<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 SEPTEMBER 30, 2007
                             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

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                          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 [    ] No [ X ]

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 June 6, 2008, the registrant had outstanding 37,755,099 and
12,256,159 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; dollars in thousands)


<CAPTION>
                                                                   THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                                      SEPTEMBER 30,                       SEPTEMBER 30,
                                                              ---------------------------         ---------------------------
                                                                2007              2006              2007              2006
                                                              ---------         ---------         ---------         ---------
<C>                                                           <C>               <C>               <C>               <C>
Net revenues...............................................   $ 172,925         $ 108,983         $ 287,282         $ 205,183
Cost of sales..............................................      45,132            38,879            84,702            72,325
                                                              ---------         ---------         ---------         ---------
Gross profit...............................................     127,793            70,104           202,580           132,858
                                                              ---------         ---------         ---------         ---------
Operating expenses:
    Research and development...............................      11,750             6,396            21,546            14,287
    Purchased in-process research and
        development........................................          --                --            10,000                --
    Selling and administrative.............................      50,999            42,855            96,173            83,008
    Amortization of intangibles............................       3,015             1,201             4,200             2,398
                                                              ---------         ---------         ---------         ---------
Total operating expenses...................................      65,764            50,452           131,919            99,693
                                                              ---------         ---------         ---------         ---------

Operating income...........................................      62,029            19,652            70,661            33,165
                                                              ---------         ---------         ---------         ---------

Other expense (income):
    Interest expense.......................................       2,768             2,305             4,898             4,541
    Interest and other income..............................      (2,741)           (2,308)           (6,156)           (4,366)
                                                              ---------         ---------         ---------         ---------
Total other expense (income), net..........................          27                (3)           (1,258)              175
                                                              ---------         ---------         ---------         ---------
Income before income taxes and cumulative effect
    of change in accounting principle.......................     62,002            19,655            71,919            32,990
Provision for income taxes.................................      21,779             7,570            25,496            12,783
                                                              ---------         ---------         ---------         ---------
Income before cumulative effect of change
    in accounting principle................................      40,223            12,085            46,423            20,207
Cumulative effect of change in accounting
    principle (net of $670 in taxes).......................          --                --                --             1,976
                                                              ---------         ---------         ---------         ---------
Net income.................................................   $  40,223         $  12,085         $  46,423         $  22,183
                                                              =========         =========         =========         =========


<CAPTION>
                                                                                       (CONTINUED)

                                      2

<PAGE>
<PAGE>


                                     K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF INCOME - (CONTINUED)
                                          (Unaudited; dollars in thousands)


                                                           THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                              SEPTEMBER 30,                      SEPTEMBER 30,
                                                      ---------------------------         ---------------------------
                                                        2007              2006              2007              2006
                                                      ---------         ---------         ---------         ---------
<C>                                                   <C>               <C>               <C>               <C>
Earnings per share before effect of change in
  accounting principle:
       Basic - Class A common......................   $    0.85         $    0.26         $    0.98         $    0.43
       Basic - Class B common......................        0.71              0.21              0.82              0.36
       Diluted - Class A common....................        0.70              0.22              0.82              0.38
       Diluted - Class B common....................        0.60              0.19              0.71              0.32

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

Earnings per share:
       Basic - Class A common......................   $    0.85         $    0.26         $    0.98         $    0.47
       Basic - Class B common......................        0.71              0.21              0.82              0.39
       Diluted - Class A common....................        0.70              0.22              0.82              0.41
       Diluted - Class B common....................        0.60              0.19              0.71              0.35

Shares used in per share calculation:
       Basic - Class A common......................      37,082            36,744            37,044            36,671
       Basic - Class B common......................      12,234            12,456            12,257            12,465
       Diluted - Class A common....................      59,107            58,917            59,098            58,882
       Diluted - Class B common....................      12,317            12,552            12,339            12,587




SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                     3

<PAGE>
<PAGE>
<TABLE>
                                     K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                             CONSOLIDATED BALANCE SHEETS
                                          (Unaudited; dollars in thousands)
<CAPTION>

                                                                                          SEPTEMBER 30,      MARCH 31,
                                                                                             2007              2007
                                                                                             ----              ----
<C>                                                                                    <C>                <C>
                                 ASSETS
                                 ------
CURRENT ASSETS:
Cash and cash equivalents                                                               $    41,275       $    82,574
Marketable securities                                                                       121,735           157,812
Receivables, less allowance for doubtful accounts of $950 and $716
   at September 30, 2007 and March 31, 2007, respectively                                   130,953            78,634
Inventories, net                                                                             96,133            91,515
Prepaid and other assets                                                                      4,851             6,571
Deferred tax asset                                                                           18,901            14,364
                                                                                        -----------       -----------
   Total Current Assets                                                                     413,848           431,470
Property and equipment, less accumulated depreciation of $65,047
   and $56,186 at June 30, 2007 and March 31, 2007, respectively                            185,899           186,900
Intangible assets and goodwill, net                                                         206,995            69,010
Other assets                                                                                 22,317            20,403
                                                                                        -----------       -----------
TOTAL ASSETS                                                                            $   829,059       $   707,783
                                                                                        ===========       ===========
                               LIABILITIES
                               -----------
CURRENT LIABILITIES:
Accounts payable                                                                            $20,071           $18,506
Accrued liabilities                                                                          37,010            33,218
Income taxes payable                                                                          5,401             5,558
Current maturities of long-term debt                                                        201,955             1,897
                                                                                        -----------       -----------
   Total Current Liabilities                                                                264,437            59,179
Long-term debt                                                                               88,466           239,451
Other long-term liabilities                                                                  23,807             6,319
Deferred tax liability                                                                       37,465            38,007
                                                                                        -----------       -----------
TOTAL LIABILITIES                                                                           414,175           342,956
                                                                                        -----------       -----------

COMMITMENTS AND CONTINGENCIES
                           SHAREHOLDERS' EQUITY
                           --------------------
7% cumulative convertible Preferred Stock, $.01 par value;
   $25.00 stated and liquidation value; 840,000 shares authorized;
   issued and outstanding -- 40,000 shares at September 30, 2007 and March 31,
   2007 (convertible into Class A shares on a 8.4375-to-one basis)                               --                --
Class A and Class B Common Stock, $.01 par value; 150,000,000 and
   75,000,000 shares authorized, respectively;
      Class A - issued 40,468,084 and 40,316,426 at September 30, 2007
         and March 31, 2007, respectively                                                       405               403
      Class B - issued 12,336,043 and 12,393,982 at September 30, 2007 and March 31,
      2007, respectively (convertible into Class A shares on a one-for-one basis)               123               124
Additional paid-in capital                                                                  154,628           150,818
Retained earnings                                                                           315,818           269,430
Accumulated other comprehensive (loss) income                                                    (4)               33
Less: Treasury stock, 3,241,099 shares of Class A and 92,902 shares of Class B
   Common Stock at September 30, 2007, respectively, and 3,237,023 shares of Class A
   and 92,902 shares of Class B Common Stock at March 31, 2007, respectively, at cost       (56,086)          (55,981)
                                                                                        -----------       -----------
TOTAL SHAREHOLDERS' EQUITY                                                                  414,884           364,827
                                                                                        -----------       -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                              $   829,059       $   707,783
                                                                                        ===========       ===========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
                                                4

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

                                                                                  SIX MONTHS ENDED
                                                                                    SEPTEMBER 30,
                                                                              ------------------------
                                                                                 2007          2006
                                                                              ---------      ---------
<C>                                                                           <C>            <C>
OPERATING ACTIVITIES:
Net income                                                                    $  46,423      $  22,183
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Acquired in-process research and development                                  10,000             --
   Cumulative effect of change in accounting principle                               --         (1,976)
   Depreciation, amortization and other non-cash charges                         13,711         11,048
   Deferred income tax (benefit) provision                                       (5,060)         3,298
   Deferred compensation                                                          1,116            377
   Stock-based compensation                                                       2,757          1,919
   Excess tax benefits associated with stock options                               (479)          (306)
Changes in operating assets and liabilities:
   Increase in receivables, net                                                 (52,319)       (13,429)
   Increase in inventories, net                                                  (4,618)        (5,331)
   Increase in prepaid and other assets                                          (1,528)        (1,870)
   Increase in income taxes payable                                              16,215          4,588
   Increase in accounts payable and accrued liabilities                           4,798          2,756
                                                                              ---------      ---------
Net cash provided by operating activities                                        31,016         23,257
                                                                              ---------      ---------

INVESTING ACTIVITIES:
   Purchase of property and equipment, net                                       (6,921)       (18,339)
   Purchase of marketable securities                                            (32,554)       (52,250)
   Sale of marketable securities                                                 68,575          5,565
   Purchase of preferred stock                                                       --           (400)
   Product acquisition                                                         (151,500)            --
                                                                              ---------      ---------
Net cash used in investing activities                                          (122,400)       (65,424)
                                                                              ---------      ---------

FINANCING ACTIVITIES:
   Principal payments on long-term debt                                            (927)          (731)
   Proceeds from borrowing on line of credit                                     50,000             --
   Dividends paid on preferred stock                                                (35)           (35)
   Purchase of common stock for treasury                                           (105)        (1,794)
   Excess tax benefits associated with stock options                                479            306
   Cash deposits received for stock options                                         673          2,420
                                                                              ---------      ---------
Net cash provided by financing activities                                        50,085            166
                                                                              ---------      ---------
Decrease in cash and cash equivalents                                           (41,299)       (42,001)
Cash and cash equivalents:
   Beginning of year                                                             82,574        100,706
                                                                              ---------      ---------
   End of period                                                              $  41,275      $  58,705
                                                                              =========      =========

SUPPLEMENTAL INFORMATION:
   Interest paid                                                              $   3,736      $   3,572
   Income taxes paid                                                             13,862          5,627
   Stock options exercised (at expiration of two-year
      forfeiture period)                                                            575          2,329

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
                                             5


<PAGE>
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                     (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 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-
and six-month periods ended September 30, 2007 are not necessarily
indicative of the results of operations and cash flows that may be
expected for the fiscal year ended March 31, 2008.  The interim
consolidated financial statements and accompanying notes should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2007.  The balance sheet information as of
March 31, 2007 has been derived from the Company's audited consolidated
balance sheet as of that date.

2. ACQUISITION

In May 2007, the Company acquired the U.S. marketing rights to
Evamist(TM), a new estrogen replacement therapy product delivered with a
patented metered-dose transdermal spray system, from VIVUS, Inc.  Under
terms of the Asset Purchase Agreement, the Company paid $10,000 in cash
at closing and agreed to make an additional cash payment of $141,500
upon final approval of the product by the U.S. Food and Drug
Administration ("FDA").  The agreement also provides for two future
payments upon achievement of certain net sales milestones.  If
Evamist(TM) achieves $100,000 of net sales in a fiscal year, a one-time
payment of $10,000 will be made, and if net sales levels reach $200,000
in a fiscal year, a one-time payment of 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 six months ended September
30, 2007.  In July 2007, FDA approval for Evamist(TM) was received and a
payment of $141,500 was made to VIVUS, Inc.  The preliminary purchase
price allocation, which is subject to change based on the final fair
value assessment, resulted in estimated identifiable intangible assets
of $52,446 to product rights; $15,166 to trademark rights; $66,417 to
rights under a sublicense agreement; and, $7,471 to a covenant not to
compete.  Upon FDA approval in July 2007, the Company began amortizing
the product rights, trademark rights and rights under the sublicense
agreement over 15 years and the covenant not to compete over nine years.

