<PAGE>

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

                                  FORM 10-Q/A
                               (AMENDMENT NO. 1)

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006


                         COMMISSION FILE NUMBER 1-9601
                                                ------


                          K-V PHARMACEUTICAL COMPANY
------------------------------------------------------------------------------
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


           DELAWARE                                    43-0618919
-------------------------------           ------------------------------------
(STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)


               2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
------------------------------------------------------------------------------
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                  (ZIP CODE)


                                (314) 645-6600
------------------------------------------------------------------------------
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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 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, OR A NON-ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE
ACT).
 LARGE ACCELERATED FILER [ ] ACCELERATED FILER [ X ] NON-ACCELERATED FILER [ ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED
IN RULE 12b-2 OF THE ACT).
YES [ ] NO [ X ]


<TABLE>
<CAPTION>
               TITLE OF CLASS OF                              NUMBER OF SHARES
                 COMMON STOCK                          OUTSTANDING AS OF JULY 31, 2006
                 ------------                          -------------------------------

<C>                                                             <C>
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE                  37,032,769
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE                  12,497,121
</TABLE>

                                      1

<PAGE>
<PAGE>

EXPLANATORY NOTE REGARDING RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS

This Form 10-Q/A reflects the restatement of our consolidated balance sheets
as of June 30, 2006, March 31, 2006 and June 30, 2005 and the related
consolidated statements of operations and cash flows for the three months
ended June 30, 2006 and 2005. In our Form 10-K for the fiscal year ended March
31, 2007 to be filed with the Securities and Exchange Commission (the "2007
Form 10-K"), we are restating our consolidated balance sheet as of March 31,
2006, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for the fiscal years ended March 31, 2006
and 2005. We have not amended, and we do not intend to amend, our previously
filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for each
of the fiscal years and fiscal quarters of 1996 through 2006. Our 2007 Form
10-K also will reflect the restatement of Selected Financial Data in Item 6 as
of March 31, 2005 and as of and for the fiscal years ended March 31, 2004 and
2003. We will also be filing Quarterly Reports on Form 10-Q for the quarters
ended September 30, 2006 and December 31, 2006, that contain the restatement
of our consolidated financial statements for certain interim periods as
discussed therein.

On October 31, 2006, we announced that we had been served with a derivative
lawsuit filed in St. Louis City Circuit Court alleging that certain stock
option grants to current or former directors and officers between 1995 and
2002 were dated improperly. In accordance with our established corporate
governance procedures, the Board of Directors referred this matter to the
independent members of its Audit Committee (the "Special Committee" or
"Committee").

Shortly thereafter, the Special Committee, assisted by independent legal
counsel and forensic accounting experts engaged by the Committee, commenced an
investigation of our stock option grant practices, with the objective of
evaluating our accounting for stock options for compliance with U.S. Generally
Accepted Accounting Principles ("GAAP") and with the terms of our related
stock option plans over the period January 1, 1995 through October 31, 2006
(the "relevant period").

The investigation has now been completed and our Board of Directors received a
final report on October 2, 2007 from the Special Committee based on facts
disclosed in the course of the investigation and the advice of its independent
legal counsel and forensic accounting experts. The Special Committee found
that our previous accounting for stock-based compensation was not in
accordance with GAAP and that corrections to our previous consolidated
financial statements were required. We agreed with the Committee's findings
and, as a result, our consolidated retained earnings as of March 31, 2006,
incorporate an additional $16.3 million of stock-based compensation expense,
including related payroll taxes, interest and penalties, net of $2.6 million
in income tax benefits. In the course of the Special Committee's
investigation, we were notified by the SEC staff that it had commenced an
investigation with respect to the Company's stock option program. We have
cooperated with the SEC staff and, among other things, provided them with
copies of the Special Committee's report and all documents collected by the
Committee in the course of its review. Recently, the SEC staff, pursuant to a
formal order of investigation, has issued subpoenas for documents, most of
which have already been produced to the SEC staff, and for testimony by
certain employees. The Company expects that the production of any additional
documents called for by the subpoena and the testimony of certain employees
will be completed by April 2008.

In addition, and as a separate matter, our statement of consolidated retained
earnings as of March 31, 2006, incorporate an additional $5.4 million of
income tax expense to record additional liabilities associated with tax
positions claimed on tax returns filed for fiscal years 2004, 2005 and 2006
that should have been recorded in accordance with GAAP, partially offset by
certain expected tax refunds. This adjustment is not related to the accounting
for stock-based compensation expense discussed above.

In addition, our consolidated retained earnings as of March 31, 2006,
incorporate a $0.4 million reduction of net income related primarily to
misstatements of net revenues and cost of sales resulting from improperly
recognizing revenue prior to when title and risk of ownership of the product
transferred to the customer.

Please see "Review of Stock Option Grant Practices," "Review of Tax Positions
(Unrelated to stock options)" and "Other Adjustments (Unrelated to stock
options)" in "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and Note 2 "Restatement of Consolidated Financial
Statements" in the Consolidated Financial Statements for a more detailed
discussion related to investigation of our former stock option grant
practices, review of tax positions and other adjustments.

                                      2

<PAGE>
<PAGE>

The effect of these restatements are reflected in our Consolidated Financial
Statements and other supplemental data herein and the unaudited quarterly data
and selected financial data included in the 2007 Form 10-K. Financial
information included in reports previously filed or furnished by K-V
Pharmaceutical Company for the fiscal periods 1996 through 2006 and our
assessment of internal control over financial reporting as of March 31, 2006,
should not be relied upon and are superseded by the information in this Form
10-Q/A and the 2007 Form 10-K.

We have modified the disclosures presented in our original quarterly report on
Form 10-Q for the three months ended June 30, 2006 to reflect the effect of
the restatement of our Consolidated Financial Statements and have modified or
updated certain other information as discussed below. However, this Form
10-Q/A does not reflect all events occurring after the original filing of our
Form 10-Q for the three months ended June 30, 2006 or modify or update all the
disclosures affected by subsequent events. Information not modified or updated
herein reflects the disclosures made at the time of the original filing of the
Form 10-Q on August 8, 2006. Accordingly, this Form 10-Q/A should be read in
conjunction with our periodic filings, as well as any Current Reports on Form
8-K, filed with the SEC subsequent to the date of the original filing of our
Form 10-Q for the three months ended June 30, 2006, provided that you should
not rely on any financial information in our previous SEC filings as noted
above.

The following items have been amended as a result of the restatement:

       Part I - Item 1. Financial Statements;
       Part I - Item 2. Management's Discussion and Analysis of Results of
                        Operations and Financial Condition;
       Part I - Item 4. Controls and Procedures; and
       Part II - Item 1A. Risk Factors

Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, this
Form 10-Q/A includes new Rule13(a)-14(a)/15d-14(a) certifications as Exhibits
31.1 and 31.2, and new certifications pursuant to Section 18 U.S.C.
Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 as Exhibits 32.1 and 32.2.


                                      3

<PAGE>
<PAGE>

PART I. - FINANCIAL INFORMATION
ITEM 1.      FINANCIAL STATEMENTS

<TABLE>
                              K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                       (Unaudited; dollars in thousands, except per share data)

<CAPTION>
                                                                       THREE MONTHS ENDED JUNE 30,
                                                                   -----------------------------------
                                                                       2006                  2005
                                                                   -------------         -------------
                                                                   (AS RESTATED)         (AS RESTATED)

<C>                                                                  <C>                   <C>
Net revenues.....................................................    $ 96,200              $ 85,043
Cost of sales....................................................      33,462                26,035
                                                                     --------              --------
Gross profit.....................................................      62,738                59,008
                                                                     --------              --------
Operating expenses:
    Research and development.....................................       7,890                 7,632
    Purchased in-process research and
        development and transaction costs........................          --                30,441
    Selling and administrative...................................      40,138                37,753
    Amortization of intangibles..................................       1,197                 1,180
                                                                     --------              --------
Total operating expenses.........................................      49,225                77,006
                                                                     --------              --------

Operating income (loss)..........................................      13,513               (17,998)
                                                                     --------              --------

Other expense (income):
    Interest expense.............................................       2,236                 1,377
    Interest and other income....................................      (2,058)               (1,053)
                                                                     --------              --------
Total other expense, net.........................................         178                   324
                                                                     --------              --------
Income (loss) before income taxes and cumulative
    effect of change in accounting principle.....................      13,335               (18,322)
Provision for income taxes.......................................       5,213                 4,566
                                                                     --------              --------
Income (loss) before cumulative effect of
    change in accounting principle...............................       8,122               (22,888)
Cumulative effect of change in accounting
    principle (net of $670 in taxes).............................       1,976                    --
                                                                     --------              --------
Net income (loss)................................................    $ 10,098              $(22,888)
                                                                     ========              ========

                                                                              (CONTINUED)
</TABLE>


                                      4

<PAGE>
<PAGE>

<TABLE>
                               K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF OPERATIONS - (CONTINUED)
                         (Unaudited; dollars in thousands, except per share data)

<CAPTION>
                                                                         THREE MONTHS ENDED JUNE 30,
                                                                     -----------------------------------
                                                                         2006                  2005
                                                                     -------------         -------------
                                                                     (AS RESTATED)         (AS RESTATED)

<C>                                                                    <C>                   <C>
Earnings (loss) per share before effect of change
   in accounting principle:
       Basic - Class A common....................................      $   0.17              $  (0.47)
       Basic - Class B common....................................          0.14                 (0.47)
       Diluted - Class A common..................................          0.15                 (0.47)
       Diluted - Class B common..................................          0.13                 (0.47)

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

Earnings (loss) per share:
       Basic - Class A common....................................      $   0.21              $  (0.47)
       Basic - Class B common....................................          0.18                 (0.47)
       Diluted - Class A common..................................          0.19                 (0.47)
       Diluted - Class B common..................................          0.16                 (0.47)

Shares used in per share calculation:
       Basic - Class A common....................................      $ 36,599              $ 35,439
       Basic - Class B common....................................        12,474                13,181
       Diluted - Class A common..................................        58,849                48,620
       Diluted - Class B common..................................        12,622                13,181



SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                      5

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                           JUNE 30,       MARCH 31,
                                                                                             2006           2006
                                                                                             ----           ----
                                                                                        (AS RESTATED)   (AS RESTATED)
<C>                                                                                      <C>             <C>
                                            ASSETS
                                            ------
CURRENT ASSETS:
Cash and cash equivalents............................................................    $    58,216     $   100,706
Marketable securities................................................................        152,111         106,763
Receivables, less allowance for doubtful accounts of $396 and $397
   at June 30, 2006 and March 31, 2006, respectively.................................         48,216          53,571
Inventories, net.....................................................................         75,805          71,166
Prepaid and other assets.............................................................          6,313           7,012
Deferred tax asset...................................................................          9,301          10,072
                                                                                         -----------     -----------
   Total Current Assets..............................................................        349,962         349,290
Property and equipment, less accumulated depreciation................................        189,380         178,042
Intangible assets and goodwill, net..................................................         72,010          72,955
Other assets.........................................................................         18,967          19,026
                                                                                         -----------     -----------
TOTAL ASSETS.........................................................................    $   630,319     $   619,313
                                                                                         ===========     ===========

                                         LIABILITIES
                                         -----------
CURRENT LIABILITIES:
Accounts payable.....................................................................    $    17,877     $    17,975
Accrued liabilities..................................................................         25,025          24,676
Current maturities of long-term debt.................................................          1,820           1,681
                                                                                         -----------     -----------
   Total Current Liabilities.........................................................         44,722          44,332
Long-term debt.......................................................................        240,888         241,319
Other long-term liabilities..........................................................          5,630           5,442
Deferred tax liability...............................................................         27,216          25,221
                                                                                         -----------     -----------
TOTAL LIABILITIES....................................................................        318,456         316,314
                                                                                         -----------     -----------

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 June 30, 2006 and March 31, 2006 (convertible into Class A
   shares at a ratio of  8.4375-to-one)..............................................             --              --
Class A and Class B Common Stock, $.01 par value;150,000,000 and
   75,000,000 shares authorized, respectively;
     Class A - issued 39,816,286 and 39,660,637 at June 30, 2006
       and March 31, 2006, respectively..............................................            398             397
     Class B - issued 12,589,261 and 12,679,986 at June 30, 2006 and March 31, 2006,
       respectively (convertible into Class A shares on a one-for-one basis).........            126             127
Additional paid-in capital...........................................................        144,027         145,180
Retained earnings....................................................................        221,490         211,410
Accumulated other comprehensive loss.................................................           (243)           (211)
Less: Treasury stock, 3,125,590 shares of Class A and 92,902 shares of Class B
   Common Stock at June 30, 2006, respectively, and 3,123,975 shares of Class A and
   92,902 shares of Class B Common Stock at March 31, 2006, respectively, at cost....        (53,935)        (53,904)
                                                                                         -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................        311,863         302,999
                                                                                         -----------     -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................    $   630,319     $   619,313
                                                                                         ===========     ===========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


                                       6

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                    THREE MONTHS ENDED
                                                                                          JUNE 30,
                                                                                -----------------------------
                                                                                    2006            2005
                                                                                -------------   -------------
                                                                                (AS RESTATED)   (AS RESTATED)
<C>                                                                             <C>             <C>
OPERATING ACTIVITIES:
Net income (loss)......................................................         $    10,098     $     (22,888)
Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
   Acquired in-process research and development........................                  --            29,570
   Cumulative effect of change in accounting principle.................              (1,976)               --
   Depreciation, amortization and other non-cash charges...............               5,368             3,891
   Deferred income tax provision.......................................               2,112               643
   Deferred compensation...............................................                 188               340
   Stock-based compensation............................................                 936               221
   Excess tax benefits associated with stock options...................                (210)               --
Changes in operating assets and liabilities:
   Decrease (increase) in receivables, net.............................               5,355               221
   Increase in inventories, net........................................              (4,639)           (5,988)
   Decrease in prepaid and other assets................................                 197             4,765
   Increase (decrease) in accounts payable and accrued
      liabilities......................................................                 376            (4,315)
                                                                                -----------     -------------
Net cash provided by operating activities..............................              17,805             6,460
                                                                                -----------     -------------

INVESTING ACTIVITIES:
   Purchase of property and equipment, net.............................             (15,200)          (22,392)
   Purchase of marketable securities...................................             (45,396)          (10,235)
   Purchase of preferred stock.........................................                  --           (11,300)
   Product acquisition.................................................                  --           (25,219)
                                                                                -----------     -------------
Net cash used in investing activities..................................             (60,596)          (69,146)
                                                                                -----------     -------------

FINANCING ACTIVITIES:
   Principal payments on long-term debt................................                (292)             (243)
   Dividends paid on preferred stock...................................                 (18)              (18)
   Purchase of common stock for treasury...............................                 (31)              (33)
   Excess tax benefits associated with stock options...................                 210                --
   Cash deposits received for stock options............................                 432                99
                                                                                -----------     -------------
Net cash provided by (used in) financing activities....................                 301              (195)
                                                                                -----------     -------------
Decrease in cash and cash equivalents..................................             (42,490)          (62,881)
Cash and cash equivalents:
   Beginning of year...................................................             100,706           159,825
                                                                                -----------     -------------
   End of period.......................................................         $    58,216     $      96,944
                                                                                ===========     =============

SUPPLEMENTAL INFORMATION:
   Interest paid, net of capitalized interest..........................         $     2,929     $       2,194
   Income taxes paid...................................................                 129                --
   Stock options exercised (at expiration of two-year forfeiture period)                347             1,439

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                      7

<PAGE>
<PAGE>

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

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 balance sheet
information as of March 31, 2006 has been derived from the Company's
consolidated balance sheet as of that date, as restated (see Note 2). These
consolidated financial statements and accompanying notes should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the fiscal year ended March 31, 2007, which are included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2007
to be filed with the Securities and Exchange Commission (the "2007 Form
10-K").

2.  RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

REVIEW OF STOCK OPTION GRANT PRACTICES

BACKGROUND AND CONCLUSIONS
This Form 10-Q/A reflects the restatement of the Company's consolidated
balance sheets as of June 30, 2006, March 31, 2006 and June 30, 2005 and the
related consolidated statements of operations and cash flows for the three
months ended June 30, 2006 and 2005. In the Company's 2007 Form 10-K, the
Company is restating its consolidated balance sheet as of March 31, 2006, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for the fiscal years ended March 31, 2006
and 2005. The Company has not amended, and does not intend to amend, its
previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
for each of the fiscal years and fiscal quarters of 1996 through 2006. The
Company will be filing Quarterly Reports on Form 10-Q for the quarters ended
September 30, 2006 and December 31, 2006, that contain the restatement of its
consolidated statements for certain interim periods as discussed therein.

On October 31, 2006, the Company announced that it had been served with a
derivative lawsuit filed in St. Louis City Circuit Court alleging that certain
stock option grants to current or former officers and directors between 1995
and 2002 were dated improperly. In accordance with the Company's established
corporate governance procedures, the Board of Directors referred this matter
to the independent members of its Audit Committee (the "Special Committee" or
"Committee").

Shortly thereafter, the Special Committee commenced an investigation of the
Company's stock option grant practices, assisted by of independent legal
counsel and forensic accounting experts engaged by the Committee, with the
objectives of evaluating the Company's accounting for stock options for
compliance with GAAP and for compliance with the terms of its related stock
option plans over the period January 1, 1995 through October 31, 2006 (the
"relevant period").

On October 11, 2007, the Company filed a Current Report on Form 8-K announcing
that the Special Committee had completed its investigation. The investigation
concluded that there was no evidence that any employee, officer or director of
the Company engaged in any intentional wrongdoing or was aware that the
Company's policies and procedures for granting and accounting for stock
options were materially non-compliant with GAAP. The

                                      8

<PAGE>
<PAGE>

investigation also found no intentional violation of law or accounting rules
with respect to the Company's historical stock option grant practices.

However, the Special Committee concluded that stock-based compensation expense
resulting from the stock option grant practices followed by the Company was
not recorded in accordance with GAAP because the expense computed for most of
the grants reflected incorrect measurement dates for financial accounting
purposes. The "measurement date" under applicable accounting principles,
namely APB 25 and related interpretations, is the first date on which all of
the following are known and not subject to change: (a) the individual who is
entitled to receive the option grant, (b) the number of options that an
individual is entitled to receive, and (c) the option's exercise price.

FINDINGS AND ACCOUNTING CONSIDERATIONS
In general, stock options were granted to employees, executives and
non-employee members of the Board of Directors over the relevant period under
the terms of the Company's 1991 and 2001 Incentive Stock Option Plans (the
"option plans"). In addition to options granted to the CEO under those plans,
options were awarded to him under the terms of his employment agreement in
lieu of, and in consideration for a reduction of, the cash bonus provided for
in that agreement.

The option plans required grants to be approved by the Compensation Committee
of the Board of Directors. Under the option plans, options were to be granted
with exercise prices set at no less than the fair market value of the
underlying common stock at the date of grant. The 1991 plan provided for the
exclusive grant of Incentive Stock Options ("ISOs") as defined by Internal
Revenue Code Section 422, while the 2001 plan provided for the grant of ISOs
and non-qualified stock options ("NSOs"). Under the plans, options granted to
employees other than the CEO or directors are subject to a ten-year ratable
vesting period. Options granted to the CEO and directors generally vest
ratably over five years.

Both option plans require that shares received upon exercise of an option
cannot be sold for two years. If the employee terminates employment
voluntarily or involuntarily (other than by retirement, death or disability)
during the two-year forfeiture period, the option plans provide the Company
may elect to repurchase the shares at the lower of the exercise price of the
option or the fair market value of the stock on the date of termination. The
Company has changed its accounting for stock-based compensation to consider
this provision of the option plans as a forfeiture provision to be accounted
for in accordance with the guidance provided in EITF No. 00-23, " Issues
Related to Accounting for Stock Based Compensation under APB 25 and FIN 44",
specifically Paragraph 78 and Issue 33 (a), "Accounting for Early Exercise".
In accordance with EITF No. 00-23, cash paid by an employee for the exercise
price is considered a deposit or a prepayment of the exercise price that is
recognized as a current liability when received by the Company at the
beginning of the two-year forfeiture period. The receipt of the exercise price
is recognized as a current liability because the options are deemed not
exercised and the option shares are not considered issued until an employee
bears the risk and rewards of ownership. The options are accounted for as
exercised when the two-year forfeiture period lapses. In addition, because the
options are not considered exercised for accounting purposes, the shares in
the two-year forfeiture period are not considered outstanding for purposes of
computing basic EPS.

The Company had accounted for all option grants as fixed in accordance with
the provisions of APB 25, using the date of grant as the measurement date.
Because the exercise price of the option was equal to or greater than the
market price of the stock at the measurement date fixed by the terms of the
awards, under prior procedures the Company did not recognize any compensation
expense since the option had no intrinsic value, intrinsic value being the
difference between the exercise price and the market price of the underlying
stock at the measurement date.

