<PAGE>

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

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
                                      OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
                FOR THE TRANSITION PERIOD FROM             TO

                         COMMISSION FILE NUMBER 1-9601



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


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

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

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


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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
 Large accelerated filer [ X ] Accelerated filer [ ] 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 ]

As of January 15, 2008, the registrant had outstanding 37,708,248 and
12,233,802 shares of Class A and Class B Common Stock, respectively.


                                      1

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<PAGE>

EXPLANATORY NOTE REGARDING RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS

This Form 10-Q reflects the restatement of our consolidated balance sheets as
of March 31, 2006 and September 30, 2005, the related consolidated statements
of operations for the three and six months ended September 30, 2005, and the
related consolidated statement of cash flows for the six months ended
September 30, 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 reflects 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 a Quarterly Report on Form 10-Q for the quarter
ended December 31, 2006, that contains 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 the employees will
be completed by April 2008.

In addition and as a separate matter, our 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 Financial Condition

                                      2

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<PAGE>

and Results of Operations" and Note 2 "Restatement of Consolidated Financial
Statements" in our consolidated financial statements for a more detailed
discussion related to the investigation of our former stock option grant
practices, review of tax positions and other adjustments.

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 and the 2007 Form 10-K.

                                      3

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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                   SIX MONTHS ENDED
                                                                       SEPTEMBER 30,                       SEPTEMBER 30,
                                                           ----------------------------------  ----------------------------------
                                                                2006              2005              2006              2005
                                                           ----------------  ----------------  ----------------  ----------------
                                                                              (AS RESTATED)                        (AS RESTATED)

<C>                                                            <C>                <C>              <C>               <C>
Net revenues.............................................      $ 108,983          $ 92,322         $ 205,183         $ 177,364
Cost of sales............................................         38,879            32,640            72,325            58,675
                                                               ---------          --------         ---------         ---------
Gross profit.............................................         70,104            59,682           132,858           118,689
                                                               ---------          --------         ---------         ---------

Operating expenses:
    Research and development.............................          6,396             6,420            14,287            14,052
    Purchased in-process research and
        development and transaction costs................             --                --                --            30,441
    Selling and administrative...........................         42,855            37,847            83,008            75,599
    Amortization of intangibles..........................          1,201             1,211             2,398             2,391
                                                               ---------          --------         ---------         ---------
Total operating expenses.................................         50,452            45,478            99,693           122,483
                                                               ---------          --------         ---------         ---------

Operating income (loss)..................................         19,652            14,204            33,165            (3,794)
                                                               ---------          --------         ---------         ---------

Other expense (income):
    Interest expense.....................................          2,305             1,467             4,541             2,844
    Interest and other income............................         (2,308)           (1,077)           (4,366)           (2,130)
                                                               ---------          --------         ---------         ---------
Total other expense (income), net........................             (3)              390               175               714
                                                               ---------          --------         ---------         ---------
Income (loss) before income taxes and cumulative effect
    of change in accounting principle....................         19,655            13,814            32,990            (4,508)
Provision for income taxes...............................          7,570             5,224            12,783             9,790
                                                               ---------          --------         ---------         ---------
Income (loss) before cumulative effect of change
    in accounting principle..............................         12,085             8,590            20,207           (14,298)
Cumulative effect of change in accounting
    principle (net of $670 in taxes).....................             --                --             1,976                --
                                                               ---------          --------         ---------         ---------
Net income (loss)........................................      $  12,085          $  8,590         $  22,183         $ (14,298)
                                                               =========          ========         =========         =========

                                                                       (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                   SIX MONTHS ENDED
                                                                      SEPTEMBER 30,                        SEPTEMBER 30,
                                                            ----------------------------------  ----------------------------------
                                                                  2006              2005              2006              2005
                                                            ----------------  ----------------  ----------------  ----------------
                                                                               (AS RESTATED)                       (AS RESTATED)

<C>                                                             <C>               <C>               <C>              <C>
Earnings (loss) per share before effect of change in
  accounting principle:
       Basic - Class A common..............................     $  0.26           $  0.18           $  0.43          $  (0.29)
       Basic - Class B common..............................        0.21              0.15              0.36             (0.29)
       Diluted - Class A common............................        0.22              0.16              0.38             (0.29)
       Diluted - Class B common............................        0.19              0.14              0.32             (0.29)

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

Earnings (loss) per share:
       Basic - Class A common..............................     $  0.26           $  0.18           $  0.47          $  (0.29)
       Basic - Class B common..............................        0.21              0.15              0.39             (0.29)
       Diluted - Class A common............................        0.22              0.16              0.41             (0.29)
       Diluted - Class B common............................        0.19              0.14              0.35             (0.29)

Shares used in per share calculation:
       Basic - Class A common..............................      36,744            35,687            36,671            35,566
       Basic - Class B common..............................      12,456            12,949            12,465            13,043
       Diluted - Class A common............................      58,917            58,499            58,882            48,609
       Diluted - Class B common............................      12,552            13,135            12,587            13,043