3.   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

                                  6


<PAGE>
<PAGE>
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 the Convertible
Subordinated Notes.  The dilutive effects of outstanding stock options
and unvested common shares subject to repurchase are reflected in
diluted earnings per share by application of the treasury stock method.
Convertible preferred stock and the Convertible Subordinated 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 and diluted
earnings per share for the three months ended September 30, 2007 and
2006:

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                 THREE MONTHS ENDED
                                                                SEPTEMBER 30, 2007                 SEPTEMBER 30, 2006
                                                        ---------------------------------  ---------------------------------
                                                            CLASS A          CLASS B           CLASS A          CLASS B
                                                        ---------------- ----------------  ---------------- ----------------
<C>                                                      <C>              <C>               <C>              <C>
Basic earnings per share:
    Numerator:
      Allocation of undistributed earnings               $       31,536   $        8,670    $        9,410   $        2,658
                                                        ---------------- ----------------  ---------------- ----------------
    Denominator:
      Weighted average shares outstanding                        37,528           12,335            37,066           12,503
      Less - weighted average unvested
        common shares subject to repurchase                        (446)            (101)             (322)             (47)
                                                        ---------------- ----------------  ---------------- ----------------
      Number of shares used in per
        share computations                                       37,082           12,234            36,744           12,456
                                                        ================ ================  ================ ================

Basic earnings per share                                 $         0.85   $         0.71    $         0.26   $         0.21
                                                        ================ ================  ================ ================

Diluted earnings per share:
    Numerator:
      Allocation of undistributed earnings
        for basic computation                            $       31,536   $        8,670    $        9,410   $        2,658
      Reallocation of undistributed earnings as a
        result of conversion of Class B to
        Class A shares                                            8,670                -             2,658                -
      Reallocation of undistributed earnings to
        Class B shares                                                -           (1,254)                -             (259)
      Add - preferred stock dividends                                17                -                17                -
      Add - interest expense convertible notes                    1,000                -               948                -
                                                        ---------------- ----------------  ---------------- ----------------
      Allocation of undistributed earnings               $       41,223   $        7,416    $       13,033   $        2,399
                                                        ================ ================  ================ ================
    Denominator:
      Number of shares used in basic computation                 37,082           12,234            36,744           12,456
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares                  12,234                -            12,456                -
        Employee stock options                                      761               83               687               96
        Convertible preferred stock                                 338                -               338                -
        Convertible notes                                         8,692                -             8,692                -
                                                        ---------------- ----------------  ---------------- ----------------
      Number of shares used in per share
        computations                                             59,107           12,317            58,917           12,552
                                                        ================ ================  ================ ================

Diluted earnings per share (1)                           $         0.70   $         0.60    $         0.22   $         0.19
                                                        ================ ================  ================ ================


<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 September 30, 2007 and 2006,
    excluded from the computation were options to purchase 56 and 889
    shares of Class A and Class B Common Stock, respectively.
</TABLE>

                                      7

<PAGE>
<PAGE>

The following table sets forth the computation of basic and diluted
earnings per share for the six months ended September 30, 2007 and 2006:

<TABLE>
<CAPTION>
                                                                                SIX MONTHS ENDED SEPTEMBER 30,
                                                         -------------------------------------------------------------------------
                                                                         2007                                 2006
                                                         ------------------------------------ ------------------------------------
                                                              CLASS A            CLASS B            CLASS A           CLASS B
                                                         -----------------  ----------------- ------------------ -----------------
<C>                                                      <C>                <C>               <C>                <C>
Basic earnings per share:
    Numerator:
      Allocation of undistributed earnings before
        cumulative effect of change in accounting
        principle                                         $        36,362    $        10,026   $         15,719   $         4,453
      Allocation of cumulative effect of
        change in accounting principle                                  -                  -              1,540               436
                                                         -----------------  ----------------- ------------------ -----------------
      Allocation of undistributed earnings                $        36,362    $        10,026   $         17,259   $         4,889
                                                         =================  ================= ================== =================
    Denominator:
      Weighted average shares outstanding                          37,486             12,357             37,005            12,527
      Less - weighted average unvested
        common shares subject to repurchase                          (442)              (100)              (334)              (62)
                                                         -----------------  ----------------- ------------------ -----------------
      Number of shares used in per
        share computations                                         37,044             12,257             36,671            12,465
                                                         =================  ================= ================== =================

Basic earnings per share before cumulative
    effect of change in accounting principle              $          0.98    $          0.82   $           0.43   $          0.36
Per share effect of cumulative effect of
    change in accounting principle                                      -                  -               0.04              0.03
                                                         -----------------  ----------------- ------------------ -----------------
Basic earnings per share                                  $          0.98    $          0.82   $           0.47   $          0.39
                                                         =================  ================= ================== =================

Diluted earnings per share:
    Numerator:
      Allocation of undistributed earnings
        for basic computation before cumulative
        effect of change in accounting principle          $        36,362    $        10,026   $         15,719   $         4,453
      Reallocation of undistributed earnings as a
        result of conversion of Class B to
        Class A shares                                             10,026                  -              4,453                 -
      Reallocation of undistributed earnings to
        Class B shares                                                  -             (1,299)                 -              (372)
      Add - preferred stock dividends                                  35                  -                 35                 -
      Add - interest expense convertible notes                      1,989                  -              1,888                 -
                                                         -----------------  ----------------- ------------------ -----------------
      Allocation of undistributed earnings
        for diluted computation before cumulative
        effect of change in accounting principle                   48,412              8,727             22,095             4,081
      Allocation of cumulative effect of
        change in accounting principle                                  -                  -              1,976               365
                                                         -----------------  ----------------- ------------------ -----------------
      Allocation of undistributed earnings                $        48,412    $         8,727   $         24,071   $         4,446
                                                         =================  ================= ================== =================

<CAPTION>
                                                            (CONTINUED)

                                      8

<PAGE>
<PAGE>

                                                                                SIX MONTHS ENDED SEPTEMBER 30,
                                                        --------------------------------------------------------------------------
                                                                        2007                                  2006
                                                        ------------------------------------  ------------------------------------
                                                            CLASS A            CLASS B            CLASS A            CLASS B
                                                        -----------------  -----------------  -----------------  -----------------
<C>                                                     <C>                <C>                <C>                <C>
Diluted earnings per share (continued):
    Denominator:
      Number of shares used in basic computation                  37,044             12,257             36,671             12,465
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares                   12,257                  -             12,465                  -
        Employee stock options                                       767                 82                716                122
        Convertible preferred stock                                  338                  -                338                  -
        Convertible notes                                          8,692                  -              8,692                  -
                                                        -----------------  -----------------  -----------------  -----------------
      Number of shares used in per share
        computations                                              59,098             12,339             58,882             12,587
                                                        =================  =================  =================  =================

Diluted earnings per share before cumulative
    effect of change in accounting principle             $          0.82    $          0.71    $          0.38    $          0.32
Per share effect of cumulative effect of
    change in accounting principle                                     -                  -               0.03               0.03
                                                        -----------------  -----------------  -----------------  -----------------
Diluted earnings per share (1)                           $          0.82    $          0.71    $          0.41    $          0.35
                                                        =================  =================  =================  =================

<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 six months ended September 30, 2007 and 2006,
    excluded from the computation were options to purchase 54 and 908
    shares of Class A and Class B Common Stock, respectively.
</TABLE>

4.   STOCK-BASED COMPENSATION

Effective April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which requires the measurement and recognition of
compensation expense, based on estimated fair values, for all share-
based compensation awards made to employees and directors over the
vesting period of the awards.  The Company adopted SFAS 123R using the
modified prospective method and, as a result, did not retroactively
adjust results from prior periods.  Under the modified prospective
method, stock-based compensation was recognized (1) for the unvested
portion of previously issued awards that were outstanding at the initial
date of adoption based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123, "Accounting for
Stock-Based Compensation," and (2) for any awards granted on or
subsequent to the effective date of SFAS 123R based on the grant date
fair value estimated in accordance with the provisions of this
statement.

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 certain employees.  Each option granted has
an exercise price of not less than 100% of the market value of the
common stock on the date of grant.  The contractual life of each option
is generally ten years and the options vest at the rate of 10% per year
from the date of grant.

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

                             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 terminates employment voluntarily
or involuntarily (other than by retirement, death or disability) during
the two-year period the stock option agreements provide the Company with
the option of repurchasing the shares at the lower of the exercise price
or the fair market value of the stock on the date of termination.  This
repurchase option is considered a forfeiture provision and the two-year
period is included in determining the requisite service period over
which stock-based compensation expense is recognized.  The requisite
service period initially is equal to the expected term (as discussed
above) and is revised when an option exercise occurs.

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

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

In accordance with the provisions of SFAS 123R, share-based compensation
expense recognized during a period is based on the value of the portion
of share-based awards that are expected to vest with employees.
Accordingly, the recognition of share-based compensation expense
beginning April 1, 2006 has been reduced for estimated future
forfeitures. SFAS 123R requires forfeitures to be estimated at the time
of grant with adjustments recorded in subsequent period compensation
expense if actual forfeitures differ from those estimates.  Prior to
implementing SFAS 123R, the Company accounted for forfeitures as they
occurred for the disclosure of pro forma information presented in the
Notes to Consolidated Financial Statements for prior periods.  Upon
adoption of SFAS 123R on April 1, 2006, the Company recognized the
cumulative effect of a change in accounting principle to reflect the
effect of estimated forfeitures related to outstanding awards that were
not expected to vest as of the adoption date.  The cumulative adjustment
increased net income for the six months ended September 30, 2006 by
$1,976, net of tax, and increased diluted earnings per share for Class A
and Class B shares by $0.03 and $0.03, respectively.

The Company recognized, in accordance with SFAS 123R, stock-based
compensation of $1,108 and $2,757, respectively, and related tax
benefits of $257 and $742, respectively, for the three and six months
ended September 30, 2007 and stock-based compensation of $983 and
$1,919, respectively, and related tax benefits of $294 and $570,
respectively, for the three and six months ended September 30, 2006.
There was no stock-based employee compensation cost capitalized as of
September 30, 2007.  Cash received from stock option deposits was $399
and $1,988 for the three months ended September 30, 2007 and 2006,
respectively, and $673 and $2,420 for the six months ended September 30,
2007 and 2006, respectively.  The actual tax benefit realized from tax
deductions associated with stock option exercises (at expiration of two-
year forfeiture period) was $407 and $145 for the three months ended
September 30, 2007 and 2006, respectively, and $529 and $423 for the six
months ended September 30, 2007 and 2006, respectively.