 As noted above, the Special Committee determined that the Company's
accounting for most of the stock option grants was not in accordance with GAAP
because the date of grant, as defined by the Company, was not a proper
measurement date. To correct the errors, and consistent with the accounting
literature and guidance from the Securities and Exchange Commission ("SEC"),
the Company organized the grants into categories based on grant type and
process by which the grant was finalized. Based on the relevant facts and
circumstances, the Company applied the authoritative accounting standard (APB
25 and related interpretations) to determine, for every grant within each
category, the proper measurement date. If the measurement date was not the
originally assigned grant date, accounting adjustments were made as required,
resulting in stock-based compensation expense and related tax effects. The
grants were classified as follows: (1) promotion/retention grants to
executives and employees and new hire grants ("employee options"); (2) grants
to persons elected or appointed to the Board of Directors ("director
options"); and

                                      9

<PAGE>
<PAGE>

(3) bonus option grants to the CEO in lieu of cash bonus payments under the
terms of his employment agreement ("bonus options").

Employee Options. The evidence obtained through the investigation indicates
----------------
that employee options were granted based on the lowest market price in the
quarter of grant determined from an effective date (as defined below) to the
end of the quarter. The exercise price and grant date of the options were
determined by looking back from the end of the quarter to the effective date
and choosing the lowest market price during that period. The date on which the
market price was lowest became the grant date. This procedure to "look back"
to the lowest market price in the preceding quarter to set the exercise price
was widely known and understood within the Company. The effective date was
either the date on which the option recipients and the number of shares to be
granted were determined and approved by the CEO, the date of a promotion or
the date of hire. For new hires and promotions of existing employees, which
represents substantially all of the award recipients, the terms of the award,
except for the exercise price, were communicated to the recipients prior to
the end of the quarter. At the end of the quarter, when the exercise price was
determined, board consents were prepared, dated as of the date on which the
stock price was lowest during the quarter, to be approved by the members of
the Compensation Committee. The evidence obtained through the investigation
indicates the Compensation Committee never changed or denied approval of any
grants submitted to them and, as such, their approval was considered a routine
matter. Based on the evidence and findings of the Special Committee, the
results of management's analysis, the criteria specified in APB 25 for
determining measurement dates and guidance from the staff of the SEC, the
Company has concluded that the measurement dates for the employee options
should not have been the originally assigned grant dates, but instead, should
have been the end of the quarter in which awards were granted when the
exercise price and number of shares granted were fixed. Changing the
measurement dates from the originally assigned grant date to the end of the
quarter resulted in recognition of additional stock-based compensation expense
of $143, net of tax, on 1,330 stock option grants for the three months ended
June 30, 2005.

Director Options. Director options were issued, prior to the effective date of
----------------
the Sarbanes-Oxley Act ("Sarbanes-Oxley") in August 2002, using the same "look
back" process as described above for employee options. This process was
changed when the time for filing Form 4s was shortened under the provisions of
the Sarbanes-Oxley Act, to award options with exercise prices equal to the
fair market value of the stock on the date of grant. Prior to this change in
grant practice, the Company concluded that the measurement date for the
director options should be the end of the quarter. Changing the measurement
date from the originally assigned grant date to the end of the quarter
resulted in recognition of additional stock-based compensation expense of $8,
net of tax, on 14 stock option grants for the three months ended June 30,
2005.

Bonus Options. Under the terms of the CEO's employment agreement, he is
-------------
permitted the alternative of electing incentive stock options, restricted
stock or discounted stock options in lieu of the payment of part or all of the
incentive bonus due to him in cash. In the event of an election to receive
options in lieu of cash incentive, those options were to be valued using the
Black-Scholes option pricing model, applying the same assumptions as those
used in the Company's most recent proxy statement. The employment agreement
provides that the CEO's annual bonus is based on fiscal year net income.

Prior to fiscal 2005, the CEO received ten bonus option grants, consisting of
337,500 shares of Class A Common Stock and 1,743,750 shares of Class B Common
Stock under this arrangement. The CEO and the Board's designated
representative (the Company's Chief Financial Officer) negotiated the terms of
the bonus options, including the number of shares covered, the exercise price
and the grant date (the latter being selected using a "look back" process
similar to that followed in granting employee and director options). The
Company typically granted bonus options prior to fiscal year-end, shortly
after such agreement was reached. These bonus options were fully vested at
grant, had three to five year terms, were granted with a 10% or 25% premium to
the market price of the stock on the selected grant date and were subject to
the approval of the Compensation Committee. The CEO's cash bonus payable at
the end of the fiscal year in which the options were granted was reduced by
the Black-Scholes value of the options according to their terms.

Based on the facts and circumstances relative to the process for granting the
bonus options, the Special Committee determined, and the Company has agreed,
that the measurement dates for these options should be the end of the fiscal
year in which they were granted. The end of the fiscal year was used as the
measurement date because that is the date on which the amount of the annual
bonus could be determined and therefore the terms of the option could be fixed
under APB 25. This conclusion is predicated on the assumption that the terms
of the option were linked to the amount

                                      10

<PAGE>
<PAGE>

of the bonus earned. While it was permissible to agree upon the number of
shares that were to be issued prior to the end of the year and would not be
forfeitable, under GAAP the exercise price is considered variable until the
amount of the bonus could be determined with finality. The variability in the
exercise price results from the premise that the CEO would have been required
to repay any shortfall in the bonus earned from the value assigned to the
option by the Black-Scholes model. Any amount repaid to cure the bonus
shortfall would in substance be an increase in the exercise price of the
option. Since the exercise price could not be determined with certainty until
the amount of the bonus was known, the Company has applied variable accounting
to the bonus options from the date of grant to the final fiscal year-end
measurement date. Variable accounting requires that compensation expense is to
be determined by comparing the quoted market value of the shares covered by
the option grant to the exercise price at each intervening balance sheet date
until the terms of the option become fixed.

The compensation expense associated with the CEO's estimated bonus was accrued
throughout the fiscal year. When the value of a bonus option was determined
using the Black-Scholes model, previously recorded compensation expense
associated with the accrual of the estimated bonus was reversed in the amount
of the value assigned to the bonus option. The previously recorded
compensation expense should not have been reversed. The Company developed a
methodology in the restatement process that considers both the intrinsic value
of the option under APB 25 and the Black-Scholes value assigned to the bonus
option in determining the amount of compensation expense to recognize once the
exercise price of the option becomes fixed and variable accounting ends. Under
this methodology, the intrinsic value of the option is determined at the
fiscal year-end measurement date under the principles of APB 25. The intrinsic
value is then compared to the Black-Scholes value assigned to the option for
compensation purposes (the bonus value). The bonus value is the amount that
would have been accrued during the fiscal year through the grant date as part
of the total liability for the CEO's bonus. The greater of the intrinsic value
or bonus value is recorded as compensation expense. Using this methodology and
the fiscal year-end as the measurement dates, resulted in an increase in
stock-based compensation expense of $6,944 over the period from fiscal 1996
through fiscal 2004. There was no tax benefit associated with this expense due
to the tax years being closed.

OTHER MODIFICATIONS OF OPTION TERMS
As described above, under the terms of the option plans, shares received on
exercise of an option are to be held for the employee for two years during
which time the shares cannot be sold. If the employee terminates employment
voluntarily or involuntarily (other than by retirement, death or disability)
during the two-year forfeiture period the option plans 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. In some
circumstances the Company elected not to repurchase the shares upon
termination of employment while the shares were in the two-year forfeiture
period, essentially waiving the remaining forfeiture period requirement. The
Company previously did not recognize this waiver as requiring a new
measurement date.

Based on management's analysis, the Company has concluded that a new
measurement date should have been recognized in two situations: (1) where the
employee terminated and the Company did not exercise its right under the
option plans to buy back the shares in the two-year forfeiture period, and (2)
where the forfeiture provision was waived and the employee subsequently
terminated within two years of the exercise date. The Company now considers
both of these waivers to be an acceleration of the vesting period because the
forfeiture provision was waived. The employee is no longer subject to a
service condition to earn the right to the shares and will benefit from the
modification. As such, a new measurement date is required. In this case the
new measurement date is the date the forfeiture provision was waived with
additional stock-based compensation expense being recognized at the date of
termination. Since the shares were fully vested, the intrinsic value of the
option at the new measurement date in excess of the intrinsic value at the
original measurement date should be expensed immediately. The new measurement
dates resulted in an increase in stock-based compensation expense of $1, net
of tax, on one stock option grant for the three months ended June 30, 2005.

STOCK OPTION ADJUSTMENTS
A discussion of the stock option restatement adjustments follows and a table
reflecting the impact of these adjustments is presented below on page 14.



                                      11

<PAGE>
<PAGE>

Stock-based Compensation Expense. Although the period for the Special
--------------------------------
Committee's investigation was January 1, 1995 to October 31, 2006, the Company
extended the period of review back to 1986 in its analysis of the aggregate
impact of the measurement date changes because the incorrect accounting for
stock options extended that far back in time. The Company has concluded that
the measurement date changes identified by the Special Committee's
investigation and management's analysis resulted in an understatement of
stock-based compensation expense arising from stock option grants since 1986,
affecting the Company's consolidated financial statements for each year
beginning with the fiscal year ended March 31, 1986. The impact of the
misstatements on the consolidated financial statements for the fiscal years
from 1986 to 1995 was not considered material, individually or in the
aggregate.

As previously discussed, the Company now considers the two-year repurchase
option specified in the option plans to be a forfeiture provision that goes
into effect when stock options are exercised. Therefore, the service period
necessary for an employee to earn an award varies based on the timing of stock
option exercises. The Company initially expenses each award (i.e., all
tranches of an option award) on a straight-line basis over ten years, which is
the period that stock options become exercisable. The Company ensures the
cumulative compensation expense for an award as of any date is at least equal
to the measurement-date intrinsic value of those options that have vested
(i.e., when the two-year forfeiture period has ended). 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 those options, is reversed as a forfeiture.

In addition, management reviewed its adoption of SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), and identified several changes to be made
to its initial application of this standard. These changes included:

*    The impact of the measurement date changes determined by the Special
     Committee and management were incorporated into the fair value
     calculations.
*    The two-year post exercise service condition was originally considered to
     be a post-vesting restriction that was accounted for by applying a 12%
     discount factor to the current market price used in the determination of
     fair value. The effect of the discount factor was eliminated from the
     fair value calculation since the two-year post- exercise service
     condition is now considered to be a forfeiture provision.
*    The requisite service period was redefined to consider the effect of the
     two-year post-exercise service condition.
*    The assumptions used in the fair value calculation for all outstanding
     stock options, including the expected term and the risk-free rate, were
     adjusted to consider the effect of the two-year post-exercise service
     condition.

The effect of these changes resulted in an increase in stock-based
compensation expense of $442 for the three months ended June 30, 2006.

Payroll Taxes, Interest and Penalties. In connection with the stock-based
-------------------------------------
compensation adjustments, the Company determined that certain options
previously classified as ISO grants were determined to have been granted with
an exercise price below the fair market value of the Company's stock on the
revised measurement dates. Under Internal Revenue Code Section 422, ISOs may
not be granted with an exercise price less than the fair market value on the
date of grant, and therefore these grants would not likely qualify for ISO tax
treatment. The disqualification of ISO classification exposes the Company and
the affected employees to payroll related withholding taxes once the
underlying shares are released from the post exercise two-year forfeiture
period and the substantial risk of forfeiture has lapsed (the "taxable
event"). The Company and the affected employees may also be subject to
interest and penalties for failing to properly withhold taxes and report this
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 Internal Revenue Service ("IRS") for
calendar years 2004, 2005 and 2006 in an effort to reach agreement on the
resulting tax liability. In the meantime, the Company has recorded expenses
related to the withholding taxes, interest and penalties associated with
options which would have created a taxable event in calendar years 2004, 2005
and 2006. The estimated payroll tax liability at March 31, 2006 for this
disqualification of tax treatment associated with ISO awards totaled $3,278.
In addition, the Company recorded an income tax benefit of $909 related to
this liability.



                                      12

<PAGE>
<PAGE>

Income Tax Benefit. The Company reviewed the income tax effect of the
------------------
stock-based compensation charges, and it believes the proper income tax
accounting for stock options under GAAP depends, in part, on the tax
distinction of the stock options as either ISOs or NSOs. Because of the
potential impact of the measurement date changes on the qualified status of
the options, the Company has determined that substantially all of the options
originally intended to be ISOs might not be qualified under the tax
regulations, and therefore should be accounted for as if they were NSOs for
financial accounting purposes. An income tax benefit has resulted from the
determination that certain NSOs 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 assets is recorded to paid-in capital in the
period in which the taxable event or forfeiture occurs. The Company has
recorded a deferred tax asset of $1,320 as of March 31, 2006, related to stock
options.

REVIEW OF TAX POSITIONS (UNRELATED TO STOCK OPTIONS)

In addition, the Company's restated consolidated financial statements include
an adjustment to increase the provision for income taxes and taxes payable to
reflect additional liabilities associated with tax positions claimed on filed
tax returns for fiscal years 2004, 2005 and 2006 that should have been
recorded in accordance with GAAP, partially offset by certain expected tax
refunds. As of March 31, 2006, the Company's liability for taxes payable
increased $5,407 as a result of these adjustments.

OTHER ADJUSTMENTS (UNRELATED TO STOCK OPTIONS)

In addition to the restatement adjustments associated with stock options and
income taxes discussed above, the Company's restated consolidated financial
statements include an adjustment for fiscal years 2002 through 2006 to reflect
the correction of errors related to the recognition of revenue associated with
shipments to customers under FOB destination terms and an adjustment to reduce
the estimated liability for employee medical claims incurred but not reported
at March 31, 2006. The Company improperly recognized revenue for certain
customers prior to when title and risk of ownership transferred to the
customer. The aggregate impact of these adjustments over the periods affected
was a decrease in net revenue of $1,175 and a decrease in net income of $385.
The aggregate impact on net income reflects a $498 decrease associated with
the net revenue errors and a $113 increase related to the adjustment of the
liability for medical claims.



                                      13

<PAGE>
<PAGE>

The table below reflects the impacts of the restatement adjustments discussed
above on the Company's consolidated statements of income for the periods
presented below (in thousands):

<TABLE>
<CAPTION>
                                                                                                CUMULATIVE
                                                                                              APRIL 1, 1995
                                                    THREE MONTHS ENDED   THREE MONTHS ENDED      THROUGH
CATEGORY OF ADJUSTMENTS:                               JUNE 30, 2006        JUNE 30, 2005     MARCH 31, 2004
------------------------                            ------------------   ------------------   --------------
                                                                                                    (a)
<C>                                                 <C>                  <C>                  <C>
Pretax income impact:
  Stock-based compensation expense (b)              $             442    $             221    $      13,626
  Payroll tax expense and penalties (b)                           413                  172              439
  Other adjustments                                             1,824                  265            1,666
                                                    ------------------   ------------------   --------------
   Decrease in pretax income                                    2,679                  658           15,731
                                                    ------------------   ------------------   --------------

Income tax impact:
  Stock-based compensation expense                               (276)                 (68)          (1,050)
  Payroll taxes                                                  (200)                 (47)            (123)
  Other income tax adjustments (c)                                266                  490            1,689
  Other adjustments                                              (713)                 (89)            (584)
                                                    ------------------   ------------------   --------------
   Increase (decrease) in income tax expense                     (923)                 286              (68)
                                                    ------------------   ------------------   --------------
Total net decrease to income before
     cumulative effect of change in
     accounting principle                                       1,756                  944           15,663
Cumulative effect of change in
     accounting principle (d)                                  (1,976)                   -                -
                                                    ------------------   ------------------   --------------
Total net decrease (increase) to net income         $            (220)   $             944    $      15,663
                                                    ==================   ==================   ==============
<FN>
  ------------------------
  (a) The cumulative effect of the restatement adjustments from fiscal 1996
through fiscal 2004 is summarized below:
</TABLE>

<TABLE>
<CAPTION>
                             STOCK OPTION ADJUSTMENTS                                  OTHER ADJUSTMENTS            DECREASE
                        ---------------------------------    OTHER INCOME      --------------------------------  (INCREASE) TO
YEARS ENDED MARCH 31,       PRETAX          INCOME TAX      TAX ADJUSTMENTS        PRETAX         INCOME TAX       NET INCOME
---------------------   ---------------    --------------  ------------------  ---------------  ---------------  ----------------

<C>                      <C>                <C>             <C>                 <C>              <C>              <C>
1996                     $         829 (e)  $          -    $              -    $           -    $           -    $          829
1997                               657                (1)                  -                -                -               656
1998                             2,391               (19)                  -                -                -             2,372
1999                               535               (27)                  -                -                -               508
2000                             1,998               (62)                  -                -                -             1,936
2001                             1,722              (141)                  -                -                -             1,581
2002                             2,317              (219)                  -            2,534             (918)            3,714
2003                             1,187              (248)                  -           (1,610)             590               (81)
2004                             2,429              (456)              1,689              742             (256)            4,148
                        ---------------    --------------  ------------------  ---------------  ---------------  ----------------
Cumulative effect        $      14,065      $     (1,173)   $          1,689    $       1,666    $        (584)   $       15,663
                        ===============    ==============  ==================  ===============  ===============  ================
<FN>
(b)   Stock-based compensation expenses including related payroll taxes,
      interest and penalties, have been recorded as adjustments to the selling
      and administrative expenses line item in the Company's consolidated
      statements of income for each period.
(c)   This represents liabilities associated with tax positions taken in these
      periods, partially offset by certain expected tax refunds and is not
      related to accounting for stock options.
(d)   Adjustment to recognize the effect of estimated forfeitures related to
      outstanding awards that are not expected to vest as of the adoption date
      of SFAS 123R.
(e)   Includes additional expense from 1986 to 1995 totaling $636, the affect
      of which on the consolidated financial statements for 1996 and for each
      year 1986 to 1995 was not material.
</TABLE>

                                      14

<PAGE>
<PAGE>

Consolidated Statements of Operations Impact

The following table reconciles the Company's previously reported results to
the restated consolidated statements of operations for the three months ended
June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED JUNE 30,
                                          ---------------------------------------------------------------------------------------
                                                           2006                                        2005
                                          -----------------------------------------  --------------------------------------------
                                               AS                                         AS
                                           PREVIOUSLY                      AS         PREVIOUSLY                         AS
                                            REPORTED    ADJUSTMENTS     RESTATED       REPORTED    ADJUSTMENTS        RESTATED
                                            --------    -----------     --------       --------    -----------        --------

<C>                                         <C>          <C>            <C>           <C>             <C>            <C>
Net revenues                                $ 98,383     $ (2,183)      $ 96,200      $  85,475       $ (432)        $  85,043
Cost of sales                                 33,821         (359)        33,462         26,202         (167)           26,035
                                          ---------------------------------------  --------------------------------------------
Gross profit                                  64,562       (1,824)        62,738         59,273         (265)           59,008
                                          ---------------------------------------  --------------------------------------------
Operating expenses:
    Research and development                   7,890            -          7,890          7,632            -             7,632
    Purchased in-process research and                                          -                                             -
        development and transaction costs          -            -              -         30,441            -            30,441
    Selling and administrative                39,283          855         40,138         37,360          393            37,753
    Amortization of intangibles                1,197            -          1,197          1,180            -             1,180
                                          ---------------------------------------  --------------------------------------------
Total operating expenses                      48,370          855         49,225         76,613          393            77,006
                                          ---------------------------------------  --------------------------------------------
Operating income (loss)                       16,192       (2,679)        13,513        (17,340)        (658)          (17,998)
                                          ---------------------------------------  --------------------------------------------
Other expense (income):
    Interest expense                           2,236            -          2,236          1,377            -             1,377
    Interest and other income                 (2,058)           -         (2,058)        (1,053)           -            (1,053)
                                          ---------------------------------------  --------------------------------------------
Total other expense, net                         178            -            178            324            -               324
                                          ---------------------------------------  --------------------------------------------
Income (loss) before income taxes and
    cumulative effect of change in
    accounting principle                      16,014       (2,679)        13,335        (17,664)        (658)          (18,322)
    Provision for income taxes                 6,136         (923)         5,213          4,280          286             4,566
                                          ---------------------------------------  --------------------------------------------
Income (loss) before cumulative effect of
    change in accounting principle             9,878       (1,756)         8,122        (21,944)        (944)          (22,888)
Cumulative effect of change in
    accounting principle (net
    of $670 in taxes)                              -        1,976          1,976              -            -                 -
                                          ---------------------------------------  --------------------------------------------
Net income (loss)                           $  9,878     $    220       $ 10,098      $ (21,944)      $ (944)        $ (22,888)
                                          =======================================  ============================================

