returns to gross sales. We evaluate the
reserve for sales returns by calculating historical return rates using data
from the last 12 months on a product specific basis and by class of trade
(wholesale versus retail chain). The calculated percentages are applied
against estimates of inventory in the distribution channel on a product
specific basis. To determine the inventory levels in the wholesale
distribution channel, we utilize actual inventory information from our major
wholesale customers and estimate the inventory positions of the remaining
wholesalers based on historical buying patterns. For inventory held by our
non-wholesale customers, we use the last two months of sales to the direct
buying chains and the indirect buying retailers as an estimate. A 10% change
in the product specific historical return rates used in the reserve analysis
would have changed the reserve balance at June 30, 2008 by approximately $0.2
million, or 6.0%, of the reported reserve for sales returns. A 10% change in
the amount of estimated inventory in the distribution channel would have
changed the reserve balance at June 30, 2008 by approximately $0.2 million, or
8.2%, of the reported reserve for sales returns.

Medicaid Rebates - Established in 1990, the Medicaid Drug Rebate Program
----------------
requires a drug manufacturer to provide to each state a rebate every calendar
quarter for covered outpatient drugs dispensed to Medicaid patients. Medicaid
rebates apply to both our branded and specialty generic segments. Individual
states invoice us for Medicaid rebates on a quarterly basis using statutorily
determined rates for generic (11%) and branded (15%) products, which are
applied to the Average Manufacturer's Price, or "AMP," for a particular
product to arrive at a Unit Rebate Amount, or "URA." The amount owed is based
on the number of units dispensed by the pharmacy to Medicaid patients extended
by the

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<PAGE>

URA. The reserve for Medicaid rebates is based on expected payments, which are
driven by patient usage and estimated inventory in the distribution channel.
We estimate patient usage by calculating a payment rate as a percentage of net
sales lagged six months, which is then applied to an estimate of customer
inventory. We currently use the last two months of our shipments to
wholesalers and direct buying chains as an estimate of inventory in the
wholesale and chain channels and an additional month of wholesale sales as an
estimate of inventory held by the indirect buying retailer. A 10% change in
the amount of customer inventory subject to Medicaid rebates would have
changed the reserve at June 30, 2008 by $0.5 million, or 7.5% of the reported
reserve for Medicaid rebates. Similarly, a 10% change in estimated patient
usage would have changed the reserve at June 30, 2008 by $0.5 million, or 7.5%
of the reported reserve for Medicaid rebates.

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

INTANGIBLE ASSETS
-----------------
Our intangible assets principally consist of product rights, license
agreements and trademarks resulting from product acquisitions and legal fees
and similar costs relating to the development of patents and trademarks.
Intangible assets that are acquired are stated at cost, less accumulated
amortization, and are amortized on a straight-line basis over their estimated
useful lives, which range from nine to 20 years. We determine amortization
periods for intangible assets that are acquired based on our assessment of
various factors impacting estimated useful lives and cash flows of the
acquired products. Such factors include the product's position in its life
cycle, the existence or absence of like products in the market, various other
competitive and regulatory issues, and contractual terms. Significant changes
to any of these factors may result in a reduction in the intangible asset's
useful life and an acceleration of related amortization expense.

We assess the impairment of intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors we consider important which could trigger an impairment review include
the following: (1) significant underperformance relative to expected
historical or projected future operating results; (2) significant changes in
the manner of our use of the acquired assets or the strategy for our overall
business; and (3) significant negative industry or economic trends.

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

STOCK-BASED COMPENSATION
------------------------
We account for stock-based compensation expense in accordance with SFAS 123R,
which requires the measurement and recognition of compensation expense, based
on estimated fair values, for all share-based compensation awards made to
employees and directors over the vesting period of the awards. Determining the
fair value of share-based awards at the grant date requires judgment to
identify the appropriate valuation model and estimate the assumptions,
including the expected term of the stock options and expected stock-price
volatility, to be used in the calculation. Judgment is also required in
estimating the percentage of share-based awards that are expected to be
forfeited. We estimate the fair value of stock options granted using the
Black-Scholes option-pricing model with assumptions based primarily on
historical data. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
materially impacted.

INCOME TAXES
------------
Our deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and

                                      39

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<PAGE>

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

We compute our annual tax rate based on the statutory tax rates and tax
planning opportunities available to us in the various jurisdictions in which
we earn income. Significant judgment is required in determining our annual tax
rate and in evaluating tax positions. We establish reserves in accordance with
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"), which provides that the
tax effects from an uncertain tax position be recognized in an entity's
financial statements, only if the position is more likely than not of being
sustained upon audit, based on the technical merits of the position. We adjust
these reserves in light of changing facts and circumstances, such as the
settlement of a tax audit. Our annual tax rate includes the impact of reserve
provisions and changes to reserves.