The following weighted average assumptions were used for stock options
granted during the three and six months ended September 30, 2007 and
2006:

<TABLE>
<CAPTION>

                                                      THREE MONTHS ENDED            SIX MONTHS ENDED
                                                         SEPTEMBER 30,                SEPTEMBER 30,
                                                   ------------------------      ------------------------
                                                     2007              2006         2007           2006
                                                     ----              ----         ----           ----
        <C>                                       <C>                 <C>       <C>            <C>
        Dividend yield                                  None           None           None           None
        Expected volatility                              43%             --            43%            46%
        Risk-free interest rate                        4.93%             --          4.93%          4.93%
        Expected term                              9.0 years             --      9.0 years      9.0 years
        Weighted average fair value per share
          at grant date                               $16.65             --       $  15.94       $  11.34
</TABLE>

                                      10



<PAGE>
<PAGE>
A summary of the changes in the Company's stock option plans during the
six months ended September 30, 2007 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, 2007                                3,666        $ 16.11
Options granted                                          617          27.27
Options exercised                                        (65)          5.82                      $  1,475
Options canceled                                        (343)         19.66
                                                      ------
Balance, September 30, 2007                            3,875          17.74            5.7       $ 38,222
                                                      ======

Expected to vest at
     September 30, 2007                                3,003        $ 17.74            5.7       $ 29,622

Options exercisable at September 30, 2007
   (excluding shares in the two-year
    forfeiture period)                                 1,200        $ 15.63            5.1       $ 14,323
</TABLE>


As of September 30, 2007, the Company had $41,435 of total unrecognized
compensation expense, related to stock option grants, which will be
recognized over the remaining weighted average period of 4.9 years.

5.   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 gross  revenues and accounts
receivable.  Sales provisions totaled $66,510 and $36,224 for the three
months ended September 30, 2007 and 2006, respectively, and $107,429 and
$72,194 for the six months ended September 30, 2007 and 2006,
respectively.  The reserve balances related to the sales provisions
totaled $48,546 and $31,281 at September 30, 2007 and March 31, 2007,
respectively, and are included in "Receivables, less allowance for
doubtful accounts" in the accompanying consolidated balance sheets.

                             11



<PAGE>
<PAGE>
6.   INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>

                                       SEPTEMBER 30, 2007         MARCH 31, 2007
                                       ------------------         --------------
    <C>                                  <C>                        <C>
    Finished goods                          $ 38,032                 $ 35,420
    Work-in-process                           14,542                   13,294
    Raw materials                             43,559                   42,801
                                            --------                 --------
                                            $ 96,133                 $ 91,515
                                            ========                 ========
</TABLE>

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

7.   INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill consist of the following:
<TABLE>
<CAPTION>

                                                       SEPTEMBER 30, 2007              MARCH 31, 2007
                                                   -------------------------      -------------------------
                                                      GROSS                         GROSS
                                                    CARRYING     ACCUMULATED      CARRYING     ACCUMULATED
                                                     AMOUNT     AMORTIZATION       AMOUNT      AMORTIZATION
                                                     ------     ------------       ------      ------------
<C>                                                <C>          <C>               <C>          <C>
Product rights - Micro-K(R)                        $  36,140     $ (15,416)       $ 36,140     $ (14,513)
Product rights - PreCare(R)                            8,433        (3,443)          8,433        (3,233)
Product rights - Evamist(TM)                          52,446          (630)             --            --
Trademarks acquired:
     Niferex(R)                                       14,834        (3,338)         14,834        (2,967)
     Chromagen(R)/StrongStart(R)                      27,642        (6,219)         27,642        (5,528)
     Evamist(TM)                                      15,166          (182)             --            --
License agreements - Evamist(TM)                      66,417          (797)             --            --
License agreements - other                             4,400          (570)          4,400          (480)
Covenant not to compete - Evamist(TM)                  7,471          (150)             --            --
Covenant not to compete - other                          375           (87)            375           (72)
Trademarks and patents                                 4,877          (931)          4,196          (774)
                                                   ---------     ---------        --------     ---------
  Total intangible assets                            238,201       (31,763)         96,020       (27,567)
Goodwill                                                 557             -             557            --
                                                   ---------     ---------        --------     ---------
                                                   $ 238,758     $ (31,763)       $ 96,577     $ (27,567)
                                                   =========     =========        ========     =========
</TABLE>

As of September 30, 2007, the Company's intangible assets have a
weighted average useful life of approximately 16 years.  Amortization
expense for intangible assets was $3,015 and $1,201 for the three months
ended September 30, 2007 and 2006, respectively, and $4,200 and $2,398
for the six months ended September 30, 2007 and 2006, 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 $7,350 for the remainder of
fiscal 2008 and approximately $14,700 in each of the four succeeding
fiscal years.

8.   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

                             12



<PAGE>
<PAGE>

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. As of September 30, 2007,
the Company was in compliance with all of its financial covenants. In
addition, the agreement requires that the Company submit quarterly
financial statements within 45 days of the close of each fiscal quarter.
The Company has obtained the consent of the lenders to extend the period
for submission of the quarterly financial statements for this quarter
and the quarter ended December 31, 2007 to June 30, 2008.  At September
30, 2007, the Company had $50,000 of borrowings outstanding under the
credit facility (see Note 9).

9.   LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                              SEPTEMBER 30, 2007              MARCH 31, 2007
                                              ------------------              --------------
     <C>                                        <C>                            <C>
     Building mortgages                           $  40,421                     $  41,348
     Line of credit                                  50,000                            --
     Convertible notes                              200,000                       200,000
                                                  ---------                     ---------
                                                    290,421                       241,348
     Less current portion                          (201,955)                       (1,897)
                                                  ---------                     ---------
                                                  $  88,466                     $ 239,451
                                                  =========                     =========
</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.

On May 16, 2003, the Company issued $200,000 principal amount of
Convertible Subordinated Notes (the "Notes") that are convertible, under
certain circumstances, into shares of Class A Common Stock at an initial
conversion price of $23.01 per share.   The Notes, which are due May 16,
2033, bear interest that is payable on May 16 and November 16 of each
year at a rate of 2.50% per annum.  The Company also is obligated to pay
contingent interest at a rate equal to 0.5% per annum during any six-
month period from May 16 to November 15 and from November 16 to May 15,
with the initial six-month period commencing May 16, 2006, if the
average trading price of the Notes per $1,000 principal amount for the
five trading day period ending on the third trading day immediately
preceding the first day of the applicable six-month period equals $1,200
or more.  As of May 15, 2007, the average trading price of the Notes had
not reached the price that would result in the payment of contingent
interest.

The Company may redeem some or all of the Notes at any time on or after
May 21, 2006, at a redemption price, payable in cash, of 100% of the
principal amount of the Notes, plus accrued and unpaid interest,
including contingent interest, if any.  Holders may require the Company
to repurchase all or a portion of their Notes on May 16, 2008, 2013,
2018, 2023 and 2028 or upon a change in control, as defined in the
indenture governing the Notes, at a purchase price, payable in cash, of
100% of the principal amount of the Notes, plus accrued and unpaid
interest, including contingent interest, if any.  The Company has
classified the Notes as a current liability as of September 30, 2007 due
to the right the holders have to require the Company to repurchase the
Notes on May 16, 2008.  Since the holders did not elect to cause us to
repurchase any of the Notes, the Notes will be reclassified as long-term
beginning with our consolidated balance sheet as of June 30, 2008.  The
Notes are subordinate to all of our existing and future senior
obligations.

                             13



<PAGE>
<PAGE>
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.

Certain conversion features of the Notes and the contingent interest
feature meet the criteria of and qualify as embedded derivatives.
Although these features represent embedded derivative financial
instruments, based on the de minimis value of them at the time of
issuance and at September 30, 2007, no value has been assigned to these
embedded derivatives.

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.

10.  TAXABLE INDUSTRIAL REVENUE BONDS

In December 2005, the Company entered into a financing arrangement with
St. Louis County, Missouri related to expansion of its operations in St.
Louis County.  Up to $135,500 of industrial revenue bonds may be issued
to the Company by St. Louis County relative to capital improvements made
through December 31, 2009.  This agreement provides that 50% of the real
and personal property taxes on up to $135,500 of capital improvements
will be abated for a period of ten years subsequent to the property
being placed in service.  Industrial revenue bonds totaling $109,397
were outstanding at September 30, 2007.  The industrial revenue bonds
are issued by St. Louis County to the Company upon its payment of
qualifying costs of capital improvements, which are then leased by the
Company for a period ending December 1, 2019, unless earlier terminated.
The Company has the option at any time to discontinue the arrangement
and regain full title to the abated property.  The industrial revenue
bonds bear interest at 4.25% per annum and are payable as to principal
and interest concurrently with payments due under the terms of the
lease.  The Company has classified the leased assets as property and
equipment and has established a capital lease obligation equal to the
outstanding principal balance of the industrial revenue bonds.  Lease
payments may be made by tendering an equivalent portion of the
industrial revenue bonds.  As the capital lease payments to St. Louis
County may be satisfied by tendering industrial revenue bonds (which is
the Company's intention), the capital lease obligation, industrial
revenue bonds and related interest expense and interest income,
respectively, have been offset for presentation purposes in the
consolidated financial statements.

11.  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 totaled $40,212 and $12,158
for the three months ended September 30, 2007 and 2006, respectively,
and $46,386 and $22,224 for the six months ended September 30, 2007 and
2006, respectively.

                             14


<PAGE>
<PAGE>
12.   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.

The following tables represent information for the Company's reportable
operating segments for the three and six months ended September 30, 2007
and 2006.

<TABLE>
<CAPTION>


                      THREE MONTHS
                         ENDED         BRANDED     SPECIALTY      SPECIALTY     ALL
                      SEPTEMBER 30,    PRODUCTS    GENERICS       MATERIALS    OTHER    ELIMINATIONS  CONSOLIDATED
                      -------------    --------   ----------      ---------    -----    ------------  ------------
<C>                   <C>             <C>         <C>             <C>         <C>       <C>          <C>

Net revenues              2007        $  53,185   $  114,864      $  4,406     $   470   $        -  $    172,925
                          2006           47,828       56,926         3,780         449            -       108,983

Segment profit (loss)     2007           25,772       76,039         1,526     (41,335)           -        62,002
                          2006           22,212       28,523           277     (31,357)           -        19,655

Identifiable assets       2007           34,731      135,833         8,676     650,977       (1,158)      829,059
                          2006           28,244       72,528         8,182     546,803       (1,158)      654,599

Property and              2007              257            -            29       4,529            -         4,815
    equipment additions   2006                -            -             -       3,139            -         3,139

Depreciation and          2007              185           80            45       7,547            -         7,857
    amortization          2006              178           85            40       5,377            -         5,680



<CAPTION>


                       SIX MONTHS
                         ENDED         BRANDED     SPECIALTY      SPECIALTY     ALL
                      SEPTEMBER 30,    PRODUCTS    GENERICS       MATERIALS    OTHER    ELIMINATIONS  CONSOLIDATED
                      -------------    --------   ----------      ---------    -----    ------------  ------------
<C>                   <C>             <C>         <C>             <C>         <C>       <C>          <C>

Net revenues              2007       $  103,238   $  175,364      $  8,020     $   660   $        -  $    287,282
                          2006           90,142      105,327         8,661       1,053            -       205,183

Segment profit (loss)     2007           47,949      106,839         2,186     (85,055)           -        71,919
                          2006           40,214       52,386         1,322     (60,932)           -        32,990

Property and              2007              257            -            76       6,588            -         6,921
    equipment additions   2006               93            -             -      18,246            -        18,339

Depreciation and          2007              361          159            88      13,103            -        13,711
    amortization          2006              355          169            81      10,443            -        11,048
</TABLE>


                             15



<PAGE>
<PAGE>

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.