                                                                       (CONTINUED)
</TABLE>

                                      15

<PAGE>
<PAGE>

Consolidated Statements of Operations Impact - (Continued)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED JUNE 30,
                                            ----------------------------------------------------------------------------------------
                                                             2006                                         2005
                                            -------------------------------------------  -------------------------------------------
                                                 AS                                           AS
                                             PREVIOUSLY                        AS         PREVIOUSLY                        AS
                                              REPORTED    ADJUSTMENTS       RESTATED       REPORTED    ADJUSTMENTS       RESTATED
                                              --------    -----------       --------       --------    -----------       --------

<C>                                           <C>          <C>              <C>            <C>          <C>              <C>
Earnings (loss) per share before effect of
    change in accounting principle:
    Basic - Class A common                    $   0.21     $ (0.04)         $   0.17       $  (0.45)    $ (0.02)         $  (0.47)
    Basic - Class B common                        0.17       (0.03)             0.14          (0.45)      (0.02)            (0.47)
    Diluted - Class A common (a)                  0.18       (0.03)             0.15          (0.45)      (0.02)            (0.47)
    Diluted - Class B common (a)                                                0.13                                        (0.47)

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

Earnings (loss) per share:
    Basic - Class A common                    $   0.21     $     -          $   0.21       $  (0.45)    $ (0.02)         $  (0.47)
    Basic - Class B common                        0.17        0.01              0.18          (0.45)      (0.02)            (0.47)
    Diluted - Class A common (a)                  0.18        0.01              0.19          (0.45)      (0.02)            (0.47)
    Diluted - Class B common (a)                                                0.16                                        (0.47)

Shares used in per share calculation:
    Basic - Class A common                      36,944        (345) (b)       36,599       $ 35,961        (522) (b)       35,439
    Basic - Class B common                      12,551         (77) (b)       12,474         13,359        (178) (b)       13,181
    Diluted - Class A common (a)                59,476        (627) (b)       58,849         49,320        (700) (b)       48,620
    Diluted - Class B common (a)                                              12,622                                       13,181



<FN>
----------------------
(a)  In fiscal 2007, the Company began reporting diluted earnings per share
     for Class B Common Stock under the two-class method which does not assume
     the conversion of Class B Common Stock into Class A Common Stock.
     Previously, the Company did not present diluted earnings per share for
     Class B Common Stock.
(b)  Adjustment to reflect impact of unrecognized stock-based compensation and
     excess tax benefits in applying the treasury stock method and unvested
     stock options in the two-year forfeiture period.
</TABLE>


                                      16

<PAGE>
<PAGE>

Consolidated Balance Sheets Impact

The following tables reconcile the consolidated balance sheets previously
reported as of June 30, 2006, March 31, 2006 and June 30, 2005 to the restated
amounts:

<TABLE>
<CAPTION>
                                                                          JUNE 30, 2006
                                               --------------------------------------------------------------------
                                                    AS
                                                PREVIOUSLY                                                AS
                                                 REPORTED       ADJUSTMENTS                            RESTATED
                                                 --------       -----------                            --------

<C>                                             <C>             <C>                                    <C>
Current assets:
Cash and cash equivalents                       $   58,216      $         -                            $  58,216
Marketable securities                              152,111                -                              152,111
Receivables, net                                    51,574           (3,358) (h)                          48,216
Inventories, net                                    75,058              747  (h)                          75,805
Prepaid and other assets                             6,264               49  (a)                           6,313
Deferred tax asset                                   7,463            1,838  (b)(c)(f)(g)(h)(i)            9,301
                                               ------------------------------------------------------------------
      Total current assets                         350,686             (724)                             349,962
Property and equipment, net                        189,380                -                              189,380
Intangible assets and goodwill, net                 72,010                -                               72,010
Other assets                                        18,967                -                               18,967
                                               ------------------------------------------------------------------
Total assets                                    $  631,043      $      (724)                           $ 630,319
                                               ==================================================================

Current liabilities:
Accounts payable                                $   17,877      $         -                            $  17,877
Accrued liabilities                                 17,614            7,411  (c)(d)(e)(f)(h)(i)           25,025
Current maturities of long-term debt                 1,820                -                                1,820
                                               ------------------------------------------------------------------
      Total current liabilities                     37,311            7,411                               44,722
Long-term debt                                     240,888                -                              240,888
Other long-term liabilities                          5,630                -                                5,630
Deferred tax liability                              27,216                -                               27,216
                                               ------------------------------------------------------------------
Total liabilities                                  311,045            7,411                              318,456
                                               ------------------------------------------------------------------

Commitments and contingencies                            -                -                                    -

Shareholders' equity:
Preferred stock                                          -                -                                    -
Class A Common Stock                                   401               (3) (d)                             398
Class B Common Stock                                   126                -                                  126
Additional paid-in capital                         130,293           13,734  (b)(d)(f)(g)                144,027
Retained earnings                                  243,356          (21,866) (a)(b)(c)(e)(f)(g)(h)(i)    221,490
Accumulated other comprehensive income                (243)               -                                 (243)
Less: Treasury stock                               (53,935)               -                              (53,935)
                                               ------------------------------------------------------------------
Total shareholders' equity                         319,998           (8,135)                             311,863
                                               ------------------------------------------------------------------
Total liabilities and shareholders' equity      $  631,043      $      (724)                           $ 630,319
                                               ==================================================================


<CAPTION>
                                                                        MARCH 31, 2006
                                               ----------------------------------------------------------------
                                                    AS
                                                PREVIOUSLY                                           AS
                                                 REPORTED       ADJUSTMENTS                       RESTATED
                                                 --------       -----------                       --------

<C>                                              <C>            <C>                               <C>
Current assets:
Cash and cash equivalents                        $ 100,706      $         -                       $ 100,706
Marketable securities                              106,763                -                         106,763
Receivables, net                                    54,746           (1,175) (h)                     53,571
Inventories, net                                    70,778              388  (h)                     71,166
Prepaid and other assets                             6,963               49  (a)                      7,012
Deferred tax asset                                   8,034            2,038  (c)(f)(h)(i)            10,072
                                               -------------------------------------------------------------
      Total current assets                         347,990            1,300                         349,290
Property and equipment, net                        178,042                -                         178,042
Intangible assets and goodwill, net                 72,955                -                          72,955
Other assets                                        19,026                -                          19,026
                                               -------------------------------------------------------------
Total assets                                     $ 618,013      $     1,300                       $ 619,313
                                               =============================================================

Current liabilities:
Accounts payable                                 $  17,975      $         -                       $  17,975
Accrued liabilities                                 17,100            7,576  (c)(d)(e)(f)(h)(i)      24,676
Current maturities of long-term debt                 1,681                -                           1,681
                                               -------------------------------------------------------------
      Total current liabilities                     36,756            7,576                          44,332
Long-term debt                                     241,319                -                         241,319
Other long-term liabilities                          5,442                -                           5,442
Deferred tax liability                              25,221                -                          25,221
                                               -------------------------------------------------------------
Total liabilities                                  308,738            7,576                         316,314
                                               -------------------------------------------------------------

Commitments and contingencies                            -                -                               -

Shareholders' equity:
Preferred stock                                          -                -                               -
Class A Common Stock                                   400               (3) (d)                        397
Class B Common Stock                                   127                -                             127
Additional paid-in capital                         129,367           15,813  (b)(d)(f)(g)           145,180
Retained earnings                                  233,496          (22,086) (a)(c)(e)(f)(h)(i)     211,410
Accumulated other comprehensive income                (211)               -                            (211)
Less: Treasury stock                               (53,904)               -                         (53,904)
                                               -------------------------------------------------------------
Total shareholders' equity                         309,275           (6,276)                        302,999
                                               -------------------------------------------------------------
Total liabilities and shareholders' equity       $ 618,013      $     1,300                       $ 619,313
                                               =============================================================

<FN>
(a)  Adjustment for accrued interest associated with certain expected tax
     refunds.
(b)  Adjustment for stock-based compensation expense pursuant to SFAS 123R
     ($442) and the related tax impact ($276).
(c)  Adjustment for payroll taxes, interest and penalties associated with
     stock-based compensation expense ($3,691 at June 30, 2006 and $3,278 at
     March 31, 2006) and the related income tax impact ($1,109 at June 30,
     2006 and $909 at March 31, 2006).
(d)  Adjustment for exercise deposits received by the Company for stock
     options in the two-year forfeiture period ($2,001 at June 30, 2006 and
     $1,916 at March 31, 2006).
(e)  Adjustment for additional liabilities associated with tax positions,
     partially offset by certain expected tax refunds ($5,673 at June 30, 2006
     and $5,407 at March 31, 2006).
(f)  Adjustment for stock-based compensation expense pursuant to APB 25
     ($15,632) and income tax impact associated with stock-based compensation
     expense pursuant to APB 25 ($1,658), partially offset by net effect of
     tax benefit realized in accrued taxes ($2,642 at June 30, 2006 and $2,432
     at March 31, 2006) and excess tax benefit reflected in paid-in capital
     ($2,304 at June 30, 2006 and $2,094 at March 31, 2006).
(g)  Adjustment for the cumulative effect of a change in accounting principle
     to reflect the effect of estimated forfeitures related to outstanding
     awards that are not expected to vest as of the adoption date ($1,976, net
     of $670 in taxes).
(h)  Adjustment to record net revenue and cost of sales when product is
     received by the customer instead of shipping date for certain customers
     (decrease in receivables of $3,358 at June 30, 2006 and $1,175 at March
     31, 2006; increase in inventories of $747 at June 30, 2006 and $388 at
     March 31, 2006; decrease in deferred tax assets of $131 at June 30, 2006
     and $125 at March 31, 2006; decrease in accrued liabilities of $1,133 at
     June 30, 2006 and $414 at March 31, 2006; and, decrease in retained
     earnings of $1,609 at June 30, 2006 and $498 at March 31, 2006).
(i)  Adjustment for reduction in estimated liability associated with employee
     medical claims incurred but not reported (decrease in deferred tax assets
     of $66; decrease in accrued liabilities of $179; and, increase in
     retained earnings of $113).
</TABLE>

                                      17

<PAGE>
<PAGE>

Consolidated Balance Sheets Impact

<TABLE>
<CAPTION>
                                                                               JUNE 30, 2005
                                                      -----------------------------------------------------------------
                                                           AS
                                                       PREVIOUSLY                                               AS
                                                        REPORTED          ADJUSTMENTS                        RESTATED
                                                        --------          -----------                        --------

<C>                                                    <C>                 <C>                              <C>
Current assets:
Cash and cash equivalents                              $   96,944          $       -                        $   96,944
Marketable securities                                      55,929                  -                            55,929
Receivables, net                                           62,572             (1,629) (f)                       60,943
Inventories, net                                           59,766                596  (f)                       60,362
Prepaid and other assets                                    4,977                 22  (a)                        4,999
Deferred tax asset                                          6,555              1,477  (b)(c)(f)                  8,032
                                                      ------------        ---------------------------      ------------
      Total current assets                                286,743                466                           287,209
Property and equipment, net                               151,612                  -                           151,612
Intangible assets and goodwill, net                        76,099                  -                            76,099
Other assets                                               19,319                  -                            19,319
                                                      ------------        ---------------------------      ------------
Total assets                                           $  533,773          $     466                        $  534,239
                                                      ============        ===========================      ============

Current liabilities:
Accounts payable                                       $   14,313          $       -                        $   14,313
Accrued liabilities                                        14,986              5,983  (b)(c)(d)(e)(f)           20,969
Current maturities of long-term debt                          973                  -                               973
                                                      ------------        ---------------------------      ------------
      Total current liabilities                            30,272              5,983                            36,255
Long-term debt                                            209,524                  -                           209,524
Other long-term liabilities                                 4,817                  -                             4,817
Deferred tax liability                                     18,354                  -                            18,354
                                                      ------------        ---------------------------      ------------
Total liabilities                                         262,967              5,983                           268,950
                                                      ------------        ---------------------------      ------------

Commitments and contingencies                                   -                  -                                 -

Shareholders' equity:
Preferred stock                                                 -                  -                                 -
Class A Common Stock                                          393                 (4) (d)                          389
Class B Common Stock                                          132                  -                               132
Additional paid-in capital                                128,280             13,147  (b) (d)                  141,427
Retained earnings                                         195,818            (18,660) (a)(b)(c)(e)(f)          177,158
Accumulated other comprehensive income                       (133)                 -                              (133)
Less: Treasury stock                                      (53,684)                 -                           (53,684)
                                                      ------------        ---------------------------      ------------
Total shareholders' equity                                270,806             (5,517)                          265,289
                                                      ------------        ---------------------------      ------------
Total liabilities and shareholders' equity             $  533,773          $     466                        $  534,239
                                                      ============        ===========================      ============
<FN>
----------------------
(a)  Adjustment for accrued interest associated with certain expected tax
     refunds.
(b)  Adjustment for stock-based compensation expense pursuant to APB 25
     ($14,926) and income tax impact associated with stock-based compensation
     expense pursuant to APB 25 ($1,441), partially offset by net effect of
     tax benefit realized in accrued taxes ($840) and excess tax benefit
     reflected in paid-in capital ($746).
(c)  Adjustment for payroll taxes, interest and penalties associated with
     stock-based compensation expense ($1,157) and the related income tax
     impact ($320).
(d)  Adjustment for exercise deposits received by the Company for stock
     options in the two-year forfeiture period ($2,529).
(e)  Adjustment for additional liabilities associated with tax positions,
     partially offset by certain expected tax refunds ($3,699).
(f)  Adjustment to record net revenue and cost of sales when product is
     received by the customer instead of shipping date for certain customers
     (decrease in receivables of $1,629; increase in inventories of $596;
     decrease in deferred tax assets of $190; decrease in accrued liabilities
     of $562; and, decrease in retained earnings of $661).
</TABLE>


                                      18

<PAGE>
<PAGE>

Consolidated Statements of Cash Flows Impact

The following table reconciles the consolidated statements of cash flows
previously reported for the three months ended June 30, 2006 and 2005 to the
restated amounts:

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED JUNE 30,
                                                        ------------------------------------------------------------
                                                                                   2006
                                                        ------------------------------------------------------------
                                                             AS
                                                         PREVIOUSLY                                           AS
                                                          REPORTED       ADJUSTMENTS                       RESTATED
                                                          --------       -----------                       --------

<C>                                                      <C>              <C>                              <C>
Operating Activities:
Net income (loss)                                        $   9,878        $     220  (b)(c)(d)(e)(f)(g)    $ 10,098
Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
      Acquired in-process research
          and development                                        -                -                               -
      Cumulative effect of change in
          accounting principle                                   -           (1,976) (d)                     (1,976)
      Depreciation, amortization and
          other non-cash charges                             5,368                -                           5,368
      Deferred income tax provision                          2,582             (470) (b)(e)(f)                2,112
      Deferred compensation                                    188                -                             188
      Stock-based compensation                                 494              442  (e)                        936
      Excess tax benefit associated with stock
          options                                                -             (210) (a)                       (210)
Changes in operating assets and liabilities:
      Decrease (increase) in receivables, net                3,172            2,183  (f)                      5,355
      Increase in inventories                               (4,280)            (359) (f)                     (4,639)
      Decrease (increase) in prepaid
           and other assets                                    197                -                             197
      Increase (decrease) in accounts payable
          and accrued liabilities                              416              (40) (b)(c)(f)                  376
                                                        ------------------------------------------------------------
Net cash provided by operating activities                   18,015             (210)                         17,805
                                                        ------------------------------------------------------------
Investing Activities:
      Purchase of property and equipment                   (15,200)               -                         (15,200)
      Purchase of marketable securities                    (45,396)               -                         (45,396)
      Purchase of preferred stock                                -                -                               -
      Product acquisition                                        -                -                               -
                                                        ------------------------------------------------------------
Net cash used in investing activities                      (60,596)               -                         (60,596)
                                                        ------------------------------------------------------------
Financing Activities:
      Principal payments on long-term debt                    (292)               -                            (292)
      Dividends paid on preferred stock                        (18)               -                             (18)
      Excess tax benefit associated with stock
          options                                                -              210  (a)                        210
      Purchase of common stock for treasury                    (31)               -                             (31)
      Cash deposits received for stock options                 432                -                             432
                                                        ------------------------------------------------------------
Net cash provided by (used in)
      financing activities                                      91              210                             301
                                                        ------------------------------------------------------------
Decrease in cash and cash equivalents                      (42,490)               -                         (42,490)
Cash and cash equivalents:
      Beginning of year                                    100,706                -                         100,706
                                                        ------------------------------------------------------------
      End of period                                      $  58,216        $       -                        $ 58,216
                                                        ============================================================

<CAPTION>
                                                                      THREE MONTHS ENDED JUNE 30,
                                                        -------------------------------------------------------
                                                                                 2005
                                                        -------------------------------------------------------
                                                             AS
                                                         PREVIOUSLY                                      AS
                                                          REPORTED       ADJUSTMENTS                  RESTATED
                                                          --------       -----------                  --------

<C>                                                      <C>              <C>                        <C>
Operating Activities:
Net income (loss)                                        $ (21,944)       $    (944) (a)(b)(c)       $ (22,888)
Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
      Acquired in-process research
          and development                                   29,570                -                     29,570
      Cumulative effect of change in
          accounting principle                                   -                -                          -
      Depreciation, amortization and
          other non-cash charges                             3,891                -                      3,891
      Deferred income tax provision                            727              (84) (a)(b)(f)             643
      Deferred compensation                                    340                -                        340
      Stock-based compensation                                   -              221  (a)                   221
      Excess tax benefit associated with stock
          options                                                -                -                          -
Changes in operating assets and liabilities:
      Decrease (increase) in receivables, net                 (211)             432  (f)                   221
      Increase in inventories                               (5,821)            (167) (f)                (5,988)
      Decrease (increase) in prepaid
           and other assets                                  4,777              (12) (c)                 4,765
      Increase (decrease) in accounts payable
          and accrued liabilities                           (4,869)             554   (b)(c)(f)         (4,315)
                                                        -------------------------------------------------------
Net cash provided by operating activities                    6,460                -                      6,460
                                                        -------------------------------------------------------
Investing Activities:
      Purchase of property and equipment                   (22,392)               -                    (22,392)
      Purchase of marketable securities                    (10,235)               -                    (10,235)
      Purchase of preferred stock                          (11,300)               -                    (11,300)
      Product acquisition                                  (25,219)               -                    (25,219)
                                                        -------------------------------------------------------
Net cash used in investing activities                      (69,146)               -                    (69,146)
                                                        -------------------------------------------------------
Financing Activities:
      Principal payments on long-term debt                    (243)               -                       (243)
      Dividends paid on preferred stock                        (18)               -                        (18)
      Excess tax benefit associated with stock
          options                                                -                -                          -
      Purchase of common stock for treasury                    (33)               -                        (33)
      Cash deposits received for stock options                  99                -                         99
                                                        -------------------------------------------------------
Net cash provided by (used in)
      financing activities                                    (195)               -                       (195)
                                                        -------------------------------------------------------
Decrease in cash and cash equivalents                      (62,881)               -                    (62,881)
Cash and cash equivalents:
      Beginning of year                                    159,825                -                    159,825
                                                        -------------------------------------------------------
      End of period                                      $  96,944        $       -                  $  96,944
                                                        =======================================================

<FN>
----------------------
(a)  Adjustment for stock-based compensation expense pursuant to APB 25 and
     the related income tax impact.
(b)  Adjustment for payroll taxes, interest and penalties associated with
     stock-based compensation expense and the related income tax impact.
(c)  Adjustment for additional liabilities associated with tax positions,
     partially offset by certain expected tax refunds.
(d)  Adjustment for the cumulative effect of a change in accounting principle
     to reflect the effect of estimated forfeitures related to outstanding
     awards that are not expected to vest as of the adoption date of SFAS
     123R.
(e)  Adjustment for stock-based compensation expense pursuant to SFAS 123R and
     the related income tax impact.
(f)  Adjustment for revenue recognition errors related to shipments made to
     certain customers and the related income tax impact.
(g)  Adjustment for reduction in estimated liability associated with employee
     medical claims incurred but not reported.
</TABLE>

                                      19

<PAGE>
<PAGE>

3.  ACQUISITION AND LICENSE AGREEMENTS

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

In May 2005, the Company entered into a long-term product development and
marketing license agreement with Strides Arcolab Limited ("Strides"), an
Indian generic pharmaceutical developer and manufacturer, for exclusive
marketing rights in the United States and Canada for ten new generic drugs.
Under the agreement, Strides will be responsible for developing, submitting
for regulatory approval and manufacturing the ten products and the Company
will be responsible for exclusively marketing the products in the territories
covered by the agreement. Under a separate agreement, the Company invested
$11,300 in Strides redeemable preferred stock. This investment is denominated
in the Indian rupee and is subject to foreign currency transaction gains or
losses resulting from exchange rate changes. As a result of changes in the
exchange rate, the carrying value of this investment was $10,717 at June 30,
2006. This investment has been accounted for using the cost method and is
included in "Other assets" in the accompanying consolidated balance sheet at
June 30, 2006.