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

CONTINGENCIES
-------------
We are involved in various legal proceedings, some of which involve claims for
substantial amounts. An estimate is made to accrue for a loss contingency
relating to any of these legal proceedings if it is probable that a liability
was incurred as of the date of the financial statements and the amount of loss
can be reasonably estimated. Because of the subjective nature inherent in
assessing the outcome of litigation and because of the potential that an
adverse outcome in legal proceedings could have a material impact on our
financial condition or results of operations, such estimates are considered to
be critical accounting estimates. After review, it was determined at June 30,
2008 that for each of the various legal proceedings in which we are involved,
the conditions mentioned above were not met. We will continue to evaluate all
legal matters as additional information becomes available.

                                      40

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We currently have investments in taxable auction rate securities. The rates on
these securities reset at pre-determined intervals up to 35 days. As of June
30, 2008, we had invested $83.9 million principal amount in auction rate
securities consisting of high quality (AAA-rated) bonds secured by student
loans which are guaranteed by the U. S. Government. The maturity of these
securities is greater than 10 years. During the fourth quarter of fiscal 2008,
certain developments in the capital and credit markets adversely affected the
market for auction rate securities, which has resulted in a loss of liquidity
for these investments. We have evaluated these securities to determine if
other-than-temporary impairment of the carrying value of the securities has
occurred due to the loss of liquidity. At June 30, 2008, the fair value of
auction rate securities was $79.9 million and the resultant difference of $4.0
million was recorded in accumulated other comprehensive loss as the unrealized
losses were considered to be temporary (see Note 7 of the Notes to
Consolidated Financial Statements). We believe that as of June 30, 2008, based
on our cash, cash equivalents and short-term marketable securities balances of
$135.1 million, excluding auction rate securities, and our current borrowing
capacity of $290.0 million under our credit facility, the current lack of
liquidity in the auction rate market will not have a material impact on our
ability to fund our operations or interfere with our external growth plans,
although we cannot assure you that this will continue to be the case.

The annual favorable impact on our net income as a result of a 25, 50 or 100
basis point (where 100 basis points equals 1%) increase in short-term interest
rates would be approximately $0.5 million, $1.1 million or $2.2 million,
respectively, based on our average cash, cash equivalents and short-term
marketable investment balances during the quarter ended June 30, 2008 compared
to an increase of $0.5 million, $1.1 million or $2.2 million, respectively,
during the fiscal year ended March 31, 2008.

Advances to us under our credit facility bear interest at a rate that varies
consistent with increases or decreases in the publicly announced prime rate
and/or the LIBOR rate with respect to LIBOR-related loans, if any. A material
increase in such rates could significantly increase borrowing expenses. At
June 30, 2008, we had $30.0 million of borrowings outstanding under our credit
facility. The annual unfavorable impact on our pre-tax income as a result of a
25, 50 or 100 basis point (where 100 basis points equals 1%) increase in
short-term interest rates would be approximately $0.1 million, $0.2 million or
$0.3 million annually based on the $30.0 million of borrowings that were
outstanding under our line of credit at June 30, 2008.

In May 2003, we issued $200.0 million principal amount of Convertible
Subordinated Notes. The interest rate on the Notes is fixed at 2.50% and
therefore not subject to interest rate changes. Beginning May 16, 2006, we
became obligated to pay contingent interest at a rate equal to 0.5% per annum
during any six-month period, if the average trading price of the Notes per
$1,000 principal amount for the five-trading day period ending on the third
trading day immediately preceding the first day of the applicable six-month
period equals $1,200 or more. In November 2007, the average trading price of
the Notes reached the threshold for the applicable five-day trading period
which resulted in the payment of contingent interest and beginning November
16, 2007 the Notes began to bear interest at a rate of 3.00% per annum.
Holders may require us to repurchase all or a portion of their Notes on May
16, 2013, 2018, 2023 and 2028, or upon a change in control, as defined in the
indenture governing the Notes, at 100% of the principal amount of the Notes,
plus accrued and unpaid interest (including contingent interest, if any) to
the date of repurchase, payable in cash. Holders had the right to require the
Company to repurchase all or a portion of their Notes on May 16, 2008 and,
accordingly, we classified the Notes as a current liability as of March 31,
2008. Since no holders required us to repurchase all or a portion of their
Notes on that date and because the next occasion holders may require us to
repurchase all or a portion of their Notes is May 16, 2013, the Notes were
classified as a long-term liability as of June 30, 2008.