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

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

The Company is named as a defendant in a patent infringement case filed
in the U.S. District Court for the District of New Jersey by Janssen,
L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil Neurologics, Inc.
(collectively, "Janssen") on December 14, 2007 and styled Janssen, L.P.
et al. v. KV Pharmaceutical Company.  After the Company filed an ANDA
with the FDA seeking permission to market a generic version of the 8 mg
and 16 mg strengths of Razadyne(R) ER (formerly Reminyl(R)) galantamine
hydrobromide extended-release capsules, Janssen filed this lawsuit for
patent infringement under a patent owned by Janssen.  In the Company's
Paragraph IV certification, KV contended that its proposed generic
versions do not infringe Janssen's patent.  Pursuant to the Hatch-Waxman
Act, the filing date of the suit against the Company instituted an
automatic stay of FDA approval of the Company's ANDA until the earlier of
a judgment, or 30 months from the date of the suit.  The Company has
filed an answer and counterclaim for declaratory judgment of non-
infringement and patent invalidity.  Discovery is on-going, but no trial
date has yet been set. Following the Company's filing of an ANDA
pertaining to a generic version of the 24 mg strength of Razadyne(R) ER
(formerly Reminyl(R)) galantamine hydrobromide extended-release capsules
and the Company's giving of notice of this filing to Janssen, Janssen has
filed in June 2008 a second complaint in the same federal court, naming
the Company as a defendant in a related patent infringement case

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<PAGE>

under the same Janssen patent with respect to such 24 mg generic version.
The time to answer the new complaint has not yet run.  The Company
anticipates that both cases will be coordinated before the court.   The
Company intends to vigorously defend its interests; however, it cannot
give any assurance that it will prevail.

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

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

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

Pursuant to the Hatch-Waxman Act, the filing date of the suit against the
Company instituted an automatic stay of FDA approval of the Company's
ANDA until the earlier of a judgment, or 30 months from the date of the
suit.  The court initially stayed all proceedings pending determining
whether Purdue committed inequitable conduct in its dealings with the
U.S. Patent and Trademark Office with respect to the issuance of its
patents, which would

                             17



<PAGE>
<PAGE>

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

The Company and ETHEX are named as defendants in a case brought by CIMA
LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et. al. v.
KV Pharmaceutical Company et. al. filed in U.S. District Court for the
District of Minnesota.  CIMA alleged that the Company and ETHEX infringed
on a CIMA patent in connection with the manufacture and sale of
Hyoscyamine Sulfate Orally Dissolvable Tablets, 0.125 mg.  The court has
entered a stay pending the outcome of the U.S. Patent and Trademark
Office's reexamination of a patent at issue in the suit.  The Patent and
Trademark Office has, to date, issued a final office action rejecting all
existing and proposed new claims by CIMA with respect to this patent.
CIMA has certain rights of appeal of this rejection of its claims and has
exercised those rights.  The product involved in this lawsuit is
currently subject to a hold on the Company's inventory of certain
unapproved products notified to the Company in March 2008 by
representatives of the Missouri Department of Health and Senior Services
and the FDA.  In the event that such hold is lifted, ETHEX intends to
resume marketing the product during the stay in the lawsuit with CIMA.
The Company intends to vigorously defend its interests when or if the
stay is lifted; however, it cannot give any assurance it will prevail or
that the stay will be lifted.

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

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

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

The Company was named as a defendant in a case filed in U.S. District
Court in Missouri by AstraZeneca AB,


                             18




<PAGE>
<PAGE>
Aktiebolaget Hassle and AstraZeneca LP (collectively, "AstraZeneca") and
styled AstraZeneca AB et. al. v. KV Pharmaceutical Company.  After the
Company filed ANDAs with the FDA seeking permission to market a generic
version of the 25 mg, 50 mg, 100 mg, and 200 mg strengths of Toprol-XL(R)
in extended-release capsule form, AstraZeneca filed lawsuits against KV
for patent infringement under the provisions of the Hatch-Waxman Act.  In
the Company's Paragraph IV certification, KV contended that its proposed
generic versions do not infringe AstraZeneca's patents.  Pursuant to the
Hatch-Waxman Act, the filing date of the suit against the Company
instituted an automatic stay of FDA approval of the Company's ANDA until
the earlier of a judgment, or 30 months from the date of the suit.  The
Company filed motions for summary judgment with the District Court in
Missouri alleging, among other things, that AstraZeneca's patent is
invalid and unenforceable.  These motions were granted and AstraZeneca
appealed.  On July 23, 2007, the Court of Appeals for the Federal Circuit
affirmed the decision of the District Court below with respect to the
invalidity of AstraZeneca's patent but reversed and remanded with respect
to inequitable conduct by AstraZeneca.  AstraZeneca filed for rehearing
by the Federal Circuit, which was denied and the time has now run with
respect to any petition for certiorari to the United States Supreme
Court.  As a result, the Company no longer faces the prospect of any
liability to AstraZeneca in connection with this lawsuit.  KV continued
to proceed with its counterclaim against AstraZeneca for inequitable
conduct in obtaining the patents that have been ruled invalid, in order
to recover the Company's defense costs, including legal fees.  In May
2008, the Company entered into a settlement agreement with AstraZeneca
and settled its remaining counterclaims against AstraZeneca in exchange
for a payment of $2,700.

The Company and/or ETHEX have been named as defendants in certain multi-
defendant cases alleging that the defendants reported improper or
fraudulent pharmaceutical pricing information, i.e., Average Wholesale
Price, or AWP, and/or Wholesale Acquisition Cost, or WAC, information,
which caused the governmental plaintiffs to incur excessive costs for
pharmaceutical products under the Medicaid program.  Cases of this type
have been filed against the Company and/or ETHEX and other pharmaceutical
manufacturer defendants by the States of Massachusetts, Alabama,
Mississippi, Utah and Iowa, New York City, and approximately 45 counties
in New York State.  The State of Mississippi effectively voluntarily
dismissed the Company and ETHEX without prejudice on October 5, 2006 by
virtue of the State's filing an Amended Complaint on such date that does
not name either the Company or ETHEX as a defendant.  In the remaining
cases, only ETHEX is a named defendant.  On August 13, 2007, ETHEX
settled the Massachusetts lawsuit for $575 in cash and pharmaceutical
products valued at $150, both of which are to be paid or delivered over
the next two years, and received a general release; no admission of
liability was made.  The New York City case and all New York county cases
(other than the Erie, Oswego and Schenectady County cases) have been
transferred to the U.S. District Court for the District of Massachusetts
for coordinated or consolidated pretrial proceedings under the Average
Wholesale Price Multidistrict Litigation (MDL No. 1456). The cases
pertaining to the State of Alabama, Erie County, Oswego County, and
Schenectady County were removed to federal court by a co-defendant in
October 2006, but all of these cases have since been remanded to the
state courts in which they originally were filed.  A motion is pending in
New York state court to coordinate the Oswego, Erie and Schenectady
Counties cases.  Each of these actions is in the early stages, with fact
discovery commencing or ongoing in the Alabama case and the federal cases
involving New York City and 42 New York counties.  On October 24, 2007,
ETHEX was served with a complaint filed in Utah state court by the State
of Utah naming it and nine other pharmaceutical companies as defendants
in a pricing suit.  On November 19, 2007, the State of Utah filed an
amended complaint.  The Utah suit has been removed to federal court and a
motion has been filed to transfer the case to the MDL litigation for
pretrial coordination.  The State is seeking to remand the case to state
court, and the decision is pending before the court.  The time for ETHEX
to answer or respond to the Utah complaint has not yet run.  On October
9, 2007, the State of Iowa filed a complaint in federal court in Iowa
naming ETHEX and 77 other pharmaceutical companies as defendants in a
pricing suit.  ETHEX and the other defendants have filed a motion to
dismiss the Iowa complaint.  The Company intends to vigorously defend its
interests in the actions described above; however, it cannot give any
assurance it will prevail.

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

The Company and ETHEX were named as co-defendants in a suit in the U.S.
District Court for the Southern District of Florida filed by the personal
representative of the estate of Joyce Hoyle and her children in
connection

                             19



<PAGE>
<PAGE>

with Ms. Hoyle's death in 2003, allegedly from oxycodone toxicity styled
Thomas Hoyle v. Purdue Pharma et al.  The suit alleged that between June
2001 and May 2003 Ms. Hoyle was prescribed and took three different
opiate pain medications manufactured and sold by the defendants,
including one product, oxycodone, that was manufactured by the Company
and marketed by ETHEX, and that such medications were promoted without
sufficient warnings about the side effect of addiction.  The causes of
action were strict liability for an inherently dangerous product,
negligence, breach of express and implied warranty and breach of implied
warranty of fitness for a particular purpose.  The discovery process had
not yet begun, and the court had set the trial to commence in July 2007.
The plaintiff and the Company agreed, however, to a tolling agreement,
under which the plaintiff dismissed the case without prejudice in return
for the Company's agreement to toll the statute of limitations in the
event the plaintiff refiled its case in the future.  The case was
dismissed without prejudice.  On January 18, 2008, the Company and ETHEX
were served with a new complaint, substantially similar to the earlier
law suit.  KV and ETHEX have filed an answer to the new complaint, as
well as a motion to dismiss the lawsuit based on expiration of the
statute of limitations.  This motion is pending before the court, with a
hearing scheduled by the court on July 7, 2008.  A trial date has been
set for November 2008.  The Company intends to vigorously defend its
interests; however, it cannot give any assurance that it will prevail.

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

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<PAGE>
<PAGE>

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

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

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

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

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

14.  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.  This interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed
on a tax return should be recorded in the financial statements.  Under
FIN 48, the Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position.  The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement.  FIN 48 also provides guidance on derecognition
of tax positions, financial statement classification, recognition of
interest and penalties, accounting in interim periods, and disclosure and
transition requirements.  The Company's adoption of FIN 48 was not
material to its consolidated financial position; however, certain
reclassifications of various income tax-related balance sheet amounts
were required.

As of September 30, 2007, the consolidated balance sheet reflects a
liability for unrecognized tax benefits of $13,654, excluding liabilities
for interest and penalties. Accrued interest and penalties included in
the consolidated balance sheet were $2,719 as of September 30, 2007.

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

It is anticipated the Company will recognize approximately $2,600 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 examination by those authorities.  The Company's federal
statute of limitations has expired for fiscal years prior to 2004 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

                             21




<PAGE>
<PAGE>

and 2007.  Various information requests with respect to the periods under
audit have been received and responded to.  We expect the IRS to issue
additional information requests.  The Company does not have any state
examinations in progress at this time.

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 Option ("ISO") grants were determined to have been
granted with an exercise price below the fair market value of the
Company's stock on the revised measurement dates. Under Internal Revenue
Code Section 422, ISOs may not be granted with an exercise price less
than the fair market value on the date of grant, and therefore these
grants would not likely qualify for ISO tax treatment. The
disqualification of ISO classification exposes the Company and the
affected employees to payroll related withholding taxes once the
underlying shares are released from the post exercise two-year forfeiture
period and the substantial risk of forfeiture has lapsed, which creates a
taxable event.  The Company and the affected employees may also be
subject to interest and penalties for failing to properly withhold taxes
and report the taxable event on their respective tax returns.  The
Company is currently reviewing the potential disqualification of ISO
grants and the related withholding tax implications with the IRS in an
effort to reach agreement on the resulting tax liability.  The Company
recorded liabilities related to this matter of $7,611 as of September 30,
2007,  in accrued liabilities on the consolidated balance sheet.