4.   EARNINGS PER SHARE

The Company has two classes of common stock: Class A Common Stock and Class B
Common Stock that is convertible into Class A Common Stock. With respect to
dividend rights, holders of Class A Common Stock are entitled to receive cash
dividends per share equal to 120% of the dividends per share paid on the Class
B Common stock. In June 2004, the Company adopted the guidance in Emerging
Issues Task Force ("EITF") Issue No. 03-06, "Participating Securities and the
Two-Class Method under FASB Statement No. 128." The pronouncement required the
use of the two-class method in the calculation and disclosure of basic
earnings per share and provided guidance on the allocation of earnings and
losses for purposes of calculating basic earnings per share. 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.

Beginning in fiscal 2007, the Company presented 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.
Previously, diluted earnings per share for Class B Common Stock was not
presented. The Company continues to present 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

                                      20

<PAGE>
<PAGE>

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
(loss) 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 (loss) per share for
Class A Common Stock assumes the conversion of the Class B Common Stock, while
the diluted earnings (loss) per share for Class B Common Stock does not assume
the conversion of those shares.

                                      21

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED JUNE 30,
                                                             -----------------------------------------------------------------------
                                                                             2006                               2005
                                                             ------------------------------------ ----------------------------------
                                                                 CLASS A            CLASS B            CLASS A           CLASS B
                                                             -----------------  ----------------- ---------------- -----------------
                                                                         (AS RESTATED)                       (AS RESTATED)
<C>                                                           <C>                <C>               <C>              <C>
Basic earnings (loss) per share:
    Numerator:
      Allocation of undistributed earnings (loss) before
        cumulative effect of change in accounting
        principle                                             $         6,311    $         1,793   $      (16,696)  $        (6,210)
      Allocation of cumulative effect of
        change in accounting principle                                  1,539                437                -                 -
                                                             -----------------  ----------------- ---------------- -----------------
      Allocation of undistributed earnings (loss)             $         7,850    $         2,230   $      (16,696)  $        (6,210)
                                                             =================  ================= ================ =================
    Denominator:
      Weighted average shares outstanding                              36,944             12,551           35,961            13,359
      Less - weighted average unvested
        common shares subject to repurchase                              (345)               (77)            (522)             (178)
                                                             -----------------  ----------------- ---------------- -----------------
      Number of shares used in per
        share computations                                             36,599             12,474           35,439            13,181
                                                             =================  ================= ================ =================

Basic earnings (loss) per share before cumulative
    effect of change in accounting principle                  $          0.17    $          0.14   $        (0.47)  $         (0.47)
Per share effect of cumulative effect of
    change in accounting principle                                       0.04               0.04                -                 -
                                                             -----------------  ----------------- ---------------- -----------------
Basic earnings (loss) per share                               $          0.21    $          0.18   $        (0.47)  $         (0.47)
                                                             =================  ================= ================ =================

Diluted earnings (loss) per share:
    Numerator:
      Allocation of undistributed earnings (loss)
        for basic computation before cumulative
        effect of change in accounting principle              $         6,311    $         1,793   $      (16,696)  $        (6,210)
      Reallocation of undistributed earnings (loss) as a
        result of conversion of Class B to
        Class A shares                                                  1,793                  -           (6,210)                -
      Reallocation of undistributed earnings (loss) to
        Class B shares                                                      -               (113)               -                 -
      Add - preferred stock dividends                                      18                  -                -                 -
      Add - interest expense convertible notes                            939                  -                -                 -
                                                             -----------------  ----------------- ---------------- -----------------
      Allocation of undistributed earnings (loss)
        for diluted computation before cumulative
        effect of change in accounting principle                        9,061              1,680          (22,906)           (6,210)
      Allocation of cumulative effect of
        change in accounting principle                                  1,976                366                -                 -
                                                             -----------------  ----------------- ---------------- -----------------
      Allocation of undistributed earnings (loss)             $        11,037    $         2,046   $      (22,906)  $        (6,210)
                                                             =================  ================= ================ =================

                                                               (CONTINUED)


                                      22

<PAGE>
<PAGE>

<CAPTION>
                                                                                  THREE MONTHS ENDED JUNE 30,
                                                          --------------------------------------------------------------------------
                                                                          2006                                  2005
                                                          ------------------------------------  ------------------------------------
                                                              CLASS A            CLASS B            CLASS A            CLASS B
                                                          -----------------  -----------------  -----------------  -----------------
                                                                      (AS RESTATED)                         (AS RESTATED)
<C>                                                        <C>                <C>                <C>                <C>
Diluted earnings (loss) per share (continued):
    Denominator:
      Number of shares used in basic computation                    36,599             12,474             35,439             13,181
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares                     12,474                  -             13,181                  -
        Employee stock options (3)                                     746                148                  -                  -
        Convertible preferred stock                                    338                  -                  -                  -
        Convertible notes                                            8,692                  -                  -                  -
                                                          -----------------  -----------------  -----------------  -----------------
      Number of shares used in per share
        computations                                                58,849             12,622             48,620             13,181
                                                          =================  =================  =================  =================

Diluted earnings (loss) per share before cumulative
    effect of change in accounting principle               $          0.15    $          0.13    $         (0.47)   $         (0.47)
Per share effect of cumulative effect of
    change in accounting principle                                    0.04               0.03                  -                  -
                                                          -----------------  -----------------  -----------------  -----------------
Diluted earnings (loss) per share (1) (2)                  $          0.19    $          0.16    $         (0.47)   $         (0.47)
                                                          =================  =================  =================  =================

<FN>
----------------------
(1)      For the three months ended June 30, 2006, excluded from the
         computation of diluted earnings per share were options to purchase
         928 Class A and Class B common shares with exercise prices greater
         than the average market price of the common shares for the period
         reported.
(2)      For the three months ended June 30, 2005, there were stock options to
         purchase 3,807 shares of Class A and Class B Common Stock, preferred
         shares convertible into 338 shares of Class A Common Stock, and
         $200,000 principal amount of Convertible Subordinated Notes
         convertible into 8,692 shares of Class A Common Stock that were
         excluded from the computation of diluted loss per share because their
         effect would have been anti-dilutive.
(3)      Includes adjustment to reflect impact of unrecognized stock-based
         compensation and excess tax benefits in applying the treasury stock
         method and unvested stock options in the two-year forfeiture period.
</TABLE>

5.       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. Prior to the adoption of
SFAS 123R, the Company measured compensation expense for its employee
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company also
applied the disclosure provisions of SFAS 123, as amended by SFAS 148, as if
the fair-value-based method had been applied in measuring compensation
expense. Under APB 25, compensation cost for stock options was recognized
based on the excess, if any, of the quoted market price of the stock at the
grant date of the award or other measurement date over the amount an employee
must pay to acquire the stock. Determining the fair value of share-based
awards at the grant date requires judgment to identify the appropriate
valuation model and estimate the assumptions, including the expected term of
the stock options and expected stock-price volatility, to be used in the
calculation. Judgment is also required in estimating the percentage of
share-based awards that are expected to be forfeited. The Company 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 the Company's results of operations could be materially impacted.


                                      23

<PAGE>
<PAGE>

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.

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) plus two years 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. These options are accounted for as issued
shares 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 are not expected to vest as of the adoption
date. The cumulative adjustment increased net income by $1,976 (as restated),
net of tax, and increased diluted earnings per share for Class A and Class B
shares by $0.04 and $0.03, respectively.

The Company recognized, in accordance with SFAS 123R, stock-based compensation
of $936 (as restated) and a related tax benefit of $276 (as restated) for the
three months ended June 30, 2006. As a result of the restatement discussed in
Note 2, stock-based compensation totaling $221 and a related tax benefit of
$68 was recognized during the three months ended June 30, 2005. There was no
stock-based employee compensation cost capitalized as of June 30, 2006. Cash
received from stock option deposits was $432 and $99 for the three months
ended June 30, 2006 and 2005, respectively. The actual tax benefit realized
from tax deductions associated with stock option exercises (at expiration at
two-year forfeiture period) was $278 and $117 for the three months ended June
30, 2006 and 2005, respectively.


                                      24

<PAGE>
<PAGE>

The following weighted average assumptions were used for stock options granted
during the three months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                                JUNE 30,
                                                                        ------------------------
                                                                          2006            2005
                                                                          ----            ----
                                                                     (as restated)   (as restated)
<C>                                                                   <C>             <C>
     Dividend yield...........................................              None            None
     Expected volatility......................................               46%             48%
     Risk-free interest rate..................................             4.93%           4.93%
     Expected term ...........................................         9.0 years       9.0 years
     Weighted average fair value per share
       at grant date..........................................        $    11.34      $    10.20
</TABLE>


A summary of the changes in the Company's stock option plans during the three
months ended June 30, 2006 is presented below (in thousands, except per share
amounts):

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

<C>                                                  <C>         <C>             <C>               <C>
Balance, March 31, 2006 (as restated)......          3,926       $    14.71
Options granted............................            229            18.66
Options exercised (as restated)............            (57)            6.00                        $    816
Options canceled...........................           (131)           14.94
                                               -----------
Balance, June 30, 2006 (as restated).......          3,968            15.05            5.2         $ 21,012
                                               ===========

Expected to vest at
     June 30, 2006 (as restated)...........          3,075       $    15.05            5.2         $ 16,284

Options exercisable at June 30, 2006
   (excluding shares in the two-year
    forfeiture period).....................          1,628       $    14.26            5.5         $  7,209
</TABLE>


As of June 30, 2006, the Company had $35,796 of total unrecognized
compensation expense, related to stock option grants, which will be recognized
over the remaining weighted average period of 5.3 years.


                                      25

<PAGE>
<PAGE>

Prior to April 1, 2006, the Company determined stock-based compensation
expense using the intrinsic value method of APB 25 and provided the
disclosures required by SFAS 123, as amended by SFAS 148. The following table
illustrates the effect of the restatement adjustments on the Company's pro
forma net income and pro forma earnings per share as if the Company had
applied the fair value recognition provisions of SFAS 123 to options granted
under the Company's stock option plans:

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED JUNE 30, 2005
                                                                   -------------------------------------------------------
                                                                        AS
                                                                    PREVIOUSLY                                     AS
                                                                     REPORTED            ADJUSTMENTS          RESTATED (1)
                                                                     --------            -----------          ------------

<C>                                                                 <C>                  <C>                  <C>
Net income (loss)                                                   $  (21,944)          $      (944)         $   (22,888)
Add: Stock-based compensation
    expense included in reported
    net income, net of tax                                                   -                   153                  153
Deduct: Stock-based compensation
    using the fair value based
    method for all awards                                                 (444)                 (209)                (653)
                                                                   -------------------------------------------------------
Pro forma net income (loss)                                         $  (22,388)          $    (1,000)         $   (23,388)
                                                                   =======================================================

Earnings (loss) per share:
    Basic - Class A common                                          $    (0.45)          $     (0.02)         $     (0.47)
    Basic - Class B common                                               (0.45)                (0.02)               (0.47)
    Diluted - Class A common                                             (0.45)                (0.02)               (0.47)
    Diluted - Class B common                                                                                        (0.47)

Earnings (loss) per share - pro forma:
    Basic - Class A common                                          $    (0.45)          $     (0.03)         $     (0.48)
    Basic - Class B common                                               (0.45)                (0.03)               (0.48)
    Diluted - Class A common                                             (0.45)                (0.03)               (0.48)
    Diluted - Class B common                                                                                        (0.48)

<FN>
    (1) See Note 2 "Restatement of Consolidated Financial Statements."
</TABLE>

6.   REVENUE RECOGNITION

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

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

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

Accruals for sales provisions are presented in the consolidated financial
statements as reductions to net revenues and accounts receivable. Sales
provisions totaled $35,970 (as restated) and $37,047 (as restated) for the
three months ended June 30, 2006 and 2005, respectively. The reserve balances
related to the sales provisions totaled $26,123 (as restated) and $28,697 (as
restated) at June 30, 2006 and March 31, 2006, respectively, and are deducted
from "Receivables, less allowance for doubtful accounts" in the accompanying
Consolidated Balance Sheets.

                                      26

<PAGE>
<PAGE>

7.   INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                    JUNE 30, 2006         MARCH 31, 2006
                                                                    -------------         --------------
                                                                    (AS RESTATED)         (AS RESTATED)

<C>                                                                  <C>                   <C>
                  Finished goods.....................                $    31,725           $   29,365
                  Work-in-process....................                      9,731                7,969
                  Raw materials......................                     34,349               33,832
                                                                     -----------           ----------
                                                                     $    75,805           $   71,166
                                                                     ===========           ==========
</TABLE>

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

8.   INTANGIBLE ASSETS AND GOODWILL

     Intangible assets and goodwill consist of the following:

<TABLE>
<CAPTION>
                                                        JUNE 30, 2006                       MARCH 31, 2006
                                                 ----------------------------       -----------------------------
                                                  GROSS                               GROSS
                                                 CARRYING         ACCUMULATED       CARRYING         ACCUMULATED
                                                  AMOUNT         AMORTIZATION        AMOUNT         AMORTIZATION
                                                  ------         ------------        ------         ------------

<C>                                            <C>               <C>              <C>                <C>
Product rights - Micro-K(R)................    $    36,140       $ (13,160)       $    36,140        $ (12,708)
Product rights - PreCare(R)................          8,433          (2,916)             8,433           (2,811)
Trademarks acquired:
     Niferex(R)............................         14,834          (2,410)            14,834           (2,225)
     Chromagen(R)/StrongStart(R)...........         27,642          (4,492)            27,642           (4,147)
License agreements.........................          4,400            (345)             4,400             (300)
Covenant not to compete....................            375             (44)               375              (34)
Trademarks and patents.....................          3,655            (659)             3,403             (604)
                                               -----------       ----------       -----------        ----------
  Total intangible assets..................         95,479         (24,026)            95,227          (22,829)
Goodwill...................................            557               -                557                -
                                               -----------       ----------       -----------        ----------
                                               $    96,036       $ (24,026)       $    95,784        $ (22,829)
                                               ===========       ==========       ===========        ==========
</TABLE>

As of June 30, 2006, the Company's intangible assets have a weighted average
useful life of approximately 19 years. Amortization expense for intangible
assets was $1,197 and $1,180 for the three months ended June 30, 2006 and
2005, 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 $3,591 for the remainder of fiscal 2007 and
approximately $4,788 in each of the four succeeding fiscal years.

9.   REVOLVING CREDIT AGREEMENT

On June 9, 2006, the Company replaced its $140,000 credit line by entering
into a new syndicated credit agreement with ten banks that provides for a
revolving line of credit for borrowing up to $320,000. The new credit
agreement also includes a provision for increasing the revolving commitment,
at the lenders' sole discretion, by up to an additional $50,000. The new
credit facility is unsecured unless the Company, under certain specified
circumstances, utilizes the facility to redeem part or all of its outstanding
Convertible Subordinated Notes. Interest is charged under the facility at the
lower of the prime rate or LIBOR plus 62.5 to 150 basis points depending on
the ratio of senior debt to EBITDA. The new credit agreement contains
financial covenants that impose limits on dividend payments, require minimum
equity, a maximum senior leverage ratio and minimum fixed charge coverage
ratio. The new credit facility has a five-year term expiring in June 2011. As
of June 30, 2006, there were no borrowings outstanding under the new credit
facility.



                                      27

<PAGE>
<PAGE>

10.   LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                    JUNE 30, 2006        MARCH 31, 2006
                                                                    -------------        --------------

<C>                                                                  <C>                   <C>
                  Building mortgages..........................       $    42,708           $   43,000
                  Convertible notes...........................           200,000              200,000
                                                                     -----------           ----------
                                                                         242,708              243,000
                  Less current portion........................            (1,820)              (1,681)
                                                                     -----------           ----------
                                                                     $   240,888           $  241,319
                                                                     ===========           ==========
</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 new
mortgage loan was used for working capital and general corporate purposes. The
mortgage loan, which is secured by three of the Company's buildings, bears
interest at a rate of 5.91% and matures on April 1, 2021.

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, 2006, 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
Notes are subordinate to all of our existing and future senior obligations.

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

            *   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 into the Company's common shares.

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

                                      28

<PAGE>
<PAGE>

minimis value of them at the time of issuance and at June 30, 2006, 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.

11.    TAXABLE INDUSTRIAL REVENUE BONDS

In December 2005, the Company entered into a financing arrangement with St.
Louis County, Missouri related to expansion of its operations in St. Louis
County. Up to $135,500 of industrial revenue bonds may be issued to the
Company by St. Louis County relative to capital improvements made through
December 31, 2009. This agreement provides that 50% of the real and personal
property taxes on up to $135,500 of capital improvements will be abated for a
period of ten years subsequent to the property being placed in service.
Industrial revenue bonds totaling $73,000 were outstanding at June 30, 2006.
The industrial revenue bonds are issued by St. Louis County to the Company
upon its payment of qualifying costs of capital improvements, which are then
leased by the Company for a period ending December 1, 2019, unless earlier
terminated. The Company has the option at any time to discontinue the
arrangement and regain full title to the abated property. The industrial
revenue bonds bear interest at 4.25% per annum and are payable as to principal
and interest concurrently with payments due under the terms of the lease. The
Company has classified the leased assets as property and equipment and has
established a capital lease obligation equal to the outstanding principal
balance of the industrial revenue bonds. Lease payments may be made by
tendering an equivalent portion of the industrial revenue bonds. As the
capital lease payments to St. Louis County may be satisfied by tendering
industrial revenue bonds (which is the Company's intention), the capital lease
obligation, industrial revenue bonds and related interest expense and interest
income, respectively, have been offset for presentation purposes in the
Consolidated Financial Statements.

12.   COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) 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
(loss) as these amounts are recorded directly as an adjustment to
shareholders' equity. For the Company, comprehensive income (loss) is
comprised of net income (loss) and the net changes in unrealized gains and
losses on available for sale marketable securities, net of applicable income
taxes. Total comprehensive income (loss) totaled $10,066 (as restated) and
($22,888) (as restated) for the three months ended June 30, 2006 and 2005,
respectively.

13.   SEGMENT REPORTING

The reportable operating segments of the Company are branded products,
specialty generics and specialty materials. The branded products segment
includes patent-protected products and certain trademarked off-patent products
that the Company sells and markets as branded 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 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.


                                      29

<PAGE>
<PAGE>

The following represents information for the Company's reportable operating
segments for the three months ended June 30, 2006 and 2005.

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

<C>                                 <C>         <C>          <C>            <C>         <C>       <C>           <C>
   Net revenues
        (AS RESTATED) (1)           2006        $  42,313    $  48,401      $  4,882    $   604   $        -    $     96,200
        (AS RESTATED) (1)           2005           32,191       47,370         4,853        629            -          85,043

   Segment profit (loss)
        (AS RESTATED) (1)           2006           18,002       23,863         1,046    (29,576)           -          13,335
        (AS RESTATED) (1)           2005           11,976       24,643         1,180    (56,121)           -         (18,322)

   Identifiable assets
        (AS RESTATED) (1)           2006           20,102       60,784         7,629    542,962       (1,158)        630,319
        (AS RESTATED) (1)           2005           24,338       68,954         9,000    433,105       (1,158)        534,239

   Property and                     2006               93            -             -     15,107            -          15,200
       equipment additions          2005              121            -           191     22,080            -          22,392

   Depreciation and                 2006              177           84            41      5,066            -           5,368
       amortization                 2005              139           71            40      3,641            -           3,891

<FN>
       -------------------
       (1) See Note 2 "Restatement of Consolidated Financial Statements."
</TABLE>

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

14.  CONTINGENCIES - LITIGATION

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

The Company and ETHEX are named as defendants in a case brought by Solvay
Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals, Inc. v. ETHEX
Corporation, filed in Federal District Court in Minnesota. In general, Solvay
alleges that ETHEX's comparative promotion of its Pangestyme(TM) CN 10 and
Pangestyme(TM) CN 20 products to Solvay's Creon(R) 10 and Creon(R) 20 products
resulted in false advertising and misleading statements under various federal
and state laws, and constituted unfair and deceptive trade practices.
Discovery has concluded. The court has entered an order granting in part, and
denying in part, the Company's motion for partial summary judgment on certain
of plaintiff's allegations of violations of the Lanham Act. A second motion by
the Company for partial summary judgment on plaintiff's allegations is still
pending. The case is expected to be tried in 2006, but no trial date has been
set. The Company intends to vigorously defend its interests; however, it
cannot give any assurance it will prevail.