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

                                      41

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<PAGE>

ITEM 4.    CONTROLS AND PROCEDURES

(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, as of the end of the period of this report, evaluated
the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and determined that, as
a result of a material weakness in internal control over financial reporting
described below, as of June 30, 2008 our disclosure controls and procedures
were not effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.

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

During the completion of its financial statements for fiscal 2008 and the
first quarter of fiscal 2009, the Company determined that a material weakness
in its internal control over financial reporting existed as of June 30, 2008
related to revenue recognition. Specifically, the design of the Company's
policies and procedures did not adequately address the financial reporting
risk associated with customer rebate agreements and were inadequate in
ensuring that the necessary information for new or modified rebate agreements
was communicated to those responsible for evaluating the accounting
implications of the agreements. This resulted in a reasonable possibility that
a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.

(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
SEC regulations require that Company management evaluate any change in our
internal controls over financial reporting that occurred during each of our
fiscal quarters that has materially affected, or is reasonably likely to
materially affect the Company's internal control over financial reporting.

There were no changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect the Company's internal control over
financial reporting.

(C) INHERENT LIMITATIONS OF DISCLOSURE CONTROLS AND PROCEDURES
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to risks that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.

(D) REMEDIATION ACTIVITIES
During the quarter ended June 30, 2008, the Company began taking steps to
remediate the material weakness related to rebate agreements by designing
policies and procedures that require all new and existing customer agreements
to be reviewed by accounting personnel with relevant GAAP knowledge to
determine the appropriate accounting treatment.

                                      42

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<PAGE>

PART II. - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information set forth under Note 16 - CONTINGENCIES - LITIGATION of the
Notes to the Consolidated Financial Statements included in Part I, Item I of
this report is incorporated in this Part II, Item 1 by reference.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth in Item 1A,
"Risk Factors," of the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2008. Please refer to that section for disclosures
regarding the risks and uncertainties related to the Company's business.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

          PURCHASE OF EQUITY SECURITIES BY THE COMPANY

          The following table provides information about purchases the Company
          made of its common stock during the quarter ended June 30, 2008:

<TABLE>
<CAPTION>
                                                                           TOTAL NUMBER OF SHARES  MAXIMUM NUMBER OF SHARES
                                   TOTAL NUMBER OF                         PURCHASED AS PART OF A       THAT MAY YET BE
                                  SHARES PURCHASED    AVERAGE PRICE PAID     PUBLICLY ANNOUNCED       PURCHASED UNDER THE
       PERIOD                            (A)              PER SHARE               PROGRAM                   PROGRAM
<C>                                    <C>                <C>                      <C>                       <C>
  April 1-30, 2008                      2,047              $ 24.33                  --                        --

  May 1-31, 2008                        1,031              $ 24.43                  --                        --

  June 1-30, 2008                         599              $ 22.17                  --                        --
                                       ------
              Total                     3,677              $ 24.01                  --                        --
                                        =====              =======
</TABLE>

Shares were purchased from employees upon their termination pursuant to the
terms of the Company's stock option plan.

                                      43

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<PAGE>

ITEM 6. EXHIBITS

                  Exhibits. See Exhibit Index.

                                      44

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                                  SIGNATURES
                                  ----------

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

                                  K-V PHARMACEUTICAL COMPANY

Date: August 11, 2008        By   /s/  Marc S. Hermelin
                                  ------------------------------------------
                                  Marc S. Hermelin
                                  Chairman of the Board and
                                  Chief Executive Officer
                                  (Principal Executive Officer)

Date: August 11, 2008        By   /s/  Ronald J. Kanterman
                                  ------------------------------------------
                                  Ronald J. Kanterman
                                  Vice President and Chief Financial Officer
                                  (Principal Financial Officer)

Date: August 11, 2008        By   /s/ Richard H. Chibnall
                                  ------------------------------------------
                                  Richard H. Chibnall
                                  Vice President, Finance
                                  (Principal Accounting Officer)

                                      45

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                                 EXHIBIT INDEX

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

   31.1     Certification of Chief Executive Officer.

   31.2     Certification of Chief Financial Officer.

   32.1     Certification pursuant to 18 U.S.C. Section 1350, as adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   32.2     Certification pursuant to 18 U.S.C. Section 1350, as adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


                                      46