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

15.  RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS 157 clarifies the principle that fair value should be
based on the assumptions that market participants would use when pricing
an asset or liability, provides a framework for measuring fair value
under GAAP and expands disclosure requirements about fair value
measurements. SFAS 157 is effective for financial statements issued in
fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company plans to adopt SFAS 157 at the
beginning of fiscal 2009 and is evaluating the impact, if any, the
adoption of SFAS 157 will have on its financial condition and results of
operations.

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

In March 2007, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") in Issue No. 06-10, "Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements" ("Issue 06-10").
Issue 06-10 requires companies with collateral assignment split-dollar
life insurance policies that provide a benefit


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<PAGE>
to an employee that extends to postretirement periods to recognize a
liability for future benefits based on the substantive agreement with the
employee. Recognition should be in accordance with FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," or APB Opinion No. 12, "Omnibus Opinion - 1967," depending on
whether a substantive plan is deemed to exist. Companies are permitted to
recognize the effects of applying the consensus through either (1) a
change in accounting principle through a cumulative-effect adjustment to
retained earnings or to other components of equity or net assets as of
the beginning of the year of adoption or (2) a change in accounting
principle through retrospective application to all prior periods. Issue
06-10 is effective for fiscal years beginning after December 15, 2007,
with early adoption permitted. The Company plans to adopt Issue 06-10 at
the beginning of fiscal 2009 and is evaluating the impact of the adoption
of Issue 06-10 on its financial condition and results of operations.

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

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)") which replaces SFAS 141 but retains the
fundamental concept of purchase method of accounting in a business
combination and improves reporting by creating greater consistency in the
accounting and financial reporting of business combinations, resulting in
more complete, comparable, and relevant information for investors and
other users of financial statements. To achieve this goal, the new
standard requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed in the
transaction and any non-controlling interest at the acquisition date at
their fair value as of that date. This statement requires measuring a
non-controlling interest in the acquiree at fair value which will result
in recognizing the goodwill attributable to the non-controlling interest
in addition to that attributable to the acquirer. This statement also
requires the recognition of assets acquired and liabilities assumed
arising from contractual contingencies as of the acquisition date,
measured at their acquisition 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 early 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.

                             23



<PAGE>
<PAGE>

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

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

16.  SUBSEQUENT EVENTS

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 NDA for Gestiva(TM) is currently
before the FDA, pending approval for use in the prevention of preterm
birth in certain categories of pregnant women.  The proposed indication
is for women with a history of at least one spontaneous preterm delivery
(i.e., less than 37 weeks), who are pregnant with a single fetus. Under
the terms of the asset purchase agreement, the Company agreed to pay
$82,000 for Gestiva(TM), $7,500 of which was paid at closing and recorded
as in-process research and development expense. The remainder is payable
on the completion of two milestones: (1) $2,000 on the earlier to occur
of CYTYC's receipt of acknowledgement from the FDA that their response to
the FDA's October 20, 2006 "approvable" letter is sufficient for the FDA
to proceed with their review of the NDA or the receipt of FDA's approval
of the Gestiva(TM) NDA and (2) $72,500 on FDA approval of a Gestiva(TM)
NDA, transfer of all rights in the NDA to the Company and receipt by the
Company of defined launch quantities of finished Gestiva(TM) suitable for
commercial sale.

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

At March 31, 2008, the Company had invested $83,900 in the principal
amount of auction rate securities ("ARS").  The Company's investments in
ARS represent interests in securities that have student loans as
collateral that are guaranteed by the U.S. Government.  Accordingly, ARS
that are backed by student loans are viewed as having low default risk
and very low risk of downgrade.  The interest rates on these securities
are reset through an auction process that resets the applicable interest
rate at pre-determined intervals, up to 35 days. The auctions have
historically provided a liquid market for these securities.  The ARS
investments held by the Company all had AAA credit ratings at the time of
purchase and at the end of the Company's fiscal 2008 year end.  With the
liquidity issues experienced in global credit and capital markets, the
ARS held by the Company at March 31, 2008 experienced failed auctions
beginning in February 2008 as the amount of securities submitted for sale
exceeded the amount of purchase orders. Given the failed auctions, the
Company's ARS will continue to be illiquid until there is a successful
auction for them. The Company cannot predict how long the current
imbalance in the auction rate market will continue.  The estimated fair
value of the Company's ARS holdings at March 31, 2008 was $81,516, which
reflected a $2,384 difference from the principal amount of $83,900.  The
estimated fair value of the ARS


                             24


<PAGE>
<PAGE>
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, the Company recorded during the fourth quarter of fiscal 2008 an
unrealized loss of $1,550, net of tax, as a reduction to shareholders'
equity in accumulated other comprehensive loss, reflecting adjustments to
the ARS holdings that the Company has concluded have a temporary decline
in value.

ARS have historically been classified as short-term marketable securities
in the Company's consolidated balance sheet.  Given the failed auctions,
the Company has reclassified the $81,516 of ARS as of March 31, 2008 from
current assets to non-current assets.  The Company believes that as of
March 31, 2008, based on its current cash, cash equivalents and
marketable securities balances of $126,893 and its current borrowing
capacity under the Company credit facility of $290,000, the current lack
of liquidity in the auction rate market will not have a material impact
on its ability to fund its operations or interfere with its external
growth plans, although the Company cannot assure you that this will
continue to be the case.

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 its inventory of certain unapproved drug products,
restricting the Company's 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, the Company timely discontinued a
number of its guaifenesin products and believed that, by doing so, had
complied with those notices.  The recent action to place a hold on
certain of the Company's 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 the Company without FDA approval
under certain "grandfather clauses" and statutory and regulatory
exceptions to the pre-market approval requirement for "new drugs" under
the FDCA.  FDA policies permit the agency to initiate broad action
against the marketing of additional categories of the Company's
unapproved products, if the FDA deems approval necessary, even if the
agency has not instituted similar actions against the marketing of such
products by other parties.  Pursuant to discussions with the Missouri
Department of Health and Senior Services and with the FDA, the affected
Morphine and Oxycodone products have been released from the hold. The
Company will discontinue manufacturing and marketing substantially all
unapproved products subject to the hold.

The FDA has not proposed, nor does the Company expect them to propose,
that the products subject to the hold be recalled from the distribution
channel.  As such, the Company has written-off the value of the products
subject to the hold in its inventory as of March 31, 2008. The Company
also evaluated the active pharmaceutical ingredients and excipients used
in the manufacture of the hold products and determined that they should
also be written-off since the Company will be discontinuing further
manufacturing and many of them cannot be returned or sold to other
manufacturers.  The write-off included in the results of operations for
the fourth quarter of fiscal 2008 totaled $5,500.

During most of fiscal 2008, the Company marketed approximately 30
products in its generic/non-branded respiratory line, which consisted
primarily of cough/cold products.  The cough/cold line accounted for
$38,536, or 10.5%, of our specialty generic net revenues in fiscal 2008.
As a result of the FDA hold discussed above, the Company is currently
marketing one generic cough/cold product with four strengths that has
been approved by the FDA.   Since its launch in December 2007, this
approved product generated sales of $884 during fiscal 2008.

                             25




<PAGE>
<PAGE>

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 for growth,
product development, product launches, regulatory approvals, market
position, market share increases, acquisitions, revenues, expenditures
and other financial results, are forward-looking statements.

All forward-looking statements are based on current expectations and are
subject to risk and uncertainties.  In connection with the "safe harbor"
provisions, we provide the following cautionary statements identifying
important economic, 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 operating results; (10) the difficulty of predicting
international regulatory approval, including timing; (11) the difficulty
of predicting the pattern of inventory movements by our customers; (12)
the impact of competitive response to our sales, marketing and strategic
efforts; (13) risks that we may not ultimately prevail in our litigation;
(14) actions by the Securities and Exchange Commission and the Internal
Revenue Service with respect to our stock option grants and accounting
practices; (15) the impact of credit market disruptions on the fair value
of auction rate securities that we have acquired as short-term
investments and have now become illiquid; (16)  whether any recalled
products will have any material financial impact or result in litigation,
agency actions or material damages; and (17) the risks detailed from time
to time in our filings with the Securities and Exchange Commission.

This discussion is 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 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, 2007, 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 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 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 three months ended September 30, 2007 increased
$63.9 million, or 58.7%, from the prior year quarter as we experienced
sales growth of 101.8% in our specialty generics/non-branded products
segment.  The increase in specialty generic net revenues resulted
primarily from the launch in July 2007 of the 100 mg and 200 mg strengths
of metoprolol succinate extended-release tablets, the generic version of
Toprol-XL(R) (marketed by AstraZeneca).  The resulting $57.7 million
increase in consolidated gross profit was offset in part by a $15.3
million increase in operating expenses.  The increase in operating
expenses was primarily due to increases in personnel costs, branded
marketing and promotions expense, legal fees, and research and
development expense.  As a result, net income for the second quarter
increased $28.1 million, or 232.8%, to $40.2 million.

Net revenues for the six months ended September 30, 2007 increased $82.1
million, or 40.0%, as we experienced sales growth of 66.5% in our
specialty generics/non-branded products segment.  The increase in
specialty generic net revenues resulted primarily from the launch in July
2007 of the 100 mg and 200 mg strengths of metoprolol succinate extended-
release tablets, the generic version of Toprol-XL(R) (marketed by
AstraZeneca).  The resulting $69.7 million increase in consolidated gross
profit was offset in part by a $32.2 million increase in operating
expenses. The increase in operating expenses was primarily due to
increases in personnel costs, branded marketing

                             27



<PAGE>
<PAGE>

and promotions expense, legal fees, and research and development expense.
Operating expenses for the six-month period also included $10.0 million
recorded in connection with the EvaMist(TM) acquisition as acquired in-
process research and development (see Note 2 of the Notes to Consolidated
Financial Statements).  As a result, net income for the six-month period
increased $24.2 million, or 109.3%, to $46.4 million.