KV previously distributed several pharmaceutical products that contained
phenylpropanolamine, or PPA, and that were discontinued in 2000 and 2001. The
Company is presently named a defendant in a product liability lawsuit in
Federal District Court in Mississippi involving PPA. The suit originated out
of a case, Virginia Madison, et al. v. Bayer Corporation, et al. The original
suit was filed in December 2002, but was not served on KV until February 2003.
The case was originally filed in the Circuit Court of Hinds County,
Mississippi, and was removed to the Federal District Court for the Southern
District of Mississippi by then co-defendant Bayer Corporation. The case has
been


                                      30

<PAGE>
<PAGE>

transferred to a Judicial Panel on Multi-District Litigation for PPA claims
sitting in the Western District of Washington. The claims against the Company
have been segregated into a lawsuit brought by Johnny Fulcher individually and
on behalf of the wrongful death beneficiaries of Linda Fulcher, deceased,
against the Company. It alleges bodily injury, wrongful death, economic
injury, punitive damages, loss of consortium and/or loss of services from the
use of the Company's distributed pharmaceuticals containing PPA that have
since been discontinued and/or reformulated to exclude PPA. In May 2004, the
case was dismissed with prejudice by the Federal District Court for the
Western District of Washington for a failure to timely file an individual
complaint as required by certain court orders. The plaintiff filed a request
for reconsideration which was opposed and subsequently denied by the Court in
June 2004. In July 2004, the plaintiff filed a notice of appeal of the
dismissal. The Company has opposed this appeal. The Company intends to
vigorously defend its interests; however, it cannot give any assurance it will
prevail.

The Company has also been advised that one of its former distributor customers
is being sued in Florida state court in a case captioned Darrian Kelly v.
K-Mart et. al. for personal injury allegedly caused by ingestion of K-Mart
diet caplets that are alleged to have been manufactured by the Company and to
contain PPA. The distributor has tendered defense of the case to the Company
and has asserted a right to indemnification for any financial judgment it must
pay. The Company previously notified its product liability insurer of this
claim in 1999 and 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, including the
Madison/Fulcher lawsuit that was filed after June 15, 2002. Moreover, the
Company may not be able to obtain product liability insurance in the future
for PPA claims with adequate coverage limits at commercially reasonable prices
for subsequent periods. From time to time in the future, KV may be subject to
further litigation resulting from products containing PPA that it formerly
distributed. The Company intends to vigorously defend its interests; however,
it cannot give any assurance it will prevail.

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

The Company and/or ETHEX have been named as defendants in certain
multi-defendant cases alleging that the defendants reported improper or
fraudulent pharmaceutical pricing information, i.e., Average Wholesale Price,
or AWP, and/or Wholesale Acquisition Cost, or WAC, information, which caused
the governmental plaintiffs to incur excessive costs for pharmaceutical
products under the Medicaid program. Cases of this type have been filed
against the Company and/or ETHEX and other pharmaceutical manufacturer
defendants by the State of Massachusetts, the State of Alabama, the State of
Mississippi, New York City, and approximately 42 counties in New York State.
The New York City case and all New York county cases (other than Erie County
and complaints for two counties that have been filed but not yet served on the
Company) 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). One of the
counties, Erie County, challenged the transfer and the Erie County Case has
been remanded to state court. Each of these actions is in the early stages,
with fact discovery at beginning phases in the Alabama, Massachusetts and
Mississippi cases, but has not yet commenced in the New York City/counties or
the Erie County case. The Company intends to vigorously defend its interests
in the actions described above; however, it cannot give any assurance it will
prevail.

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

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

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

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

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

15.  RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs, an Amendment to ARB No. 43, Chapter 4," which requires that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) costs be recognized as current period charges. In addition, this
statement requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities.
This statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS 151 on April 1, 2006 did
not have a material effect on the Company's Consolidated Financial Statements.

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

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compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. On April 1, 2006, the Company
adopted SFAS 123R using the modified prospective method (see Note 4).

In March 2005, the SEC issued SEC Staff Accounting Bulletin No. 107 ("SAB
107") which describes the SEC staff position as well as supplemental
implementation guidance on the application and adoption of SFAS 123R. The
Company has applied the provisions of SAB 107 and its guidance in its adoption
of SFAS 123R on April 1, 2006 (see Note 4).

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which replaces Accounting Principles Board ("APB")
Opinion No. 20, "Accounting Changes" ("APB 20"), and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements" ("SFAS 3"). SFAS 154
applies to all voluntary changes in accounting principle and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 also requires retrospective application to prior period
financial statements involving changes in accounting principle unless it is
impracticable to determine either the period-specific or cumulative effect of
the change. This statement also requires that a change in the method of
depreciation, amortization or depletion of long-lived assets be accounted for
as a change in accounting estimate that is accounted for prospectively. SFAS
154 also retains many provisions of APB 20 including those related to
reporting a change in accounting estimate, a change in the reporting entity
and a correction of an error and also carries forward provisions of SFAS 3
governing the reporting of accounting changes in interim financial statements.
SFAS 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of SFAS 154 on
April 1, 2006 did not have a material effect on the Company's Consolidated
Financial Statements.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"
("FIN 48"), which prescribes accounting for and disclosure of uncertainty in
tax positions. This interpretation defines the criteria that must be met for
the benefits of a tax position to be recognized in the financial statements
and the measurement of tax benefits recognized. Additionally, FIN 48 provides
guidance on subsequent derecognition of tax positions, financial statement
classification, recognition of interest and penalties, accounting in interim
periods, and disclosure and transition requirements. FIN 48 is effective for
fiscal years beginning after December 15, 2006, with early adoption permitted.
The Company is currently determining the impact the adoption of FIN 48 will
have on its financial condition and results of operations.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-Q/A, 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 ("PSLRA"),
and which may be based on or include assumptions concerning our operations,
future results and prospects. Such statements may be identified by the use of
words like "plans," "expect," "aim," "believe," "projects," "anticipates,"
"commit," "intend," "estimate," "will," "should," "could," and other
expressions that indicate future events and trends.

All statements that address expectations or projections about the future,
including without limitation, statements about our filing of the 2007 Form
10-K and continued satisfaction of the continued listing requirements on the
New York Stock Exchange and our strategy for growth, product development,
regulatory approvals, market position, 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 the 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; (8) the regulatory
environment, including regulatory agency and judicial actions and changes in
applicable law or regulations; (9) fluctuations in revenues and operating
results; (10) the difficulty of predicting international regulatory approval,
including the timing; (11) the difficulty of predicting the pattern of
inventory movements by our customers; (12) the impact of competitive response
to our sales, marketing and strategic efforts; (13) risks that we may not
ultimately prevail in our litigation; (14) the restatement of our financial
statements for fiscal periods 1996 through 2006 and for the quarter ended June
30, 2006, as well as completion of the Company's financial statements for the
second and third quarters of fiscal 2007 and for the full fiscal year ended
March 31, 2007; (15) actions by the Securities and Exchange Commission and the
Internal Revenue Service with respect to the Company's stock option grants and
accounting practices; and (16) 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 are under no
obligation to update any of the forward-looking statements after the date of
this report.


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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 such
forward-looking statements. These risks, uncertainties and other factors are
discussed throughout this report and specifically under the captions
"Cautionary Statement Regarding Forward-Looking Information" and "Risk
Factors." In addition, the following discussion and analysis of financial
condition and results of operations, which gives effect to the restatement
discussed in Note 2 to the Consolidated Financial Statements, 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 to be filed with
the Securities and Exchange Commission (the "2007 Form 10-K"), and the
unaudited interim consolidated financial statements and related notes to
unaudited interim consolidated financial statements included in Item 1 of this
Quarterly Report on Form 10-Q/A.

REVIEW OF STOCK OPTION GRANT PRACTICES

BACKGROUND AND CONCLUSIONS

On October 31, 2006, we announced that we had been served with a derivative
lawsuit filed in St. Louis City Circuit Court alleging that certain stock
option grants to current or former directors and officers between 1995 and
2002 were dated improperly. In accordance with our established corporate
governance procedures, the Board of Directors referred this matter to the
independent members of its Audit Committee (the "Special Committee" or
"Committee").

Shortly thereafter, the Special Committee commenced an investigation of our
stock option grant practices, assisted by independent legal counsel and
forensic accounting experts engaged by the Committee, with the objectives of
evaluating our accounting for stock options for compliance with GAAP and for
compliance with the terms of our related stock option plans over the period
January 1, 1995 through October 31, 2006 (the "relevant period"). Over an
approximately twelve-month period, the Committee and its advisors interviewed
all available persons (45 in all) believed to be relevant to the issues being
investigated, including current and former employees, current and former
outside directors and our current auditors and outside legal counsel. They
reviewed nearly 300,000 electronic and hard copy documents relating to our
stock option grant practices. During the relevant period we awarded 2,639
option grants covering 10.6 million shares of our Class A and Class B Common
Stock, which were reviewed by the Committee.

On October 11, 2007, we filed a Current Report on Form 8-K announcing the
Special Committee had completed its investigation. The investigation concluded
that there was no evidence that any employee, officer or director of the
Company engaged in any intentional wrongdoing or was aware that the Company's
policies and procedures for granting and accounting for stock options were
materially non-compliant with GAAP. The investigation also found no
intentional violation of law or accounting rules with respect to our
historical stock option grant practices.

However, the Special Committee concluded that stock-based compensation expense
resulting from the stock option grant practices followed by the Company prior
to April 2, 2006 were not recorded in accordance with GAAP because the expense
computed for most of those grants reflected incorrect measurement dates for
financial accounting purposes. The "measurement date" under applicable
accounting principles, namely APB 25 and related interpretations, is the first
date on which all of the following are known and not subject to change: (a)
the individual who is entitled to receive the option grant, (b) the number of
options that an individual is entitled to receive, and (c) the option's
exercise price.

FINDINGS AND ACCOUNTING CONSIDERATIONS

In general, stock options were granted to employees, executives and
non-employee members of the Board of Directors over the relevant period under
the terms of our 1991 and 2001 Incentive Stock Option Plans (the "option
plans"). The majority of our employees participate in our stock option
program. Approximately 78% of our employees have been

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awarded grants under our option plans. In addition to options granted to the
CEO under those plans, "bonus options" were awarded to him under the terms of
his employment agreement in lieu of, and in consideration for a reduction of,
the cash bonus provided for in that agreement.

The option plans required grants to be approved by the Compensation Committee
of the Board of Directors. Under the option plans, options were to be granted
with exercise prices set at no less than the fair market value of the
underlying common stock at the date of grant. The 1991 plan provided for the
exclusive grant of Incentive Stock Options ("ISOs") as defined by Internal
Revenue Code Section 422, while the 2001 plan provided for the grant of both
ISOs and non-qualified stock options ("NSOs"). Under the plans, options
granted to employees other than the CEO or directors are subject to a ten year
ratable vesting period. Under the plans, options granted to the CEO and
directors generally vest ratably over five years.

Both option plans require that shares received upon exercise of an option
cannot be sold for two years. If the employee terminates employment
voluntarily or involuntarily (other than by retirement, death or disability)
during the two-year forfeiture period, the option plans provide the Company
with the option of repurchasing the shares at the lower of the exercise price
of the option or the fair market value of the stock on the date of
termination. We have changed our accounting for stock-based compensation to
consider this provision of the option plans as a forfeiture provision to be
accounted for in accordance with the guidance provided in EITF No. 00-23,
Issues Related to Accounting for Stock Based Compensation under APB 25 and FIN
44, specifically Paragraph 78 and Issue 33 (a), "Accounting for Early
Exercise." In accordance with EITF No. 00-23, cash paid by an employee for the
exercise price is considered a deposit or a prepayment of the exercise price
that is recognized as a current liability when received by the Company at the
beginning of the two-year forfeiture period. The receipt of the exercise price
is recognized as a current liability because the options are deemed not
exercised and the option shares are not considered issued until an employee
bears the risk and rewards of ownership. The options are accounted for as
exercised when the two-year forfeiture period lapses. In addition, because the
options are not considered exercised for accounting purposes, the shares in
the two-year forfeiture period are not considered outstanding for purposes of
computing basic EPS.

Prior to fiscal 2007, we had accounted for all option grants as fixed in
accordance with the provisions of APB 25 using the date of grant as the
measurement date. Because the exercise price of the option was equal to or
greater than the market price of the stock at the measurement date, under our
prior procedures we did not recognize any compensation expense since the
option had no intrinsic value (intrinsic value being the difference between
the exercise price and the market price of the underlying stock at the
measurement date).

As noted above, the Special Committee determined that our accounting for most
of the stock option grants was not in accordance with GAAP because the date of
grant, as defined by the Company, was not a proper measurement date. To
correct those errors, and consistent with the accounting literature and
guidance from the Securities and Exchange Commission ("SEC"), we organized the
grants into categories based on grant type and process by which the grant was
finalized. Based on the relevant facts and circumstances, we applied the
authoritative accounting standard (APB 25 and related interpretations) to
determine, for every grant within each category, the proper measurement date.
If the measurement date was not the originally assigned grant date, accounting
adjustments were made as required, resulting in stock-based compensation
expense and related tax effects. The grants were classified as follows: (1)
promotion/retention grants to executives and employees and new hire grants
("employee options"); (2) grants to persons elected or appointed to the Board
of Directors ("director options"); and (3) bonus option grants to the CEO in
lieu of cash bonus payments under the terms of his employment agreement
("bonus options").

Employee Options. The evidence obtained through the Committee's investigation
----------------
indicates that employee options were granted based on the lowest market price
in the quarter of grant determined from an effective date (as defined below)
to the end of the quarter. The exercise price and grant date of the options
were determined by looking back from the end of the quarter to the effective
date and choosing the lowest market price during that period. The date on
which the market price was lowest became the grant date. This procedure to
"look back" to the lowest market price in the preceding quarter to set the
exercise price was widely known and understood within the Company. The
effective date was either the date on which the option recipients and the
number of shares to be granted were determined and approved by the CEO, the
date of a promotion or the date of hire. For new hires and promotions of
existing employees, which represents substantially all of the award
recipients, the terms of the award, except for the exercise price, were
communicated to the recipients prior to the end of the quarter. At the end of
the quarter, when the exercise price was determined, written consents were
prepared, dated as of the date on which the stock price was lowest during

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the quarter, to be approved by the members of the Compensation Committee. The
evidence obtained through the investigation indicated the Compensation
Committee never changed or denied approval of any grants submitted to them
and, as such, their approval was considered a routine matter. Based on the
evidence and findings of the Special Committee, the results of management's
analysis, the criteria specified in APB 25 for determining measurement dates
and guidance from the staff of the SEC, we have concluded that the measurement
dates for the employee options should not have been the originally assigned
grant dates, but instead, should have been the end of the quarter in which
awards were granted when the exercise price and number of shares granted were
fixed. Changing the measurement date from the originally assigned grant date
to the end of the quarter resulted in recognition of additional stock-based
compensation expense of $6.0 million, net of tax, on 2,830 stock option grants
over the period from fiscal 1996 through fiscal 2006.

Director Options. Director options were issued, prior to the effective date of
----------------
the Sarbanes-Oxley Act ("Sarbanes-Oxley") in August 2002, using the same "look
back" process as described above for employee options. This process was
changed when the time for filing Form 4s was shortened under the provisions of
Sarbanes-Oxley to award options with exercise prices equal to the fair market
value of the stock on the date of grant. We concluded that the measurement
date for the director options granted prior to this change in grant practice
should be the end of the quarter. Changing the measurement date from the
originally assigned grant date to the end of the quarter resulted in
recognition of additional stock-based compensation expense of $0.7 million,
net of tax, on 24 stock option grants over the period from fiscal 1996 through
fiscal 2006.

Bonus Options. The terms of the CEO's employment agreement, give him the
-------------
alternative of taking incentive stock options, restricted stock or discounted
stock options in lieu of the cash payment of part or all of his annual
incentive bonus. In the event of an election to receive options in lieu of
cash incentive, those options were to be valued using the Black-Scholes option
pricing model, applying the same assumptions as those used in the Company's
most recent proxy statement. The employment agreement provides that the CEO's
annual bonus, based on the fiscal year net income, is payable after the end of
the year. However, based on advice provided to us by legal counsel, and
longstanding interpretation, the Company believed that it was permissible to
make advance payments in the form of bonus options during the year based on
the anticipated annual bonus, and did so.

Prior to fiscal 2005, the CEO received ten bonus option grants, consisting of
options to purchase 337,500 shares of Class A Common Stock and 1,743,750
shares of Class B Common Stock under this arrangement. The CEO and the Board's
designated representative (our Chief Financial Officer) agreed on the terms of
the bonus options, including the number of shares covered, the exercise price
and the grant date (the latter being selected using a "look back" process
similar to that followed in granting employee and director options). We
typically granted bonus options prior to fiscal year-end, shortly after such
agreement was reached. These bonus options were fully vested at grant, had
three-to-five year terms, were granted with a 10% or 25% premium to the market
price of the stock on the selected grant date and were subject to the approval
of the Compensation Committee. The CEO's cash bonus for the fiscal year in
which the options were granted, was reduced by the Black-Scholes value of the
options according to their terms.

Based on the facts and circumstances relative to the process for granting the
bonus options, the Special Committee determined, and management has agreed
that the measurement dates for these options should be the end of the fiscal
year in which they were granted. The end of the fiscal year was used as the
measurement date because that is the date on which the amount of the annual
bonus could be determined and therefore the terms of the option could be fixed
under APB 25. This conclusion is predicated on the assumption that the terms
of the option were linked to the amount of the bonus earned. While it was
permissible to agree upon the number of shares that were to be issued prior to
the end of the year and would not be forfeitable, under GAAP the exercise
price is considered variable until the amount of the bonus could be determined
with finality. The variability in the exercise price results from the premise
that the CEO would have been required to repay any shortfall in the bonus
earned from the value assigned to the option by the Black-Scholes model.
Although there was never an instance when the CEO's bonus did not exceed
substantially the value of the options as calculated, if that were to have
occurred, the amount repaid to cure the bonus shortfall would in substance be
an increase in the exercise price of the option. Since the exercise price
could not be determined with certainty until the amount of the bonus was
known, we have applied variable accounting to the bonus options from the date
of grant to the final fiscal year-end measurement date. Variable accounting
requires that compensation expense is to be determined by comparing the quoted
market value of the shares covered by the option grant to the exercise price
at each intervening balance sheet date until the terms of the option become
fixed.

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The compensation expense associated with the CEO's estimated bonus was accrued
throughout the fiscal year. When the value of a bonus option was determined
using the Black-Scholes model, previously recorded compensation expense
associated with the accrual of the estimated bonus was reversed in the amount
of the value assigned to the bonus option. The previously recorded
compensation expense should not have been reversed. We developed a methodology
in the restatement process that considers both the intrinsic value of the
option under APB 25 and the Black-Scholes value assigned to the bonus option
in determining the amount of compensation expense to recognize once the
exercise price of the option becomes fixed and variable accounting ends. Under
this methodology, the intrinsic value of the option is determined at the
fiscal year-end measurement date under the principles of APB 25. The intrinsic
value is then compared to the Black-Scholes value assigned to the option for
compensation purposes (the bonus value). The bonus value is the amount that
would have been accrued during the fiscal year through the grant date as part
of the total liability for the CEO's bonus. The greater of the intrinsic value
or bonus value is recorded as compensation expense. Using this methodology and
the fiscal year-end as the measurement dates resulted in an increase in
stock-based compensation expense of $6.9 million over the period from fiscal
1996 through fiscal 2004. There was no tax benefit associated with this
expense due to the tax years being closed.

OTHER MODIFICATIONS OF OPTION TERMS

As described above, under the terms of our stock option plans shares received
on exercise of an option are to be held for the employee for two years during
which time the shares cannot be sold. If the employee terminates employment
voluntarily or involuntarily (other than by retirement, death or disability)
during the two-year forfeiture period the option plans 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. In some
circumstances we elected not to repurchase the shares upon termination of
employment while the shares were in the two-year forfeiture period essentially
waiving the remaining forfeiture period requirement. We did not previously
recognize this waiver as requiring a new measurement date.

Based on management's analysis we have concluded that a new measurement date
should have been recognized in two situations: (1) where the employee
terminated and the Company did not exercise its right under the option plans
to buy back the shares in the two-year forfeiture period, and (2) where the
forfeiture provision was waived and the employee subsequently terminated
within two years of the exercise date. We now consider both of these waivers
to be an acceleration of the vesting period because the forfeiture provision
was waived (i.e., the employee is no longer subject to a service condition to
earn the right to the shares and will benefit from the modification). As such,
a new measurement date is required. In this case the new measurement date is
the date the forfeiture provision was waived with additional stock-based
compensation expense being recognized at the date of termination. Since the
shares were fully vested, the intrinsic value of the option at the new
measurement date in excess of the intrinsic value at the original measurement
date should be expensed immediately. The new measurement dates resulted in an
increase in stock-based compensation expense of $0.4 million, net of tax, on
27 stock option grants over the period from fiscal 1996 through fiscal 2006.

STOCK OPTION ADJUSTMENTS

Stock-based Compensation Expense. Although the period for the Special
--------------------------------
Committee's investigation was January 1, 1995 to October 31, 2006, management
extended the period of review back to 1986 for purposes of analyzing the
aggregate impact of the measurement date changes because the incorrect
accounting for stock options extended that far back in time. We have concluded
that the measurement date changes identified by the Special Committee's
investigation and management's analysis resulted in an understatement of
stock-based compensation expense arising from stock option grants since fiscal
1986, effecting our consolidated financial statements for each year beginning
with the fiscal year ended March 31, 1986. The affect on the consolidated
financial statements for the fiscal years from 1986 to 1995 was considered to
be not material to those years. Therefore, it was included as a cumulative
adjustment to the stock-based compensation expense for fiscal 1996. We have
determined the aggregate understatement of stock-based compensation expense
for the 11-year restatement period from 1996 through 2006 was $14.0 million,
net of tax, on 2,891 stock options grants.

As previously discussed, we now consider the two-year repurchase option
specified in the option plans to be a forfeiture provision that goes into
effect when stock options are exercised. Therefore, the service period
necessary for an employee to earn an award varies based on the timing of stock
option exercises. We initially expense each award


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(i.e., all tranches of an option award) on a straight-line basis over ten
years, which is the period that stock options become exercisable. We ensure
the cumulative compensation expense for an award as of any date is at least
equal to the measurement-date intrinsic value of those options that have
vested (i.e., when the two-year forfeiture period has ended). 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 we repurchased the
shares during the two-year forfeiture period, all compensation expense for
those options is reversed as a forfeiture.

In addition, management reviewed its adoption of SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), and identified several changes to be made
to its initial application of this standard. These changes included:

*    The impact of the measurement date changes determined by the Special
     Committee and management were incorporated into the fair value
     calculations.
*    The two-year post exercise service condition was originally considered to
     be a post-vesting restriction that was accounted for by applying a 12%
     discount factor to the current market price used in the determination of
     fair value. The effect of the discount factor was eliminated from the
     fair value calculation since the two-year post-exercise service condition
     is now considered to be a forfeiture provision.
*    The requisite service period was redefined to consider the effect of the
     two-year post-exercise service condition.
*    The assumptions used in the fair value calculation for all outstanding
     stock options, including the expected term and the risk-free rate, were
     adjusted to consider the effect of the two-year post-exercise service
     condition.

The effect of these changes resulted in an increase in stock-based
compensation expense of $0.4 million for the three months ended June 30, 2006.

Payroll Taxes, Interest and Penalties. In connection with the stock-based
-------------------------------------
compensation adjustments, we determined that certain options previously
classified as ISO grants were determined to have been granted with an exercise
price below the fair market value of our stock on the revised measurement
date. Under the 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 (the "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 Internal
Revenue Service for calendar years 2004, 2005 and 2006 in an effort to reach
agreement on the resulting tax liability. In the meantime, the Company has
recorded expenses related to the withholding taxes, interest and penalties
associated with options which would have created a taxable event in calendar
years 2004, 2005 and 2006. The estimated payroll tax liability at March 31,
2006 for the disqualification of tax treatment associated with ISO awards
totaled $3.3 million. In addition, we recorded an income tax benefit of
approximately $0.9 million related to this liability.

Income Tax Benefit. We reviewed the income tax effect of the stock-based
------------------
compensation charges, and we believe that the proper income tax accounting for
stock options under GAAP depends, in part, on the tax designation of the stock
options as either ISOs or NSOs. Because of the potential impact of measurement
date changes on the qualified status of the options, we have determined that
substantially all of the options originally intended to be ISOs might not be
qualified under the tax regulations, and therefore should be accounted for as
if they were NSOs for financial accounting purposes. An income tax benefit has
resulted from the determination that certain NSOs for which stock-based
compensation expense was recorded will create an income tax deduction. This
tax benefit has resulted in an increase to our 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 assets is recorded to paid-in capital
in the period in which the taxable event or forfeiture occurs. We have
recorded a deferred tax asset of $1.3 million as of March 31, 2006 related
to stock options.

 The stock option adjustments and related income tax impacts discussed above
reduced net income by $16.3 million in aggregate for the fiscal years ended
March 31, 1996 through 2006. We have restated pro forma net income and
earnings per share under Statement of Financial Accounting Standards ("SFAS
123") in Note 1 of the Notes to

                                      39

<PAGE>
<PAGE>

Consolidated Financial Statements of this Form 10-Q/A to reflect the impact of
these adjustments for the three months ended June 30, 2005.

The Special Committee recommended a remediation plan that included the
repricing of certain stock option grants awarded to officers and directors and
reimbursement by our CEO of $1.4 million. To reprice the stock option grants
awarded to certain senior officers and directors, the original exercise price
has been increased to the market price of the stock on the new measurement
date for all options outstanding as of the beginning of the investigation.

As described above, the Special Committee concluded that the CEO's bonus
options awarded under his employment agreement should have been issued at the
end of the fiscal year rather than during the year as had been our past
practice. The Committee concluded that an adjustment was appropriate to
reflect that the bonus options should not have been issued before fiscal year
end and to remove any benefits to the CEO from our past practice of looking
back to select grant dates and exercise prices. The Committee determined the
adjustment by calculating the Black-Scholes values of the bonus options as if
they had been issued at the end of the fiscal year and then comparing those
values to the amounts reported in our proxy statements as the values of the
bonus options based on the earlier grant dates. The difference in the
aggregate value of the bonus options based on this methodology was $1.4
million. The Committee considered several other alternative remediation
calculations but concluded, based on consideration of all of the facts and
circumstances, that the recommended amount was the appropriate remediation.
The CEO has made the recommended reimbursement of $1.4 million by delivery to
the Company of 45,531 shares of Class A Common Stock on November 1, 2007.

The Committee also recommended changes to our stock option grant practices and
additional training for employees involved in the accounting for and
administration of our stock option program. These recommendations were
accepted by the Board of Directors by unanimous consent on October 11, 2007.

REVIEW OF TAX POSITIONS (UNRELATED TO STOCK OPTIONS)

In addition to the restatement adjustments associated with stock options
discussed above, our restated consolidated financial statements include an
adjustment for fiscal years 2004, 2005 and 2006 to reflect additional
liabilities associated with tax positions taken on filed tax returns for those
years that should have been recorded in accordance with GAAP, partially offset
by certain expected tax refunds. The aggregate impact of this adjustment was a
$5.4 million increase in income tax expense with a corresponding increase in
taxes payable. This adjustment is not related to accounting for stock-based
compensation expense discussed above.

OTHER ADJUSTMENTS (UNRELATED TO STOCK OPTIONS)

In addition to the restatement adjustments associated with stock options and
income taxes discussed above, our restated Consolidated Financial Statements
include an adjustment for fiscal years 2002 through 2006 to reflect the
correction of errors related to the recognition of revenue associated with
shipments to customers under FOB destination terms and an adjustment to reduce
the estimated liability for employee medical claims incurred but not reported
at March 31, 2006. We improperly recognized revenue from certain customers
prior to when title and risk of ownership transferred to the customer. The
aggregate impact of these adjustments over the periods affected was a decrease
in net revenue of $1.2 million and a decrease in net income of $0.4 million.
The aggregate impact on net income reflected a $0.5 million decrease
associated with the net revenue errors and a $0.1 million increase related to
the adjustment of the liability for medical claims.

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

This Form 10-Q/A reflects the restatement of our consolidated balance sheets
as of June 30, 2006, March 31, 2006 and June 30, 2005 and the related
consolidated statements of operations and consolidated statements of cash
flows for the three months ended June 30, 2006 and 2005. In the March 31,
2007 Form 10-K, we are restating our consolidated balance sheet as of March
31, 2006, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for the years ended March 31,
2006 and 2005. We have not amended,

                                      40

<PAGE>
<PAGE>

and do not intend to amend, our previously filed Annual Reports on Form 10-K
or Quarterly Reports on Form 10-Q for each of the fiscal years and fiscal
quarters of 1996 through 2006. Our 2007 Form 10-K also will reflect the
restatement of Selected Financial Data in Item 6 as of March 31, 2005 and as
of and for the years ended March 31, 2004 and 2003. We will also be filing
Quarterly Reports on Form 10-Q for the quarters ended September 30, 2006 and
December 31, 2006, that contain the restatement of our consolidated statements
for certain interim periods as discussed therein.

The table below reflects the impacts of the restatement adjustments discussed
above on our consolidated statements of income for the periods presented below
(in thousands):

<TABLE>
<CAPTION>
                                                                                                CUMULATIVE
                                                                                              APRIL 1, 1995
                                                    THREE MONTHS ENDED   THREE MONTHS ENDED      THROUGH
CATEGORY OF ADJUSTMENTS:                               JUNE 30, 2006        JUNE 30, 2005     MARCH 31, 2004
------------------------                            ------------------   ------------------   --------------
                                                                                                    (b)
<C>                                                 <C>                  <C>                  <C>
Pretax income impact:
  Stock-based compensation expense (c)              $             442    $             221    $      13,626
  Payroll tax expense and penalties (c)                           413                  172              439
  Other adjustments                                             1,824                  265            1,666
                                                    ------------------   ------------------   --------------
   Decrease in pretax income                                    2,679                  658           15,731
                                                    ------------------   ------------------   --------------

Income tax impact:
  Stock-based compensation expense                               (276)                 (68)          (1,050)
  Payroll taxes                                                  (200)                 (47)            (123)
  Other income tax adjustments (d)                                266                  490            1,689
  Other adjustments                                              (713)                 (89)            (584)
                                                    ------------------   ------------------   --------------
   Increase (decrease) in income tax expense                     (923)                 286              (68)
                                                    ------------------   ------------------   --------------
Total net decrease to income before
     cumulative effect of change in
     accounting principle                                       1,756                  944           15,663
Cumulative effect of change in
     accounting principle (e)                                  (1,976)                   -                -
                                                    ------------------   ------------------   --------------
Total net decrease (increase) to net income         $            (220)   $             944    $      15,663
                                                    ==================   ==================   ==============
<FN>
  (a) See Note 2 "Restatement of Consolidated Financial Statements" of the
      Notes to Consolidated Financial Statements included in this Form 10-Q
      for additional information regarding the adjustments made to the
      Company's restated consolidated financial statements.

  (b) The cumulative effect of the stock-based compensation adjustments from
      fiscal 1996 through fiscal 2004 is summarized below:

<CAPTION>
                             STOCK OPTION ADJUSTMENTS                                  OTHER ADJUSTMENTS            DECREASE/
                        ---------------------------------    OTHER INCOME      --------------------------------  (INCREASE) TO
YEARS ENDED MARCH 31,       PRETAX          INCOME TAX      TAX ADJUSTMENTS        PRETAX         INCOME TAX       NET INCOME
---------------------   ---------------    --------------  ------------------  ---------------  ---------------  ----------------

<C>                      <C>                <C>             <C>                 <C>              <C>              <C>
1996                     $         829 (f)  $          -    $              -    $           -    $           -    $          829
1997                               657                (1)                  -                -                -               656
1998                             2,391               (19)                  -                -                -             2,372
1999                               535               (27)                  -                -                -               508
2000                             1,998               (62)                  -                -                -             1,936
2001                             1,722              (141)                  -                -                -             1,581
2002                             2,317              (219)                  -            2,534             (918)            3,714
2003                             1,187              (248)                  -           (1,610)             590               (81)
2004                             2,429              (456)              1,689              742             (256)            4,148
                        ---------------    --------------  ------------------  ---------------  ---------------  ----------------
Cumulative effect        $      14,065      $     (1,173)   $          1,689    $       1,666    $        (584)   $       15,663
                        ===============    ==============  ==================  ===============  ===============  ================
<FN>
  (c) Stock-based compensation expenses, including related payroll taxes,
      interest and penalties have been recorded as adjustments to the selling
      and administrative expenses line item in our consolidated statements of
      income for each period.


                                      41

<PAGE>
<PAGE>

  (d) This represents liabilities associated with tax positions claimed on
      filed returns for these years, partially offset by certain expected tax
      refunds and is not related to accounting for stock-based compensation.

  (e) Adjustment to recognize the effect of estimated forfeitures related to
      outstanding awards that are not expected to vest as of the adoption date
      of SFAS 123R.

  (f) Includes additional expense from 1986 to 1995 totaling $0.6 million, the
      affect of which on the consolidated financial statements for 1996 and
      for each year 1986 to 1995 was not material.
</TABLE>

BACKGROUND

We are a fully integrated specialty pharmaceutical company that develops,
manufactures, acquires and markets technologically-distinguished branded and
generic/non-branded prescription pharmaceutical products. We have a broad
range of dosage form capabilities, including tablets, capsules, creams,
liquids and ointments. We conduct our branded pharmaceutical operations
through Ther-Rx Corporation and our generic/non-branded pharmaceutical
operations through ETHEX Corporation, which focuses principally on
technologically-distinguished generic/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 diverse portfolio of drug delivery technologies which we leverage to
create technologically-distinguished brand name and specialty generic
products. We have developed and patented 15 drug delivery and formulation
technologies primarily in four principal areas: SITE RELEASE(R) 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 June 30, 2006 increased $11.2 million
from the first quarter of the prior fiscal year, or 13.1%, as we experienced
sales growth of 31.4% in our branded products segment. The resulting $3.7
million increase in gross profit was offset in part by a $2.7 million increase
in operating expenses, before taking into account the $30.4 million of expense
associated with the prior year acquisition of FemmePharma. The increase in
operating expenses for the three months ended June 30, 2006 was primarily due
to an increase in personnel costs associated with expansion of the branded
sales force in fiscal 2006, an increase in management and other personnel, and
the incremental impact of stock-based compensation expense recorded in
conjunction with the adoption of SFAS 123R (see Note 5 to the Consolidated
Financial Statements).

For the three months ended June 30, 2006, we reported net income of $10.1
million compared to a net loss of $22.9 million in the first quarter of fiscal
2006. During the comparable prior quarter, we recorded expense of $30.4
million in connection with the FemmePharma acquisition (see Note 3) that
consisted of $29.6 million for acquired in-process research and development
and $0.9 million in direct expenses related to the transaction. As a result of
this, we incurred a net loss for the three months ended June 30, 2005 of $22.9
million, or $0.47 per share for both Class A and Class B Common Stock.
Excluding the $30.4 million of expense associated with the prior year
acquisition of FemmePharma, net income for the three months ended June 30,
2006 would have increased $2.5 million, or 33.7%.


                                      42

<PAGE>
<PAGE>

<TABLE>
NET REVENUES BY SEGMENT
-----------------------
   ($ IN THOUSANDS):
<CAPTION>
                                                            THREE MONTHS ENDED JUNE 30,
                                              ------------------------------------------------------
                                                                                       CHANGE
                                                  2006             2005          -------------------
                                              (AS RESTATED)    (AS RESTATED)         $           %
                                              -------------    -------------     ---------    ------
<C>                                           <C>              <C>               <C>          <C>
Branded products                              $     42,313     $     32,191      $  10,122     31.4%
   as % of net revenues                               44.0%            37.9%
Specialty generics/non-branded                      48,401           47,370          1,031      2.2%
   as % of net revenues                               50.3%            55.7%
Specialty materials                                  4,882            4,853             29      0.6%
   as % of net revenues                                5.1%             5.7%
Other                                                  604              629            (25)    (4.0)%
                                              -------------    -------------     ---------
   Total net revenues                         $     96,200     $     85,043      $  11,157     13.1%
</TABLE>

The increase in branded product sales was due primarily to the continued sales
growth of our PreCare(R) product line which generated increased sales of $11.7
million, a 142.3% increase compared to the prior year quarter. This increase
was attributable to sales growth experienced by our PrimaCare(R) product line,
the introduction of PreCare Premier(TM) and product line price increases that
have occurred over the past 12 months. Specifically, sales of PrimaCare(R) ONE
increased $7.6 million, or 322.4%, due to $5.0 million of sales volume growth
coupled with $2.6 million of higher sales associated with price increases over
the past year. The sales volume growth experienced by PrimaCare(R) ONE was
primarily due to continued market share gains since the fourth quarter of
fiscal 2005 when a temporary supply disruption of PrimaCare(R) ONE occurred.
The increase in prescription prenatal sales was offset in part by a $1.3
million, or 9.6%, decrease in sales of our anti-infective brands. This
decrease reflected the impact during the three months ended June 30, 2005 of
larger-than-normal customer purchases of Gynazole-1(R) made in anticipation of
a July 2005 price increase. Our other anti-infective brand, Clindesse(TM),
generated sales of $5.1 million during the quarter. Sales from our hematinic
product line were flat during the quarter as a $3.2 million reduction in sales
from our Chromagen(R) product line was offset by $2.4 million of incremental
sales associated with Repliva 21/7(TM), a new hematinic product introduced in
the second quarter of fiscal 2006, and increased sales from our Niferex(R)
product line. The decrease in Chromagen(R) sales was partially the result of
additional fiscal 2006 first quarter sales of Chromagen(R) as customers
responded to a July 2005 price increase.

The increase in specialty generic net sales resulted primarily from sales
volume growth in our pain management product line, offset in part by a decline
in sales volume from certain products in our cardiovascular product line. The
pain management product line, which comprised 22.8% of specialty generic sales
during the quarter compared to 17.9% for the prior quarter, contributed $2.6
million in increased revenue due primarily to incremental sales from three
product approvals which were received in fiscal 2006.


                                      43

<PAGE>
<PAGE>

<TABLE>
GROSS PROFIT BY SEGMENT
-----------------------
  ($ IN THOUSANDS):
<CAPTION>
                                                          THREE MONTHS ENDED JUNE 30,
                                              ------------------------------------------------------
                                                                                       CHANGE
                                                  2006            2005          --------------------
                                              (AS RESTATED)    (AS RESTATED)          $          %
                                              -------------    -------------    ---------     ------
<C>                                           <C>              <C>              <C>           <C>
Branded products                              $     37,301     $    29,394      $   7,907      26.9%
   as % of net revenues                               88.2%           91.3%
Specialty generics/non-branded                      27,376          27,410            (34)     (0.1)%
   as % of net revenues                               56.6%           57.9%
Specialty materials                                  1,998           2,026            (28)     (1.4)%
   as % of net revenues                               40.9%           41.7%
Other                                               (3,937)            178         (4,115)       NM
                                              -------------    ------------     ---------
   Total gross profit                         $     62,738     $    59,008      $   3,730       6.3%
        as % of total net revenues                    65.2%           69.4%
</TABLE>

The increase in gross profit was primarily due to the significant sales growth
experienced by our branded products segment. The lower gross profit percentage
on a consolidated basis reflected the impact of higher production costs that
resulted from lower than expected production volume, coupled with an increase
in provisions for obsolete inventory. The gross profit percentage decrease
experienced by branded products was partially due to the impact of rebates
associated with branded product sales to managed care organizations that began
late in fiscal 2005.

<TABLE>
RESEARCH AND DEVELOPMENT
------------------------
   ($ IN THOUSANDS):
<CAPTION>
                                                            THREE MONTHS ENDED JUNE 30,
                                               -------------------------------------------------------
                                                                                         CHANGE
                                                                                  --------------------
                                                  2006         2005                    $           %
                                               ----------   ----------            -----------     ----
<C>                                            <C>          <C>                   <C>            <C>
Research and development                       $    7,890   $    7,632            $       258     3.4%
   as % of net revenues                               8.2%         9.0%
</TABLE>

The increase in research and development expense was primarily due to an
increase in personnel expenses associated with the growth of our research and
development staff. Research and development expense for the quarter grew at a
slower rate than management anticipated due to the deferral of certain
clinical studies.

<TABLE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
---------------------------------------------
            ($ IN THOUSANDS):
<CAPTION>
                                                                 THREE MONTHS ENDED JUNE 30,
                                                    ------------------------------------------------------
                                                                                             CHANGE
                                                                                       -------------------
                                                       2006         2005                    $            %
                                                    -------      -----------           ------------     --
<C>                                                 <C>          <C>                   <C>             <C>
Purchased in-process research and development       $    -       $    30,441           $   (30,441)     NM
       as % of net revenues                              - %            35.8 %
</TABLE>


                                      44

<PAGE>
<PAGE>

During the three months ended June 30, 2005, we recorded expense of $30.4
million in connection with the FemmePharma acquisition (see Note 3 to the
Consolidated Financial Statements) that consisted of $29.6 million for
acquired in-process research and development and $0.9 million in direct
expenses related to the transaction. The valuation of acquired in-process
research and development represented the estimated fair value of the worldwide
marketing rights to an endometriosis product we acquired as part of the
FemmePharma, Inc. acquisition that, at the time of the acquisition, had no
alternative future use and for which technological feasibility had not been
established.