NET REVENUES BY SEGMENT
-----------------------
   ($ IN THOUSANDS)
-----------------------
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                   SEPTEMBER 30,                     SEPTEMBER 30,
                                     ------------------------------------ ----------------------------------
                                                                    %                                 %
                                         2007         2006        CHANGE      2007       2006       CHANGE
                                     ----------    ----------    -------- ----------  ----------   ---------
<C>                                  <C>           <C>           <C>      <C>         <C>          <C>
Branded products                       $ 53,185    $ 47,828        11.2%   $103,238    $ 90,142       14.5%
     as % of total net revenues            30.8%       43.9%                   35.9%       43.9%
Specialty generics/non-branded          114,864      56,926       101.8%    175,364     105,327       66.5%
     as % of total net revenues            66.4%       52.2%                   61.0%       51.3%
Specialty materials                       4,406       3,780        16.6%      8,020       8,661       (7.4)%
     as % of total net revenues             2.5%        3.5%                    2.8%        4.2%
Other                                       470         449         4.7%        660       1,053      (37.3)%

     Total net revenues                $172,925    $108,983        58.7%   $287,282    $205,183       40.0%
</TABLE>

The increases in branded product sales of $5.4 million and $13.1 million
for the three- and six-month periods, respectively, were due primarily
to sales growth of our anti-infective brand, Clindesse(TM), and
increased sales of Repliva 21/7(TM), our newest hematinic product.  The
increase in sales for the six-month period was also affected by
sustained sales growth of our prescription prenatal product,
PrimaCare(R) ONE.  Clindesse(TM) continued to experience increased sales
as our share of the intravaginal bacterial vaginosis market improved to
27.1% at the end of the fiscal 2008 second quarter.  The sales increase
in Clindesse(TM) was also impacted by larger-than-normal customer
purchases during the second quarter in anticipation of a September 2007
price increase.  Sales of Repliva 21/7(TM) increased 344.0% to $4.8
million and 100.2% to $7.1 million for the three- and six-month periods,
respectively.  These increases mainly resulted from the introduction of
a reformulated version of Repliva 21/7(TM) in August 2007.  Sales of
Gynazole-1(R), our vaginal antifungal cream product, declined 36.1% for
the quarter and were flat on a year-to-date basis.  Sales of
PrimaCare(R) ONE decreased 16.3% to $9.0 million for the quarter and
increased 33.8% to $27.7 million for the six-month period.  The decline
in sales of Gynazole-1(R) and PrimaCare(R) ONE for the quarter resulted
from larger-than-normal customer purchases during the previous quarter
in anticipation of a June 2007 price increase.  For the six-month
period, the increase in sales of PrimaCare(R) ONE reflected the impact
of price increases that have occurred over the past 12 months coupled
with an increase in our share of the branded prenatal vitamin market to
24.3% at the end of the fiscal 2008 second quarter.

The growth in specialty generic net sales of $57.9 million and $70.0
million for the three- and six-month periods, respectively, resulted
primarily from the launch in July 2007 of the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the generic
version of Toprol-XL(R) (marketed by AstraZeneca).  In fiscal 2006, we
received a favorable court ruling in a Paragraph IV patent infringement
action filed against us by AstraZeneca based on our ANDA submissions to
market these generic formulations.  Since we were the first company to
file with the FDA for generic approval of the 100 mg and 200 mg dosage
strengths, we were accorded the opportunity for a 180-day exclusivity
period for marketing these two dosage strengths.  We began shipping
these two products in July 2007 and they generated net revenues of $49.7
million during the quarter.  Our specialty generic sales for the three-
and six-month periods were also favorably impacted by sales of Diltiazem
HCI ER Capsules (AB rated to Tiazac(R)).  In September 2006, we expanded
our cardiovascular product line when we received approval to market six
strengths of Diltiazem HCI ER Capsules. These products generated
incremental revenues of $4.6 million and $8.8 million for the three- and
six-month periods, respectively.


                             28


<PAGE>
<PAGE>
GROSS PROFIT BY SEGMENT
-----------------------
   ($ IN THOUSANDS)
-----------------------
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                   SEPTEMBER 30,                     SEPTEMBER 30,
                                     ------------------------------------ ----------------------------------
                                                                    %                                 %
                                         2007         2006        CHANGE      2007       2006       CHANGE
                                     ----------    ----------    -------- ----------  ----------   ---------
<C>                                  <C>           <C>           <C>      <C>         <C>          <C>
Branded products                      $  48,193    $ 42,464        13.5%  $  92,130   $  79,765       15.5%
     as % of  net revenues                 90.6%       88.8%                   89.2%       88.5%
Specialty generics/non-branded           79,981      32,047       149.6%    113,876      59,424       91.6%
     as % of net revenues                  69.6%       56.3%                   64.9%       56.4%
Specialty materials                       1,762       1,066        65.3%      3,041       3,063       (0.7)%
     as % of net revenues                  40.0%       28.2%                   37.9%       35.4%
Other                                    (2,143)     (5,473)      (60.8)%    (6,467)     (9,394)     (31.2)%
   Total gross profit                 $ 127,793    $ 70,104        82.3%  $ 202,580   $ 132,858       52.5%
    as % of total net revenues             73.9%       64.3%                   70.5%       64.8%
</TABLE>

The increases in gross profit of $57.7 million and $69.7 million for the
three- and six-month periods, respectively, were primarily due to the
sales growth experienced by our specialty generics and branded products
segments. The increases in the specialty generic gross profit amounts
and percentages for the three- and six-month periods, respectively,
resulted from sales of the 100 mg and 200 mg strengths of metoprolol
succinate extended-release tablets.  We began shipping these two
products in July 2007 and they generated net revenues of $49.7 million
during the quarter.  Since we were the first company to file with the
FDA for generic approval of the 100 mg and 200 mg dosage strengths, we
were accorded the opportunity for a 180-day exclusivity period for
marketing these two dosage strengths.  The 180-day exclusivity period
has allowed us to offer these products at relatively higher prices than
our other generic/non-branded products.  The higher branded product
gross profit percentages for the quarter and six-month period reflected
a favorable shift in the mix of product sales toward higher margin anti-
infective products.  Impacting the Other category were contract
manufacturing revenues, pricing and production variances, and changes to
inventory reserves associated with production.  Any inventory reserve
changes associated with finished goods were reflected in the applicable
segment. The fluctuations in the Other category were primarily due to
the impact of higher production costs in the prior year comparative
periods that resulted from lower than expected production volume,
coupled with a decrease in the provisions for obsolete inventory on
certain existing products in various stages of production.

RESEARCH AND DEVELOPMENT
------------------------
   ($ IN THOUSANDS)
------------------------
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                   SEPTEMBER 30,                     SEPTEMBER 30,
                                     ------------------------------------ ----------------------------------
                                                                    %                                 %
                                         2007         2006        CHANGE      2007       2006       CHANGE
                                     ----------    ----------    -------- ----------  ----------   ---------
<C>                                  <C>           <C>           <C>       <C>         <C>          <C>
    Research and development           $ 11,750    $  6,396       83.7%    $ 21,546    $ 14,287       50.8%
        as % of total net revenues          6.8%        5.9%                    7.5%        7.0%
</TABLE>

The increases in research and development expense of $5.4 million and
$7.3 million for the three- and six-month periods, respectively, were
primarily due to a growing product development pipeline, continued
active development of various branded and generic/non-brand products in
our internal and external pipelines, and increased personnel expenses
related to the growth of our research and development staff.

                             29




<PAGE>
<PAGE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
---------------------------------------------
    ($ IN THOUSANDS)
---------------------------
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                   SEPTEMBER 30,                     SEPTEMBER 30,
                                     ------------------------------------ ----------------------------------
                                                                    %                                 %
                                         2007         2006        CHANGE      2007       2006       CHANGE
                                     ----------    ----------    -------- ----------  ----------   ---------
<C>                                  <C>           <C>           <C>      <C>         <C>          <C>
    Purchased in-process research
     and development                        $ -         $ -          - %    $ 10,000      $ -         NM
        as % of total net revenues            - %         - %                    3.5%       - %
</TABLE>

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 2 of the Notes to Consolidated Financial Statements).  Under
terms of the Agreement, the Company paid $10.0 million in cash at
closing and made an additional 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 purchased in-
process research and development charge during the six months ended
September 30, 2007.

SELLING AND ADMINISTRATIVE
--------------------------
    ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                   SEPTEMBER 30,                     SEPTEMBER 30,
                                     ------------------------------------ ----------------------------------
                                                                    %                                 %
                                         2007         2006        CHANGE      2007       2006       CHANGE
                                     ----------    ----------    -------- ----------  ----------   ---------
<C>                                  <C>           <C>           <C>      <C>         <C>          <C>
    Selling and administrative         $ 50,999     $ 42,855        19.0%   $ 96,173    $ 83,008       15.9%
        as % of total net revenues         29.5%        39.3%                   33.5%       40.5%
</TABLE>

The increases in selling and administrative expense of $8.1 million and
$13.2 million for the three- and six-month periods, respectively, were
primarily due to greater personnel costs associated with increases in
management, sales and other personnel, an increase in branded marketing
and promotions expense and an increase in legal fees.  The increase in
legal costs was commensurate with an increase in litigation activity and
evaluation of potential acquisition opportunities.  The increase in
litigation activity also included ongoing costs associated with certain
patent infringement actions brought against us on products we market or
propose to market.  For the six-month period, the increase in legal fees
was also due to a $0.8 million reimbursement of legal fees received
during the comparative prior year six-month period.

AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
    ($ IN THOUSANDS)
---------------------------
<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                    SEPTEMBER 30,                     SEPTEMBER 30,
                                      ------------------------------------ ----------------------------------
                                                                     %                                 %
                                         2007          2006        CHANGE     2007       2006        CHANGE
                                      ----------    ----------    -------- ----------  ----------   ---------
<C>                                    <C>           <C>           <C>      <C>         <C>          <C>
    Amortization of Intangible assets  $ 3,015      $ 1,201        151.0%  $ 4,200      $ 2,398     75.2%
</TABLE>

The increases in amortization of intangible assets of $1.8 million and
$1.8 million for the three- and six-month periods, respectively, were
due to amortization of intangible assets associated with the May 2007
purchase of Evamist(TM), a new estrogen replacement therapy product
delivered with a patented metered-dose transdermal spray system, from
VIVUS, Inc (see Note 2 of the Notes to Consolidated Financial
Statements).  Under terms of the Agreement, we made two cash payments:
$10.0 million was paid in May 2007 and expensed as in-process research
and development and $141.5 million was paid in July 2007 when final
approval of the product was received from the FDA.  The preliminary
purchase price allocation, which is subject to change based on the final
fair value assessment, resulted in estimated identifiable intangible
assets of $52.4 million to product rights; $15.2 million to trademark
rights; $66.4 million to rights under a sublicense agreement; and, $7.5
million to a covenant not to compete.  Upon FDA approval in July 2007,
we began amortizing the product rights, trademark rights and rights
under the sublicense agreement over 15 years and the covenant not to
compete over nine years.

                             30

<PAGE>
<PAGE>

<TABLE>
INTEREST EXPENSE
----------------
($ IN THOUSANDS)
----------------

<CAPTION>
                                                 THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                    SEPTEMBER 30,                               SEPTEMBER 30,
                                      ------------------------------------------  ------------------------------------------
                                                                        %                                            %
                                          2007           2006         CHANGE          2007           2006          CHANGE
                                      -------------  ------------- -------------  -------------  ------------- -------------
   <C>                                <C>            <C>           <C>            <C>            <C>           <C>
    Interest expense                  $      2,768   $      2,305          20.1%  $      4,898   $      4,541           7.9%
     as % of total net revenues                1.6%           2.1%                         1.7%           2.2%
</TABLE>

The increases in interest expense for the three- and six-month periods
resulted from interest incurred on the $50.0 million of borrowings made under
our credit facility in August 2007. The advances were used, along with cash on
hand, to fund the $141.5 million payment for the purchase of Evamist(TM) (see
Note 2 of the Notes to Consolidated Financial Statements).