<TABLE>
SELLING AND ADMINISTRATIVE
--------------------------
     ($ IN THOUSANDS):
<CAPTION>
                                                             THREE MONTHS ENDED JUNE 30,
                                              ----------------------------------------------------------
                                                  2006            2005                     CHANGE
                                              ------------    -------------         --------------------
                                              (AS RESTATED)   (AS RESTATED)               $          %
                                                                                    -----------     ----
<C>                                            <C>            <C>                   <C>             <C>
Selling and administrative                     $    40,138    $     37,753          $     2,385     6.3%
  as % of net revenues                                41.7%           44.4%
</TABLE>

The increase in selling and administrative expense was primarily due to
increases in personnel, promotional and marketing costs associated with
expanded sales efforts and increases in facilities, management and other
personnel costs over the proceeding year. The increase in personnel costs was
also impacted by the adoption of SFAS 123R, "Share Based Payment," using the
modified prospective method which resulted in the recognition of incremental
stock-based compensation expense of $0.7 million during the quarter and an
increase in accrued payroll taxes associated with the disqualification of
certain stock options as ISOs. We adopted SFAS 123R using the modified
prospective method and, as a result, did not retroactively adjust results from
prior periods. Prior to the adoption of SFAS 123R, we accounted for
stock-based compensation using the intrinsic value method prescribed in APB 25
(see the "Explanatory Note" immediately preceding Part I, Item 1,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation", and Note 2 "Restatement of Consolidated Financial Statements" of
the Notes to Consolidated Financial Statements in this Form 10-Q/A). The
increase in these costs was offset in part by a $0.8 million reimbursement of
legal fees received during the quarter.

<TABLE>
OPERATING INCOME (LOSS)
-----------------------
  ($ IN THOUSANDS):
<CAPTION>
                                                               THREE MONTHS ENDED JUNE 30,
                                               ---------------------------------------------------------
                                                   2006           2005                      CHANGE
                                               -------------  -------------          -------------------
              ($ IN THOUSANDS):                (AS RESTATED)  (AS RESTATED)                $           %
                                                                                     ------------     --
<C>                                            <C>             <C>                   <C>             <C>
Operating income (loss)                        $     13,513    $  (17,998)           $     31,511     NM
</TABLE>

The improvement in operating income was primarily due to the $30.4 million of
expense we recorded during the three months ended June 30, 2005 in connection
with the FemmePharma acquisition. Without taking into account the $30.4
million of expense associated with the prior year acquisition of FemmePharma,
operating income for the three months ended June 30, 2006 would have increased
$1.1 million, or 8.6%.


                                      45

<PAGE>
<PAGE>

<TABLE>
INTEREST EXPENSE
----------------
($ IN THOUSANDS):
<CAPTION>
                                                              THREE MONTHS ENDED JUNE 30,
                                               ------------------------------------------------------
                                                                                         CHANGE
                                                                                  -------------------
                                                  2006         2005                   $           %
                                               ----------   ----------            ----------     ----
<C>                                            <C>          <C>                   <C>           <C>
Interest expense                               $    2,236   $    1,377            $      859     62.4%
</TABLE>

The increase in interest expense was primarily due to interest incurred on the
$43.0 million mortgage loan agreement we entered into in March 2006 coupled
with the completion of a number of capital projects during fiscal 2006 and the
related reduced level of capitalized interest thereon.

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

                                                             THREE MONTHS ENDED JUNE 30,
                                               ------------------------------------------------------
                                                                                         CHANGE
                                                                                  -------------------
                                                  2006         2005                   $           %
                                               ----------   ----------            ----------     ----
<C>                                            <C>          <C>                   <C>           <C>
Interest and other income                      $    2,058   $    1,053            $    1,005     95.4%
</TABLE>

The increase in interest and other income was primarily due to an increase in
interest income on short-term investments and dividends earned on the Strides
redeemable preferred stock investment. The increase in interest income
resulted from the effect of investing excess cash in short-term investments
with higher yielding interest rates, an increase in the average balance of
invested cash and the increase in short-term interest rates.

<TABLE>
PROVISION FOR INCOME TAXES
--------------------------
    ($ IN THOUSANDS):
<CAPTION>
                                                             THREE MONTHS ENDED JUNE 30,
                                               --------------------------------------------------------
                                                  2006            2005                    CHANGE
                                               -----------    ------------          -------------------
                                              (AS RESTATED)   (AS RESTATED)              $          %
                                                                                    -----------    ----
<C>                                            <C>            <C>                   <C>            <C>
Provision for income taxes                     $     5,213    $      4,566          $       647    14.2%
  effective tax rate                                  39.1%           37.7%
</TABLE>


The effective tax rate for the quarter was adversely affected by the
expiration of Federal research and experimentation tax credits on December 31,
2005. Future research and experimentation tax credits cannot be recognized
until passed by Congress and signed into law. The effective tax rates for both
quarters were also adversely affected by the non-deductibility of stock-based
compensation on certain of our outstanding stock options that were issued as
incentive stock options. For the three months ended June 30, 2005, we recorded
a provision for income taxes as the $30.4 million of expense we recognized for
the FemmePharma acquisition was determined to not be deductible for tax
purposes. The effective tax rate of 37.7% was applied to a pre-tax income
amount for the three months ended June 30, 2005 that excluded the FemmePharma
acquisition expense of $30.4 million.

                                      46

<PAGE>
<PAGE>

<TABLE>
NET INCOME (LOSS) AND DILUTED EARNINGS (LOSS) PER SHARE
-------------------------------------------------------
              ($ IN THOUSANDS):
<CAPTION>
                                                            THREE MONTHS ENDED JUNE 30,
                                               ----------------------------------------------------
                                                  2006          2005                    CHANGE
                                               -----------  ------------          -----------------
                                              (AS RESTATED) (AS RESTATED)              $         %
                                                                                  ------------   --
<C>                                            <C>          <C>                   <C>           <C>
Net income (loss)                              $    10,098  $   (22,888)          $     32,986   NM
  Diluted earnings (loss) per Class A share           0.19        (0.47)                  0.66   NM
  Diluted earnings (loss) per Class B share           0.16        (0.47)                  0.63   NM
</TABLE>

The increase in net income was mainly due to the $30.4 million of expense we
recorded during the three months ended June 30, 2005 in connection with the
FemmePharma acquisition. Excluding the effect of the $30.4 million of expense
associated with the prior year acquisition of FemmePharma, net income for the
three months ended June 30, 2006 would have increased $2.5 million, or 33.7%.
This increase includes $2.0 million, net of tax, for the cumulative effect of
a change in accounting principle to reflect the effect of estimated
forfeitures related to outstanding awards that are not expected to vest as of
the adoption date of SFAS 123R.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and working capital were $58.2 million and $305.2
million, respectively, at June 30, 2006, compared to $100.7 million and $305.0
million, respectively, at March 31, 2006. The decrease in cash and cash
equivalents resulted primarily from the $45.4 million of additional short-term
marketable securities that were purchased and classified as available for sale
during the quarter ended June 30, 2006. The primary source of operating cash
flow used in the funding of our businesses continues to be internally
generated funds from product sales. For the three months ended June 30, 2006,
our net cash flow from operations of $17.8 million resulted primarily from net
income adjusted for non-cash items.

Net cash flow used in investing activities included capital expenditures of
$15.2 million for the three months ended June 30, 2006 compared to $22.4
million for the corresponding prior year period. In June 2006, the Company
completed the purchase of a 126,000 square foot building in the St. Louis
metropolitan area for $4.9 million. The property had been leased by the
Company since June 2001 and is used as a manufacturing facility and office
space. The purchase price was paid in cash. The remaining capital expenditures
during the quarter were primarily for purchasing machinery and equipment to
upgrade and expand our pharmaceutical manufacturing and distribution
capabilities, and for other building renovation projects. Other investing
activities during the quarter consisted of $45.4 million in purchases of
short-term marketable securities that were classified as available for sale.
For the corresponding prior year quarter, other investing activities included
the acquisition of FemmePharma for a $25.0 million cash payment and the
purchase of Strides redeemable preferred stock for $11.3 million (see Note 2
to the Consolidated Financial Statements).

Our debt balance including current maturities, was $242.7 million at June 30,
2006 compared to $243.0 million at March 31, 2006. In March 2006, we entered
into a $43.0 million mortgage loan agreement with one of our primary lenders,
in part, to refinance $9.9 million of existing mortgages. The $32.8 million of
net proceeds we received from the new mortgage loan was used for working
capital and general corporate purposes. The new mortgage loan bears interest
at a rate of 5.91% and matures on April 1, 2021.

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

                                      47

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<PAGE>

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

On June 9, 2006, we replaced our $140.0 million credit line by entering into a
new syndicated credit agreement with ten banks that provides for a revolving
line of credit for borrowing up to $320.0 million. The new credit agreement
also includes a provision for increasing the revolving commitment, at the
lenders' sole discretion, by up to an additional $50.0 million. The new credit
facility is unsecured unless we, under certain specified circumstances,
utilize the facility to redeem part or all of our outstanding Convertible
Subordinated Notes. Interest is charged under the facility at the lower of the
prime rate or one-month LIBOR plus 62.5 to 150 basis points depending on the
ratio of our senior debt to EBITDA. The new credit agreement contains
financial covenants that impose limits on dividend payments, require minimum
equity, a maximum senior leverage ratio and minimum fixed charge coverage
ratio. The new credit facility has a five-year term expiring in June 2011. As
of June 30, 2006, we were in compliance with all of our financial covenants
and there were no borrowings outstanding under the facility. In addition, the
agreement requires that we submit annual audited financial statements to the
lenders within 90 days of the close of the fiscal year and 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
audited financial statements for the year ended March 31, 2007 to March 31,
2008 and for the submission of the quarterly financial statements for the
quarters ended June 30, 2007, September 30, 2007 and December 31, 2007 to
April 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 11 of the Notes to Consolidated Financial Statements). Up to $135.5
million of industrial revenue bonds may be issued to us by St. Louis County
relative to capital improvements made through December 31, 2009. This
agreement provides that 50% of the real and personal property taxes on up to
$135.5 million of capital improvements will be abated for a period of ten
years subsequent to the property being placed in service. Industrial revenue
bonds totaling $73.0 million were outstanding at June 30, 2006. The industrial
revenue bonds are issued by St. Louis County to us upon our payment of
qualifying costs of capital improvements, which are then leased by us for a
period ending December 1, 2019, unless earlier terminated. We have the option
at any time to discontinue the arrangement and regain full title to the abated
property. The industrial revenue bonds bear interest at 4.25% per annum and
are payable as to principal and interest concurrently with payments due under
the terms of the lease. We have classified the leased assets as property and
equipment and have established a capital lease obligation equal to the
outstanding principal balance of the industrial revenue bonds. Lease payments
may be made by tendering an equivalent portion of the industrial revenue
bonds. As the capital lease payments to St. Louis County may be satisfied by
tendering industrial revenue bonds (which is our intention), the capital lease
obligation, industrial revenue bonds and related interest expense and interest
income, respectively, have been offset for presentation purposes in the
Consolidated Financial Statements.

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

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INFLATION

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

CRITICAL ACCOUNTING ESTIMATES

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

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

Simultaneously with the recognition of revenue, we reduce the amount of gross
revenues by recording estimated sales provisions for chargebacks, sales
rebates, sales returns, cash discounts and other allowances, and Medicaid
rebates. These sales provisions are established based upon consideration of a
variety of factors, including among other factors, historical relationship to
revenues, historical payment and return experience, estimated and actual
customer inventory levels, customer rebate arrangements, and current contract
sales terms with wholesale and indirect customers.

From time to time, we provide incentives to our wholesale customers, such as
trade show allowances or stocking allowances that they in turn use to
accelerate distribution to their end customers. We believe that these
incentives are normal and customary in the industry. Sales allowances are
accrued and revenue is recognized as sales are made in accordance with the
terms of the allowances offered to the customer. Due to the nature of these
allowances, we are able to accurately calculate the required provisions for
the allowances based on the specific terms in each agreement. Additionally,
customers will normally purchase additional product ahead of regular demand to
take advantage of the temporarily lower cost resulting from the sales
allowances. This practice has been customary in the industry and we believe
would be part of a customer's ordinary course of business inventory level. We
reserve the right, with our major wholesale customers, to limit the amount of
these forward buys. Sales made as a result of allowances offered on our
specialty generics product line in conjunction with trade shows sponsored by
our major wholesale customers and for other promotional programs accounted for
14.7% and 10.8% of total gross revenues for the three months ended June 30,
2006 and 2005, respectively.

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

We evaluate inventory levels at our wholesale customers, which accounted for
approximately 60% of our unit sales during the three months ended June 30,
2006, through an internal analysis that considers, among other things,
wholesaler purchases, wholesaler contract sales, available end consumer
prescription information and inventory data received from our three largest
wholesaler 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

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shelf life to permit sufficient time for our wholesaler customers to sell our
products in their inventory through to the end consumer.

The following table reflects the activity during the three months ended June
30, 2006 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
                                              -----------  ------------------ ------------------- -----------------  ------------
THREE MONTHS ENDED JUNE 30, 2006              (as restated)
<C>                                            <C>          <C>                <C>                 <C>                <C>
  Accounts Receivable Reserves:
    Chargebacks                                $  14,312    $         23,668   $               -   $       (25,962)   $   12,018
    Sales Rebates                                  2,214               3,346                   -            (3,033)        2,527
    Sales Returns                                  2,127               2,863                   -            (2,971)        2,019
    Cash Discounts and Other Allowances            4,226               3,999                   -            (4,742)        3,483
    Medicaid Rebates                               5,818               2,094                   -            (1,836)        6,076
                                              -----------  ------------------ ------------------- -----------------  ------------
      TOTAL                                    $  28,697    $         35,970   $               -   $       (38,544)   $   26,123
                                              ===========  ================== =================== =================  ============
</TABLE>

The decrease in the reserve for chargebacks at June 30, 2006 was primarily due
to our specialty generics segment experiencing a 20.5% decline in the average
chargeback per unit since March 31, 2006. This decrease resulted from our
specialty generics segment reducing the invoice price to our wholesale
customers (referred to as wholesale acquisition cost, or "WAC") on a number of
generic products during the quarter. As a result of the WAC decrease to
certain generic products, we paid shelf-stock adjustments of $4.5 million to
our wholesale customers during the quarter. The June 30, 2006 reserve for
chargebacks also included $1.7 million of unpaid shelf-stock adjustments
associated with this WAC reduction.

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

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

Chargeback transactions are almost exclusively related to our specialty
generics business segment. During the three months ended June 30, 2006 and
2005, the chargeback provision reduced the gross sales of our specialty
generics segment by $23.5 million and $24.1 million, respectively. These
amounts accounted for 99.2% and 99.3% of the total chargeback provisions
recorded during the three months ended June 30, 2006 and 2005, respectively.

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

  *      The amount of inventory in the wholesale distribution channel. We
         receive actual inventory information from our three major wholesale
         customers and estimate the inventory position of the remaining
         wholesalers based on historical buying patterns. During the three
         months ended June 30, 2006, unit sales to our three major wholesaler
         customers accounted for 80% of our total unit sales to all
         wholesalers, and the aggregate inventory position of the three major
         wholesalers at June 30, 2006 was approximately equivalent to our last
         ten weeks of

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         shipments during the fiscal year. We 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 wholesaler
         customers carry less inventory than our large wholesaler customers.
         As of June 30, 2006, each week of inventory for those remaining
         wholesalers represented approximately $0.2 million, or 1.6%, of the
         reported reserve for chargebacks.

  *      The percentage of sales to our wholesaler 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
         wholesaler 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
         wholesaler distribution channel. As of June 30, 2006, the aggregate
         weighted average percentage of sales to wholesalers assumed to result
         in chargebacks was approximately 95%, with each 1% representing
         approximately $0.1 million, or 1.1%, of the reported reserve for
         chargebacks.

  *      Contract pricing and the resulting chargeback per unit. The
         chargeback provision is based on the difference between our invoice
         price to the wholesaler, or "WAC," and the contract price negotiated
         with either our indirect customer or with the wholesaler for sales by
         the wholesaler to the indirect customers. We calculate the price
         difference, or chargeback per unit, for each product and for each
         major wholesaler customer using historical weighted average pricing,
         based on actual chargeback experience. Use of weighted average
         pricing over time compensates for changes in the mix of indirect
         customers and products from period to period. As of June 30, 2006, a
         5% shift in the calculated chargeback per unit in the same direction
         across all products and customers would result in a $0.6 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 wholesaler 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 June 30, 2006 by approximately $0.2
million, or 7.7%, of the reported reserve for sales returns. A 10% change in
the amount of estimated inventory in the distribution channel would have
changed the reserve balance at June 30, 2006 by approximately $0.2 million, or
8.2%, of the reported reserve for sales returns.

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


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by the URA. The reserve for Medicaid rebates is based on expected payments,
which are affected by patient usage and estimated inventory in the
distribution channel. We estimate patient usage by calculating a payment rate
as a percentage of net sales lagged six months, which is then applied to an
estimate of customer inventory. We currently use the last two months of our
shipments to wholesalers and direct buying chains as an estimate of inventory
in the wholesale and chain channels and an additional month of wholesale sales
as an estimate of inventory held by the indirect buying retailer. A 10% change
in the amount of customer inventory subject to Medicaid rebates would have
changed the reserve at June 30, 2006 by $0.4 million, or 6.2% of the reported
reserve for Medicaid rebates. Similarly, a 10% change in estimated patient
usage would have changed the reserve at June 30, 2006 by $0.4 million, or 6.2%
of the reported reserve for Medicaid rebates.

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

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

We assess the impairment of intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors we consider important which could trigger an impairment review include
the following: (1) significant underperformance relative to expected
historical or projected future 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. As discussed in Note 5 to the Consolidated Financial
-------------------------
Statements, 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. Prior to the adoption of
SFAS 123R, the Company measured compensation expense for its employee
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company also
applied the disclosure provisions of SFAS 123, as amended by SFAS 148, as if
the fair-value-based method had been applied in measuring compensation
expense. Determining the fair value of share-based awards at the grant date
requires judgment to identify the appropriate valuation model and estimate the
assumptions, including the expected term of the stock options and expected
stock-price volatility, to be used in the calculation. Judgment is also
required in estimating the

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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, applying enacted tax rates expected to be in effect for the year
in which the differences are expected to reverse. 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 in fiscal 2008 will be affected by the
adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109." See Note 15 of the
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 June 30, 2006 that for each of the various legal proceedings in
which we are involved, the conditions mentioned above were not met. We will
continue to evaluate all legal matters as additional information becomes
available.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Advances to us under our credit facilities bear interest at a rate that varies
consistent with increases or decreases in the publicly announced prime rate
and/or the LIBOR rate with respect to LIBOR-related loans, if any. A material
increase in such rates could significantly increase borrowing expenses. We did
not have any cash borrowings under our credit facilities at June 30, 2006.

The majority of our investments in marketable securities are tax-exempt
auction rate securities. The rates on these securities reset on a 28-day
cycle. As of June 30, 2006, we had invested $115.0 in auction rate securities,
primarily in high quality AAA municipal bonds.

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 are 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. As of
May 15, 2006, the average trading price of the Convertible Subordinated Notes
had not reached the price that would result in the payment of contingent
interest.

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.

ITEM 4.    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 December 31, 2006 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.

The Public Company Accounting Oversight Board's Auditing Standard No. 2
defines a material weakness as a significant deficiency, or a combination of
significant deficiencies, that results in there being a more than remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.

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.

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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 that should have been recorded in
accordance with GAAP, partially offset by certain expected tax refunds for the
years ended March 31, 2004 through 2006. 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.

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 described above, we will file a comprehensive Form 10-K for the
fiscal year ended March 31, 2007 in which we will restate our consolidated
statements of earnings, of shareholders' equity and comprehensive income and
of cash flows for the years ended March 31, 2006 and 2005, our consolidated
balance sheet as of March 31, 2006 and selected consolidated financial data
for the years ended March 31, 2006, 2005, 2004, and 2003, and for each of the
quarters in the year ended March 31, 2006.



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PART II.  - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The information set forth under Note 14 - CONTINGENCIES - LITIGATION of
the Notes to Consolidated Financial Statements included in Part I of
this report is incorporated in this Part II, Item 1 by reference.

ITEM 1A. RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

We announced at an earlier date that our Board of Directors had formed a
Special Committee of outside directors  to conduct an investigation,
with the assistance of independent legal counsel and forensic accounting
experts, of our past stock option grant practices over the period
January 1, 1995 through October 31, 2006.  The investigation concluded
that no employee, officer or director of the Company engaged in any
intentional wrongdoing or was aware that the Company's policies and
procedures for granting and accounting for stock options were materially
noncompliant with GAAP.  The investigation also found no intentional
violation of law or accounting rules with respect to the Company's
historical stock option grant practices.