<TABLE>
INTEREST AND OTHER INCOME
-------------------------
   ($ IN THOUSANDS)
-------------------------

<CAPTION>
                                                 THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                    SEPTEMBER 30,                               SEPTEMBER 30,
                                      ------------------------------------------  ------------------------------------------
                                                                        %                                            %
                                          2007           2006         CHANGE          2007           2006          CHANGE
                                      -------------  ------------- -------------  -------------  ------------- -------------
   <C>                                <C>            <C>           <C>            <C>            <C>           <C>
    Interest and other income         $      2,741   $      2,308          18.8%  $      6,156   $      4,366          41.0%
     as % of total net revenues                1.6%           2.1%                         2.1%           2.1%
</TABLE>

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

<TABLE>
PROVISION FOR INCOME TAXES
--------------------------
    ($ IN THOUSANDS)
--------------------------

<CAPTION>
                                                 THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                    SEPTEMBER 30,                               SEPTEMBER 30,
                                      ------------------------------------------  ------------------------------------------
                                                                        %                                            %
                                          2007           2006         CHANGE          2007           2006          CHANGE
                                      -------------  ------------- -------------  -------------  ------------- -------------
   <C>                                <C>            <C>           <C>            <C>            <C>           <C>
   Provision for income taxes         $     21,779   $      7,570         187.7%  $     25,496   $     12,783          99.5%
   Effective tax rate                         35.1%          38.5%                        35.5%          38.7%
</TABLE>

The lower effective tax rates for the three- and six-month periods were
primarily due to the comparative prior three- and six-month periods being
adversely affected by the expiration of Federal research and experimentation
tax credits on December 31, 2005. Additional credits could not be recognized
until passed by Congress and signed into law. The effective tax rates for all
periods were favorably impacted by the domestic manufacturer's deduction.

<TABLE>
NET INCOME AND DILUTED EARNINGS PER SHARE
-----------------------------------------
          ($ IN THOUSANDS)
-----------------------------------------

<CAPTION>
                                                 THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                    SEPTEMBER 30,                               SEPTEMBER 30,
                                      ------------------------------------------  ------------------------------------------
                                                                        %                                            %
                                          2007           2006         CHANGE          2007           2006          CHANGE
                                      -------------  ------------- -------------  -------------  ------------- -------------
   <C>                                <C>            <C>           <C>            <C>            <C>           <C>
    Net income                        $     40,223   $     12,085         232.8%  $     46,423   $     22,183         109.3%
    Diluted earnings per
    Class A share                             0.70           0.22         218.2%          0.82           0.41         100.0%
    Diluted earnings per
    Class B share                             0.60           0.19         215.8%          0.71           0.35         102.9%
</TABLE>

The increases in net income of $28.1 million and $24.2 million for the three-
and six-month periods, respectively, resulted primarily from the launch in
July 2007 of the 100 mg and 200 mg strengths of metoprolol succinate
extended-release tablets, the generic version of Toprol-XL(R) (marketed by
AstraZeneca). In fiscal 2006, we


                                      31


<PAGE>
<PAGE>

received a favorable court ruling in a Paragraph IV patent infringement action
filed against us by AstraZeneca based on our ANDA submissions to market these
generic formulations. Since we were the first company to file with the FDA for
generic approval of the 100 mg and 200 mg dosage strengths, we were accorded
the opportunity for a 180-day exclusivity period for marketing these two
dosage strengths. The 180-day exclusivity period has allowed us to offer these
products at relatively higher prices than our other generic/non-branded
products. We began shipping these two products in July 2007 and they generated
net revenues of $49.7 million during the quarter.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and working capital were $41.3 million and $149.4
million, respectively, at September 30, 2007, compared to $82.6 million and
$372.3 million, respectively, at March 31, 2007. The decrease in working
capital resulted primarily from the $200.0 million principal amount of
Convertible Subordinated Notes that were classified as a current liability as
of September 30, 2007 due to the holders having the right to require us to
repurchase all or a portion of their Notes on May 16, 2008 and the payment of
$141.5 million made during the quarter for the Evamist(TM) acquisition. 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 six
months ended September 30, 2007, our net cash flow from operations of $31.0
million resulted primarily from net income adjusted for non-cash items.

Net cash flow used in investing activities included capital expenditures of
$6.9 million for the six months ended September 30, 2007 compared to $18.3
million for the corresponding prior year period. The decrease in capital
expenditures was primarily due to the comparative prior year amount including
the cost of a building purchased in June 2006, additional costs associated
with the development of a new lab facility and equipment purchases for
Metoprolol production. Other investing activities during the six-month period
consisted of two cash payments made in conjunction with the terms of the
Evamist(TM) purchase agreement: $10.0 million was paid in May 2007 and
expensed as in-process research and development and $141.5 million was paid in
July 2007 when final approval of the product was received from the FDA. The
preliminary purchase price allocation, which is subject to change based on the
final fair value assessment, resulted in estimated identifiable intangible
assets of $52.4 million to product rights; $15.2 million to trademark rights;
$66.4 million to rights under a sublicense agreement; and, $7.5 million to a
covenant not to compete. Upon FDA approval in July 2007, we began amortizing
the product rights, trademark rights and rights under the sublicense agreement
over 15 years and the covenant not to compete over nine years. Other investing
activities also included $32.6 million and $68.6 million of purchases and
sales, respectively, of short-term marketable securities classified as
available for sale. The net proceeds received from the purchase and sales
activity associated with marketable securities was used in the funding of the
Evamist(TM) acquisition.

Our debt balance, including current maturities, was $290.4 million at
September 30, 2007 compared to $241.3 million at March 31, 2007. In August
2007, we borrowed $50.0 million under our credit facility, the proceeds of
which were used in the funding of the Evamist(TM) purchase.

In May 2003, we issued $200.0 million principal amount of Convertible
Subordinated Notes (the "Notes") that are convertible, under certain
circumstances, into shares of our Class A Common Stock at an initial
conversion price of $23.01 per share. The Notes bear interest at a rate of
2.50% and mature on May 16, 2033. We are also obligated to pay contingent
interest at a rate equal to 0.5% per annum during any six-month period
commencing May 16, 2006, if the average trading price of the Notes per $1,000
principal amount for the five-trading day period ending on the third trading
day immediately preceding the first day of the applicable six-month period
equals $1,200 or more. We may redeem some or all of the Notes at any time on
or after May 21, 2006, at a redemption price, payable in cash, of 100% of the
principal amount of the Notes, plus accrued and unpaid interest (including
contingent interest, if any) to the date of redemption. Holders may require us
to repurchase all or a portion of their Notes on May 16, 2008, 2013, 2018,
2023 and 2028, or upon a change in control, as defined in the indenture
governing the Notes, at 100% of the principal amount of the Notes, plus
accrued and unpaid interest (including contingent interest, if any) to the
date of repurchase, payable in cash. As a result, we have classified the Notes
as a current liability as of September 30, 2007 due to the right the holders
have to require us to repurchase the Convertible Subordinated Notes on May 16,
2008. Since the holders did not elect to cause us to repurchase any of the
Notes, the Notes will be reclassified as long-term beginning with our
consolidated balance sheet as of June 30, 2008. The Notes are subordinate to
all of our existing and future senior obligations.

                                      32


<PAGE>
<PAGE>

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 Convertible Subordinated
Notes. Interest is charged under the facility at the lower of the prime rate
or one-month LIBOR plus 62.5 to 150 basis points depending on the ratio of
senior debt to EBITDA. The 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 September 30, 2007, we were
in compliance with all of our financial covenants and there was $50.0 million
of borrowings outstanding under the facility. In addition, the agreement
requires that we submit quarterly financial statements within 45 days of the
close of each fiscal quarter. The Company has obtained the consent of the
lenders to extend the period for submission of the quarterly financial
statements for this quarter and the quarter ended December 31, 2007 to June
30, 2008.

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 10 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 $109.4 million were outstanding at September 30, 2007. 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 16 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.

GOVERNMENT REGULATION

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

The hold relates to a misinterpretation about the intended scope of recent FDA
notices setting limits on the marketing of unapproved guaifenesin products. In
response to notices issued by the FDA in 2002 and 2003 with


                                      33


<PAGE>
<PAGE>

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

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

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

On June 6, 2008, ETHEX initiated a voluntary recall of a single lot of
morphine sulfate 60 mg extended-release tablets due to a report that a tablet
with as much as double the appropriate thickness was identified and therefore
the possibility that other oversized tablets could have been commercially
released in the affected lot. On June 13, 2008, the recall was expanded to
include additional specific lots of morphine sulfate 60 mg extended-release
tablets and specific lots of morphine sulfate 30 mg extended release tablets.
We accrued a liability of $0.9 million in the fourth quarter of fiscal 2008
for the anticipated cost of the recall. No oversized tablets have been
identified in any additional distributed lot of these products and based on
our investigation, there are likely to be few, if any, oversized tablets in
the 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.




                                      34


<PAGE>
<PAGE>

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 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
16.6% and 16.0% of total gross revenues for the six months ended September 30,
2007 and 2006, 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 62% of our unit sales during the six months ended September 30,
2007, 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.

                                      35


<PAGE>
<PAGE>

The following table reflects the activity during the six months ended
September 30, 2007 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>
SIX MONTHS ENDED SEPTEMBER 30, 2007
  Accounts Receivable Reserves:
    Chargebacks                                $  13,005    $         66,818   $               -   $       (57,239)   $   22,584
    Sales Rebates                                  5,386              13,510                   -            (9,563)        9,333
    Sales Returns                                  2,873               8,800                   -            (7,549)        4,124
    Cash Discounts and Other Allowances            3,511              13,818                   -           (10,009)        7,320
    Medicaid Rebates                               6,506               4,483                   -            (5,804)        5,185
                                              -----------  ------------------ ------------------- -----------------  ------------
      TOTAL                                    $  31,281    $        107,429   $               -   $       (90,164)   $   48,546
                                              ===========  ================== =================== =================  ============
</TABLE>

The increase in the reserve for chargebacks at September 30, 2007 was
primarily due to an increase in customer inventory levels of our specialty
generic products at the end of the quarter. This increase was mainly impacted
by the launch of the 100 mg and 200 mg strengths of metoprolol succinate
extended-release tablets, the generic version of Toprol-XL(R) (marketed by
AstraZeneca). We began shipping these two products in July 2007 and they
generated net revenues of $49.7 million during the quarter. The increases at
September 30, 2007 in the reserves for sales rebates, sales returns, and cash
discounts and other allowances were also primarily due to the launch of the
two strengths of metoprolol succinate extended-release tablets. The decrease
in the reserve for Medicaid rebates at September 30, 2007 resulted primarily
from the timing of when certain Medicaid rebate payments were processed.

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 six months ended September 30, 2007 and
2006, the chargeback provision reduced the gross sales of our specialty
generics segment by $65.4 million and $46.4 million, respectively. These
amounts accounted for 98.1% and 99.2% of the total chargeback provisions
recorded during the six months ended September 30, 2007 and 2006,
respectively.

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

     o    The amount of inventory in the wholesale distribution channel. We
          receive actual inventory information from our three major wholesale
          customers and estimate the inventory position of the remaining
          wholesalers based on historical buying patterns. During the six
          months ended September 30, 2007, unit


                                      36


<PAGE>
<PAGE>

          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 September 30, 2007 was
          approximately equivalent to our last twelve weeks of shipments
          during the fiscal year. We currently use the last six weeks of our
          shipments as an estimate of the inventory held by the remaining
          wholesalers where we do not receive actual inventory data, as our
          experience and buying patterns indicate that our smaller wholesale
          customers carry less inventory than our large wholesale customers.
          As of September 30, 2007, each week of inventory for those remaining
          wholesalers represented approximately $0.3 million, or 1.3%, of the
          reported reserve for chargebacks.

     o    The percentage of sales to our wholesale customers that will result
          in chargebacks. Using our automated chargeback system we track, at
          the product level, the percentage of sales units shipped to our
          wholesale customers that eventually result in chargebacks to us. The
          percentage for each product, which is based on actual historical
          experience, is applied to the respective inventory units in the
          wholesale distribution channel. As of September 30, 2007, the
          aggregate weighted average percentage of sales to wholesalers
          assumed to result in chargebacks was approximately 94%, with each 1%
          representing approximately $0.2 million, or 1.0%, of the reported
          reserve for chargebacks.

     o    Contract pricing and the resulting chargeback per unit. The
          chargeback provision is based on the difference between our invoice
          price to the wholesaler, 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 September 30,
          2007, a 5% shift in the calculated chargeback per unit in the same
          direction across all products and customers would result in a $1.0
          million, or 4.6%, impact on the reported reserve for chargebacks.

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

Sales Returns - Consistent with industry practice, we maintain a returns
-------------
policy that allows our direct and indirect customers to return product six
months prior to expiration and within one year after expiration. This policy
is applicable to both our branded and specialty generics business segments.
Upon recognition of revenue from 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 September 30, 2007 by approximately
$0.3 million, or 8.3%, 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 September 30, 2007 by approximately $0.5
million, or 10.9%, of the reported reserve for sales returns.


                                      37


<PAGE>
<PAGE>

Medicaid Rebates - Established in 1990, the Medicaid Drug Rebate Program
----------------
requires a drug manufacturer to provide to each state a rebate every calendar
quarter for covered outpatient drugs dispensed to Medicaid patients. Medicaid
rebates apply to both our branded and specialty generic segments. Individual
states invoice us for Medicaid rebates on a quarterly basis using statutorily
determined rates for generic (11%) and branded (15%) products, which are
applied to the Average Manufacturer's Price, or "AMP," for a particular
product to arrive at a Unit Rebate Amount, or "URA." The amount owed is based
on the number of units dispensed by the pharmacy to Medicaid patients extended
by the URA. The reserve for Medicaid rebates is based on expected payments,
which are driven by patient usage and estimated inventory in the distribution
channel. We estimate patient usage by calculating a payment rate as a
percentage of net sales lagged six months, which is then applied to an
estimate of customer inventory. We currently use the last two months of our
shipments to wholesalers and direct buying chains as an estimate of inventory
in the wholesale and chain channels and an additional month of wholesale sales
as an estimate of inventory held by the indirect buying retailer. A 10% change
in the amount of customer inventory subject to Medicaid rebates would have
changed the reserve at September 30, 2007 by $0.5 million, or 9.5% of the
reported reserve for Medicaid rebates. Similarly, a 10% change in estimated
patient usage would have changed the reserve at September 30, 2007 by $0.5
million, or 9.5% 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. Effective April 1, 2006, we adopted SFAS 123R, which
------------------------
requires the measurement and recognition of compensation expense, based on
estimated fair values, for all share-based compensation awards made to
employees and directors over the vesting period of the awards. The Company
adopted SFAS 123R using the modified prospective method and, as a result, did
not retroactively adjust results from prior periods. Under the modified
prospective method, stock-based compensation was recognized (1) for the
unvested portion of previously issued awards that were outstanding at the
initial date of adoption based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123 and (2) for any awards
granted on or subsequent to the effective date of SFAS 123R based on the grant
date fair value estimated in accordance with the provisions of this statement.
Determining the fair value of share-based awards at the grant date requires
judgment to identify the


                                      38


<PAGE>
<PAGE>

appropriate valuation model and estimate the assumptions, including the
expected term of the stock options and expected stock-price volatility, to be
used in the calculation. Judgment is also required in estimating the
percentage of share-based awards that are expected to be forfeited. We
estimated the fair value of stock options granted using the Black-Scholes
option-pricing model with assumptions based primarily on historical data. If
actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially
impacted.

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

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

Our accounting for income taxes was affected by the adoption of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" on April 1, 2007. See Note 14 of the
Notes to Consolidated Financial Statements.

CONTINGENCIES. We are involved in various legal proceedings, some of which
-------------
involve claims for substantial amounts. An estimate is made to accrue for a
loss contingency relating to any of these legal proceedings if 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 September 30, 2007 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.




                                      39


<PAGE>
<PAGE>

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.

The majority of our investments in marketable securities are taxable auction
rate securities. The rates on these securities reset at a pre-determined
interval up to 35 days. As of September 30, 2007, and March 31, 2007, we had
invested $82.2 million and $119.2 million, respectively, in auction rate
securities, primarily in high quality (AAA rated) bonds secured by student
loans which are guaranteed by the U. S. Government. Recent developments in the
capital and credit markets subsequent to September 30, 2007 have adversely
affected the market for auction rate securities, which has resulted in a loss
of liquidity for these investments. We have evaluated these securities to
determine if other-than-temporary impairment of the carrying value of the
securities has occurred due to the loss of liquidity. At March 31, 2008, the
fair value of auction rate securities was $81.5 million and the resultant
difference of $2.4 million was recorded in accumulated other comprehensive
loss as the unrealized losses were considered to be temporary (See Note 16 of
the Notes to the Consolidated Financial Statements for further discussion of
our investment in auction rate securities). We believe that as of March 31,
2008, based on our cash, cash equivalents and short-term marketable securities
balances of $126.9 million 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 $0.6 million, $1.1 million or $2.2 million,
respectively, based on our average cash, cash equivalents and short-term
marketable investment balances during the six months ended September 30, 2007
compared to an increase of $0.6 million, $1.1 million or $2.2 million,
respectively, during the fiscal year ended March 31, 2007.

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
September 30, 2007, we had $50.0 million of borrowings outstanding under our
credit facility. At March 31, 2007, we had no borrowings outstanding under our
credit facility.

In May 2003, we issued $200.0 million principal amount of Convertible
Subordinated Notes. The interest rate on the Convertible Subordinated Notes is
fixed at 2.50% 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 Convertible Subordinated Notes per $1,000 principal amount for the
five-trading day period ending on the third trading day immediately preceding
the first day of the applicable six-month period equals $1,200 or more.
Holders may require us to repurchase all or a portion of their Convertible
Subordinated Notes on May 16, 2008, 2013, 2018, 2023 and 2028, or upon a
change in control, as defined in the indenture governing the Convertible
Subordinated Notes, at 100% of the principal amount of the Convertible
Subordinated Notes, plus accrued and unpaid interest (including contingent
interest, if any) to the date of repurchase, payable in cash. As a result, we
have classified the Convertible Subordinated Notes as a current liability as
of September 30, 2007 due to the right the holders have to require us to
repurchase the Convertible Subordinated Notes on May 16, 2008. Since the
holders did not elect to cause us to repurchase any of the Notes, the Notes
will be reclassified as long-term beginning with our consolidated balance
sheet as of June 30, 2008.

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.


                                      40


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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 material weaknesses in internal control over financial reporting
described below, as of September 30, 2007 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 fiscal 2008 financial statements, the Company
determined that a material weakness in its internal control over financial
reporting existed as of September 30, 2007 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.

The Company identified a material weakness in its internal control over
financial reporting as of March 31, 2007 related to the determination of
appropriate measurement dates and forfeiture provisions for stock option
grants to employees; accordingly, the measurement dates used for certain
option grants were not appropriate, and the accounting for those grants was
not in accordance with Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees ("APB 25"). The material weakness resulted from the
combined effect of the following control deficiencies:

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

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

The Company's policies and procedures to ensure that the necessary information
was captured and communicated to those responsible for stock option accounting
were inadequate. This resulted in a more than remote likelihood of a material
misstatement in the Company's financial statements.

The Company's finance and accounting personnel and personnel involved in the
stock option granting and administration process were inadequately trained.
This resulted in a more than remote likelihood of a material misstatement in
the Company's financial statements.

In addition, and unrelated to accounting for stock-based compensation, in
August 2006 our management identified additional liabilities associated with
tax positions taken on filed tax returns for the years ended March 31, 2004
through 2006 that should have been recorded in accordance with GAAP, partially
offset by certain expected tax refunds. We have determined that these errors
in our accounting for income taxes resulted from a material weakness in our
internal control over financial reporting. Specifically, the design of the
Company's policies, procedures and control activities did not adequately
address the financial reporting risks associated with uncertain tax positions
and were inadequate in ensuring that the necessary information was captured
and communicated to those responsible for accounting for uncertain tax
positions. This resulted in a more than remote likelihood of a material
misstatement in the Company's financial statements.

                                      41


<PAGE>
<PAGE>

In addition, management identified a material weakness in our internal control
over financial reporting as of March 31, 2007 related to revenue recognition.
Specifically, the design of the Company's policies, procedures, and control
activities did not adequately address the financial reporting risks associated
with customer shipping terms. This resulted in a more than remote likelihood
of a material misstatement in the Company's financial statements.

As a result of financial statement errors attributable to the material
weaknesses identified as of August 2006 and March 31, 2007 described above, we
have filed a comprehensive Form 10-K for the fiscal year ended March 31, 2007
in which we restated our consolidated statements of income, comprehensive
income, shareholders' equity and cash flows for the fiscal years ended March
31, 2006 and 2005, our consolidated balance sheet as of March 31, 2006 and
selected consolidated financial data for the fiscal years ended March 31,
2006, 2005, 2004, and 2003, and for each of the quarters in the fiscal year
ended March 31, 2006.

(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 September 30, 2007 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
Subsequent to March 31, 2008, the Company is taking steps to remediate the
material weakness related to rebate agreements by designing policies and
procedures that require all new or modified customer agreements to be reviewed
by accounting personnel with relevant GAAP knowledge to determine the
appropriate accounting treatment.

Subsequent to September 30, 2007, we are still in the process of remediating
the material weaknesses related to accounting for stock-based compensation,
income taxes and revenue recognition described in (a) above as follows:

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

                                      42


<PAGE>
<PAGE>

o        Established quarterly testing by the Company's Internal Audit
         Department of controls relating to stock option activity and the
         accuracy of the model used in valuing the Company's stock options.

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

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





                                      43


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<PAGE>

PART II.  - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information set forth under Note 13 - CONTINGENCIES - LITIGATION of the
Notes to the Consolidated Financial Statements included in Part I, Item 1 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, 2007. 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 September 30,
        2007:

<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>
  July 1-31, 2007                        460               $ 28.05                   --                         --

  August 1-31, 2007                      --                   --                     --                         --

  September 1-30, 2007                   240               $ 27.39                   --                         --
                                         ---
              Total                      700               $ 27.82                   --                         --
                                         ===
</TABLE>

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





                                      44


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<PAGE>

ITEM 6. EXHIBITS

                  Exhibits. See Exhibit Index.





                                      45


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<PAGE>

                                  SIGNATURES
                                  ----------

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


                                     K-V PHARMACEUTICAL COMPANY



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



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



Date: June 25, 2008             By   /s/ Richard H. Chibnall
                                     -------------------------------------------
                                     Richard H. Chibnall
                                     Vice President, Finance
                                     (Principal Accounting Officer)





                                      46


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<PAGE>

                                 EXHIBIT INDEX


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

   10.1*          Asset Purchase Agreement by and between the Company and
                  VIVUS, Inc., dated as of March 30, 2007, filed herewith.

   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.

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




                                      47