However, as a result of the independent investigation, the Special
Committee concluded, and based on its internal review, management
agrees, that incorrect measurement dates were used for financial
accounting purposes for stock option grants made in certain prior
periods.  Therefore, we have recorded additional non-cash stock-based
compensation expense, and related tax effects, with regard to certain
past stock option grants, and we have restated certain previously filed
financial statements included in this Form 10-Q, as more fully described
in the Explanatory Note immediately preceding Part I, Item 1, in
''Management's Discussion and Analysis of Financial Condition and
Results of Operation'' in Item 7, and in Note 2 "Restatement of
Consolidated Financial Statements" of the Notes to Consolidated
Financial Statements in this Form 10-Q.

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

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

Our past stock option grant practices and the restatement of prior
financial statements have exposed the Company to risks associated with
litigation, regulatory proceedings and government enforcement actions.
Several derivative lawsuits, and a class action complaint have been
filed in state and federal courts against certain current and former
directors and executive officers pertaining to allegations relating to
stock option grants. Also, the Company was notified by the SEC in
December 2006 that it had initiated a confidential, informal inquiry
with respect to the Company's stock option plans, grants, exercises and
accounting practices.  Outcomes of litigation or regulatory

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proceedings relating to the Company's past stock option practices may
have a material adverse effect on our financial condition, results of
operations or cash flows. The resolution of these matters will continue
to be time-consuming, expensive, and a distraction of management from
the conduct of the Company's business. Furthermore, if we are subject to
adverse findings in litigation or regulatory proceedings we could be
required to pay damages or penalties or have other remedies imposed.

WE HAVE MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
AND CANNOT ASSURE YOU THAT ADDITIONAL MATERIAL WEAKNESSES WILL NOT BE
IDENTIFIED IN THE FUTURE.

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

In assessing the findings of the investigation as well as the
restatement, our management concluded that there were material
weaknesses, as defined in the Public Company Accounting Oversight
Board's Auditing Standard No. 2, in our internal control over financial
reporting as of June 30, 2006.  Management is implementing steps to
remediate these material weaknesses by March 31, 2008. However, we
cannot assure you that such remediation will be effective.  See the
discussion included in Item 4 of this Report for additional information
regarding our internal control over financial reporting.

Our internal control over financial reporting may not prevent all error
and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override
of the controls. Over time, controls may become inadequate because
changes in conditions or deterioration in the degree of compliance with
policies or procedures may occur. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.

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


OUR FUTURE GROWTH WILL LARGELY DEPEND UPON OUR ABILITY TO DEVELOP NEW
PRODUCTS.

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

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

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

OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

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

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

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

The coverage claimed in a patent application can be significantly
reduced before a patent is issued, either in the United States or
abroad.  Consequently, our pending or future patent applications may not
result in the issuance of patents.  Patents issued to us may be
subjected to further proceedings limiting their scope and may not
provide significant proprietary protection or competitive advantage.
Our patents also may be challenged, circumvented, invalidated or deemed
unenforceable.  Patent applications in the United States filed prior to
November 29, 2000 are currently maintained in secrecy until and unless
patents issue, and patent applications in certain other countries
generally are not published until more than 18 months after they are
first filed (which generally is the case in the United States for
applications filed on or after November 29, 2000).  In addition,
publication of discoveries in scientific or patent literature often lags
behind actual discoveries.  As a result, we cannot be certain that we or
our licensors will be entitled to any rights in purported inventions
claimed in pending or future patent applications or that we or our
licensors were the first to file patent applications on such inventions.
Furthermore, patents already issued to us or our pending applications
may become subject to dispute, and any dispute could be resolved against
us.  For example, we may become involved in re-examination, reissue or
interference proceedings in the PTO, or opposition proceedings in a
foreign country.  The result of these proceedings can be the
invalidation or substantial narrowing of our patent claims.  We also
could be subject to court proceedings that could find our patents
invalid or unenforceable

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or could substantially narrow the scope of our patent claims.  In
addition, statutory differences in patentable subject matter may limit
the protection we can obtain on some of our inventions outside of the
United States.  For example, methods of treating humans are not
patentable in many countries outside of the United States.

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

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

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

WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.

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

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

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

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

WE MAY BE UNABLE TO MANAGE OUR GROWTH.

Over the past ten years, our businesses and product offerings have grown
substantially.  This growth and expansion has placed, and is expected to
continue to place, a significant strain on our management, operational
and financial resources.  To manage our growth, we must continue to (1)
expand our operational, sales, customer support and financial control
systems and (2) hire, train and retain qualified personnel.  If we are
unable to manage our growth effectively, our financial position, results
of operations or cash flows could be materially adversely affected.

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

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

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

Many of our products are manufactured and marketed without FDA approval.
For example, our prenatal products, which contain folic acid, are sold
as prescription multiple vitamin supplements.  These types of prenatal
vitamins are typically regulated by the FDA as prescription drugs, but
are not covered by an NDA or ANDA.  As a result, competitors may more
easily and rapidly introduce products competitive with our prenatal and
other products that have a similar regulatory status.  In other cases,
we sell unapproved products that may become subject to FDA orders to the
pharmaceutical industry to remove one or more types of such products
from the marketplace.  During the past year, such FDA orders have
required manufacturers and distributors of certain unapproved products
containing guaifenesin and hydrocodone to cease manufacture or
distribution, including certain ETHEX products.  In the future, FDA may
issue similar orders affecting other of our products.

One of the key motivations for challenging patents is the reward of a
180-day period of market exclusivity. Under the Hatch-Waxman Act, the
developer of a generic version of a product which is the first to have
its ANDA accepted for filing by the FDA, and whose filing includes a
certification that the patent is invalid, unenforceable and/or not
infringed (a so-called "Paragraph IV certification"), may be eligible to
receive a 180-day period of generic market exclusivity. This period of
market exclusivity provides the patent challenger with the opportunity
to earn a risk-adjusted return on legal and development costs associated
with bringing a product to market.  In cases such as these where suit is
filed by the manufacturer of the branded product, final FDA approval of
an ANDA generally requires a favorable disposition of the suit, either
by judgment that the patents at issue are invalid and/or not infringed
or by settlement.  We may not ultimately prevail in these litigations,
we may not receive final FDA approval of our ANDAs, and we may not
achieve our expectation of a period of generic exclusivity for certain
of these products when and if resolution of the litigations and receipt
of final approvals from the FDA occur.

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

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

We could invest a significant amount of time and expense in the
development of our generic products only to be subject to significant
additional delay and changes in the economic prospects for our products.
If we receive FDA approval for our pending ANDAs, we may consider
commercializing the product prior to the final resolution of any related
patent infringement litigation. The risk involved in marketing a product
prior to the final resolution of the litigation may be substantial
because the remedies available to the patent holder could include, among
other things, damages measured by the profits lost by such patent holder
and not by the profits earned by us. Patent holders may also recover
damages caused by the erosion of prices for its patented drug as a
result of the introduction of our generic drug in the marketplace.
Further, in the case of a willful infringement, which requires a complex
analysis of the totality of the circumstances, such damages may be
trebled. However, in order to realize the economic benefits of some of
our products, we may decide to risk an amount that may exceed the profit
we anticipate making on our product. There are a number of factors we
would need to consider in order to decide whether to launch our product
prior to final resolution, including (1) outside legal advice, (2) the
status of a pending lawsuit, (3) interim court decisions, (4) status and
timing of a trial, (5) legal decisions affecting other competitors for
the same product, (6) market factors, (7) liability sharing agreements,
(8) internal capacity issues, (9) expiration dates of patents,
(10) strength of lower court decisions and (11) potential triggering or
forfeiture of exclusivity. An adverse determination in the litigation
relating to a product we launch at risk could have a material adverse
effect on our financial condition, results of operations or cash flows.

After we 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 our Paragraph IV certification, we contended that our
proposed generic versions do not infringe AstraZeneca's patents.
Pursuant to the Hatch-Waxman Act, the filing date of the suit against us
instituted an automatic stay of FDA approval of our ANDA until the
earlier of a judgment, or 30 months from the date of the suit.  We filed
motions for summary judgment with the Federal District Court in Missouri
alleging, among other things, that AstraZeneca's patent is invalid and
unenforceable.  These motions have been granted. AstraZeneca has
appealed.  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 has been denied.  The time has
not yet run with respect to any petition for certiorari by AstraZeneca
to the United States Supreme Court.  We intend to vigorously defend our
interests regardless of the outcome of any further appeal by
AstraZeneca; however, we may not prevail.

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

Manufacturing, selling and testing pharmaceutical products involve a
risk of product liability.  Even unsuccessful product liability claims
could require us to spend money on litigation, divert management's time,
damage our reputation and impair the marketability of our products.  A
successful product liability claim outside of or in excess of our
insurance coverage could require us to pay substantial sums and
adversely affect our financial position, results of operations or cash
flows.

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

Our product liability coverage for PPA claims expired for claims made
after June 15, 2002.  Although we renewed our product liability coverage
for coverage after June 15, 2002, that policy excludes future PPA claims
in accordance with the standard industry exclusion. Consequently, as of
June 15, 2002, we will provide for legal defense costs and

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indemnity payments involving PPA claims on a going forward basis as
incurred.  Moreover, we may not be able to obtain product liability
insurance in the future for PPA claims with adequate coverage limits at
commercially reasonable prices for subsequent periods.  From time to
time in the future, we may be subject to further litigation resulting
from products containing PPA that we formerly distributed.  We intend to
vigorously defend our interests; however, we may not prevail.

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

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

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

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

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

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

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

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

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

We utilize controlled substances in certain of our current products and
products in development and therefore must meet the requirements of the
Controlled Substances Act of 1970 and the related regulations
administered by the Drug

                                 62


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

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

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

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

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

The Company and/or ETHEX have been named as defendants in certain multi-
defendant cases alleging that the defendants reported improper or
fraudulent pharmaceutical pricing information, i.e., 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 42 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.  On August 13, 2007, the
Company settled the Massachusetts lawsuit for $575,000 in cash and
agreed to supply $150,000 in free pharmaceuticals over the next two
years and the Company has 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.  Each of these actions
is in the early stages, with fact discovery commencing or ongoing.  The
Company has been served with a complaint naming ETHEX and nine other
pharmaceutical companies as defendants in a pricing suit filed in state
court in Utah by the State of Utah.  The time to file an answer or other
response in the Utah suit has not yet run.  The Company has also
received, but not yet been served with, a copy of a complaint naming
ETHEX and 77 other pharmaceutical companies as defendants in a pricing
suit filed in federal court by the State of Iowa.  The Company intends
to vigorously defend its interests in the actions described above;
however, may not prevail.

                                   63


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

RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY.

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

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

Our future results of operations, financial condition and cash flows
will depend to a significant extent upon our branded and generic/non-
branded product sales mix. Our sales of branded products generate higher
gross margins than our sales of generic/non-branded products. In
addition, the introduction of new generic products at any given time can
involve significant initial quantities being purchased by our wholesaler
customers, as they supply initial quantities to pharmacies and purchase
product for their own wholesaler inventories.  As a result, our sales
mix will significantly impact our gross profit from period to period.
During fiscal 2006, sales of our branded products and generic/non-
branded products accounted for 39.6% and 55.4%, respectively, of our net
revenues. During that year, branded products and generic/non-branded
products contributed gross margins of 88.4% and 54.9%, respectively, to
our consolidated gross profit margin of 66.3% in fiscal 2006. Factors
that may cause our sales mix to vary include:

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

The profitability of our product sales is also dependent upon the prices
we are able to charge for our products, the costs to purchase products
from third parties, and our ability to manufacture our products in a
cost-effective manner.  If our revenues and gross profit decline or do
not grow as anticipated, we may not be able to correspondingly reduce
our operating expenses.

WE ARE INVOLVED IN VARIOUS LEGAL PROCEEDINGS AND CERTAIN GOVERNMENT
INQUIRIES AND MAY EXPERIENCE UNFAVORABLE OUTCOMES OF SUCH PROCEEDINGS OR
INQUIRIES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION, RESULTS OF OPERATIONS OR CASH FLOWS.

We are involved in various legal proceedings and certain government
inquiries, including, but not limited to, patent infringement, product
liability, breach of contract and claims involving Medicaid and Medicare
reimbursements, some of which are described in our periodic reports and
involve claims for, or the possibility of fines and penalties involving,
substantial amounts of money or for other relief. If any of these legal
proceedings or inquiries were to result in an adverse outcome, the
impact could have a material adverse effect on our financial condition,
results of operations or cash flows.

With respect to product liability, we maintain commercial insurance to
protect against and manage a portion of the risks involved in conducting
our business. Although we carry insurance, we believe that no reasonable
amount of insurance can fully protect against all such risks because of
the potential liability inherent in the business of producing
pharmaceuticals for human consumption. To the extent that a loss occurs,
depending on the nature of the loss and the level of insurance coverage
maintained, it could have a material adverse effect on our financial
position, results of operations or cash flows.

                                   64

<PAGE>
<PAGE>
INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION, RESULTS OF
OPERATIONS OR CASH FLOWS.

At June 30, 2006, we had $242.7 million of outstanding debt, consisting
of $200.0 million principal amount of 2.5% Contingent Convertible
Subordinated Notes (the "Notes") and the remaining principal balance of
a $43.0 million mortgage loan entered into in March 2006.  In June 2006,
we replaced our $140.0 million credit line by entering into a new credit
agreement with ten banks that provides for a revolving line of credit
for borrowing up to $320.0 million.  The new credit agreement also
includes a provision for increasing the revolving commitment, at the
lenders' sole discretion, by up to an additional $50.0 million. The new
credit facility is unsecured unless we, under certain specified
circumstances, utilize the facility to redeem part or all of our
outstanding Convertible Subordinated Notes.  The new credit facility has
a five-year term expiring in June 2011.  At June 30, 2006, we had no
cash borrowings under our credit facility.  Our level of indebtedness
may have several important effects on our future operations, including:

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

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

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

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

     *    seek additional financing in the debt or equity markets;

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

     *    sell selected assets;

     *    reduce or delay planned capital expenditures; or

     *    reduce or delay planned research and development
          expenditures.

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

We may also consider issuing additional debt or equity securities in the
future to fund potential acquisitions or investments, to refinance
existing debt and/or for general corporate purposes. If a material
acquisition or investment is completed, our financial position, results
of operations or cash flows could change materially in future periods.
However, additional funds may not be available on satisfactory terms, or
at all, to fund such activities.

Holders of the Notes may require us to offer to repurchase their Notes
for cash upon the occurrence of a change in control or on May 16, 2008,
2013, 2018, 2023 and 2028.  As a result of this, we classified the
Convertible Subordinated Notes as a current liability as of June 30,
2007 due to the right the holders have to require us to repurchase the
Convertible Subordinated Notes on May 16, 2008. The source of funds for
any repurchase required as a result of any such events will be our
available cash or cash generated from operating activities or other
sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling entity. The use of available cash to fund
the repurchase of the Notes may impair our ability to obtain additional
financing in the future.

                                      65

<PAGE>
<PAGE>
WE MAY HAVE FUTURE CAPITAL NEEDS AND FUTURE ISSUANCES OF EQUITY
SECURITIES THAT MAY RESULT IN DILUTION.

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

WE MAY BE ADVERSELY IMPACTED BY ECONOMIC FACTORS BEYOND OUR CONTROL AND
MAY INCUR IMPAIRMENT CHARGES TO OUR INVESTMENT PORTFOLIO.

The Company has funds invested in auction rate securities ("ARS").
Consistent with the Company's investment policy guidelines, the ARS held
by the Company are AAA rated securities with long-term nominal
maturities secured by student loans which are guaranteed by the U.S.
Government. The interest rates on these securities are reset through an
auction process that resets the applicable interest rate at pre-
determined intervals, up to 35 days. There may be liquidity issues which
arise in the credit and capital markets and the ARS held by the Company
may experience failed auctions as the amount of securities submitted for
sale may exceed the amount of purchase orders.

If uncertainties in the credit and capital markets exist and failed
auctions occur, the Company may incur impairments to its investments in
ARS, which could negatively affect the Company's financial condition,
cash flow and reported earnings.

WE MAY INCUR CHARGES FOR INTANGIBLE ASSET IMPAIRMENT.

When we acquire the rights to manufacture and sell a product, we record
the aggregate purchase price, along with the value of the product-
related liabilities we assume, as intangible assets. We use the
assistance of valuation experts to help us allocate the purchase price
to the fair value of the various intangible assets we have acquired.
Then, we must estimate the economic useful life of each of these
intangible assets in order to amortize their cost as an expense in our
consolidated statements of income over the estimated economic useful
life of the related asset. The factors that affect the actual economic
useful life of a pharmaceutical product are inherently uncertain, and
include patent protection, physician loyalty and prescribing patterns,
competition by products prescribed for similar indications, future
introductions of competing products not yet FDA-approved and the impact
of promotional efforts, among many others. We consider all of these
factors in initially estimating the economic useful lives of our
products, and we also continuously monitor these factors for indications
of decline in carrying value.

In assessing the recoverability of our intangible assets, we must make
assumptions regarding estimated undiscounted future cash flows and other
factors. If the estimated undiscounted future cash flows do not exceed
the carrying value of the intangible assets we must determine the fair
value of the intangible assets. If the fair value of the intangible
assets is less than its carrying value, an impairment loss will be
recognized in an amount equal to the difference. If these estimates or
their related assumptions change in the future, we may be required to
record impairment charges for these assets. We review intangible assets
for impairment at least annually and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If we determine that an intangible asset is impaired, a
non-cash impairment charge would be recognized.

Because circumstances after an acquisition can change, the value of
intangible assets we record may not be realized by us. If we determine
that impairment has occurred, we would be required to write-off the
impaired portion of the unamortized intangible assets, which could have
a material adverse effect on our results of operations in the period in
which the write-off occurs.  In addition, in the event of a sale of any
of our assets, we might not recover our recorded value of associated
intangible assets.

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

                               66


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

                       RISKS RELATED TO OUR INDUSTRY

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

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

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

     *    the growth of organizations such as HMOs and MCOs;

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

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

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

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

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

                                     67

<PAGE>
<PAGE>
                      RISKS RELATED TO OUR COMMON STOCK

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

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

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

As of March 31, 2006, an aggregate of 3,162,307 shares of our Class A
Common Stock and 356,849 shares of our Class B Common Stock were
issuable upon exercise of outstanding stock options under our stock
option plans, and an additional 611,494 shares of our Class A Common
Stock and 1,230,000 shares of Class B Common Stock were reserved for the
issuance of additional options and shares under these plans.  In
addition, as of March 31, 2006, 8,691,880 shares of Class A Common Stock
were reserved for issuance upon conversion of $200.0 million principal
amount of convertible notes, and 337,500 shares of our Class A Common
Stock were reserved for issuance upon conversion of our outstanding 7%
Cumulative Convertible Preferred Stock.

MANAGEMENT SHAREHOLDERS CONTROL OUR COMPANY.

At March 31, 2006, our directors and executive officers beneficially own
approximately 13% of our Class A Common Stock and approximately 62% of
our Class B Common Stock.  As a result, these persons control
approximately 55% of the combined voting power represented by our
outstanding securities.  These persons will retain effective voting
control of our Company and are expected to continue to have the ability
to effectively determine the outcome of any matter being voted on by our
shareholders, including the election of directors and any merger, sale
of assets or other change in control of our Company.

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

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

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

                                 68

<PAGE>
<PAGE>

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

                                        69

<PAGE>
<PAGE>

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

PURCHASE OF EQUITY SECURITIES BY THE COMPANY

The following table provides information about purchases the Company made of
its common stock during the quarter ended June 30, 2006:

<TABLE>
<CAPTION>
                                                      TOTAL NUMBER OF
                   TOTAL NUMBER                      SHARES PURCHASED           MAXIMUM NUMBER
                    OF SHARES                          AS PART OF A           OF SHARES THAT MAY
                    PURCHASED      AVERAGE PRICE    PUBLICLY ANNOUNCED        YET BE PURCHASED
        PERIOD          (a)        PAID PER SHARE         PROGRAM             UNDER THE PROGRAM


<C>                  <C>            <C>                 <C>                      <C>
April 1-30, 2006        298          $  23.06                --                      --

  May 1-31, 2006        317          $  20.67                --                      --

 June 1-30, 2006      1,000          $  17.68                --                      --
                      -----

           Total      1,615          $  19.26                --                      --
                      =====

</TABLE>

Shares were purchased from employees upon their termination pursuant to the
terms of the Company's stock option plan or were purchased from certain
individuals who sold existing shares to the Company as a means to exercise
stock options.

          a)   Exhibits.  See Exhibit Index.

                                         70



<PAGE>
<PAGE>

                             SIGNATURES
                             ----------

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



                                         K-V PHARMACEUTICAL COMPANY



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



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



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

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                                EXHIBIT INDEX


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

   31.1       Certification of Chief Executive Officer.

   31.2       Certification of Chief Financial Officer.

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

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

                             72