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>
                                                                                         SEPTEMBER 30,     MARCH 31,
                                                                                             2006            2006
                                                                                             ----            ----
                                                                                                         (AS RESTATED)
                                            ASSETS
                                            ------
<C>                                                                                      <C>             <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................    $    58,705     $   100,706
Marketable securities................................................................        153,509         106,763
Receivables, less allowance for doubtful accounts of $474 and $397
   at September 30, 2006 and March 31, 2006, respectively............................         67,000          53,571
Inventories, net.....................................................................         76,497          71,166
Prepaid and other assets.............................................................          7,817           7,012
Deferred tax asset...................................................................         12,292          10,072
                                                                                         -----------     -----------
   Total Current Assets..............................................................        375,820         349,290
Property and equipment, net..........................................................        188,452         178,042
Intangible assets and goodwill, net..................................................         71,067          72,955
Other assets.........................................................................         19,260          19,026
                                                                                         -----------     -----------
TOTAL ASSETS.........................................................................    $   654,599     $   619,313
                                                                                         ===========     ===========

                                         LIABILITIES
                                         -----------
CURRENT LIABILITIES:
Accounts payable.....................................................................    $    15,046     $    17,975
Accrued liabilities..................................................................         34,732          24,676
Current maturities of long-term debt.................................................          1,848           1,681
                                                                                         -----------     -----------
   Total Current Liabilities.........................................................         51,626          44,332
Long-term debt.......................................................................        240,421         241,319
Other long-term liabilities..........................................................          5,819           5,442
Deferred tax liability...............................................................         31,429          25,221
                                                                                         -----------     -----------
TOTAL LIABILITIES....................................................................        329,295         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 September 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 40,110,579 and 39,660,637 at September 30, 2006
       and March 31, 2006, respectively..............................................            401             397
     Class B - issued 12,469,164 and 12,679,986 at September 30, 2006 and March 31,
       2006, respectively (convertible into Class A shares on a one-for-one basis)...            125             127
Additional paid-in capital...........................................................        147,088         145,180
Retained earnings....................................................................        233,558         211,410
Accumulated other comprehensive loss.................................................           (170)           (211)
Less: Treasury stock, 3,223,298 shares of Class A and 92,902 shares of Class B Common
   Stock at September 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....        (55,698)        (53,904)
                                                                                         -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................        325,304         302,999
                                                                                         -----------     -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................    $   654,599     $   619,313
                                                                                         ===========     ===========


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                      6

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

<CAPTION>
                                                                                         SIX MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                      2006              2005
                                                                                  ------------      ----------
                                                                                                   (AS RESTATED)
<C>                                                                             <C>               <C>
OPERATING ACTIVITIES:
Net income (loss)......................................................         $      22,183     $    (14,298)
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 and amortization.......................................                11,048            8,389
   Deferred income tax provision.......................................                 3,298               93
   Deferred compensation...............................................                   377              590
   Stock-based compensation............................................                 1,919              453
   Excess tax benefit associated with stock options....................                  (306)              --
Changes in operating assets and liabilities:
   Increase in receivables, net........................................               (13,429)          (3,183)
   Increase in inventories, net........................................                (5,331)          (5,872)
   (Increase) decrease in prepaid and other assets.....................                (1,870)           4,132
   Increase in accounts payable and accrued liabilities................                 7,344            2,964
                                                                                -------------     ------------
Net cash provided by operating activities..............................                23,257           22,838
                                                                                -------------     ------------

INVESTING ACTIVITIES:
   Purchase of property and equipment, net.............................               (18,339)         (36,856)
   Purchase of marketable securities...................................               (46,685)         (49,513)
   Purchase of preferred stock.........................................                  (400)         (11,300)
   Product acquisition.................................................                    --          (25,643)
                                                                                -------------     ------------
Net cash used in investing activities..................................               (65,424)        (123,312)
                                                                                -------------     ------------

FINANCING ACTIVITIES:
   Principal payments on long-term debt................................                  (731)            (486)
   Dividends paid on preferred stock...................................                   (35)             (35)
   Excess tax benefit associated with stock options....................                   306               --
   Purchase of common stock for treasury...............................                (1,794)            (136)
   Cash deposits received for stock options............................                 2,420              450
                                                                                -------------     ------------
Net cash provided by (used in) financing activities....................                   166             (207)
                                                                                -------------     ------------
Decrease in cash and cash equivalents..................................               (42,001)        (100,681)
Cash and cash equivalents:
   Beginning of year...................................................               100,706          159,825
                                                                                -------------     ------------
   End of period.......................................................         $      58,705     $     59,144
                                                                                =============     ============

SUPPLEMENTAL INFORMATION:
   Interest paid.......................................................         $       3,572     $      2,156
   Income taxes paid...................................................                 5,627            3,025
   Stock options exercised (at expiration of two-year
      forfeiture period)...............................................                 2,329            2,092

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                      7

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            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 reflects the restatement of the Company's consolidated balance
sheets as of March 31, 2006 and September 30, 2005, the related consolidated
statements of operations for the three and six months ended September 30, 2005
and the related consolidated statement of cash flows for the six months ended
September 30, 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 a
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006 that
contains the restatement of its consolidated financial 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 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").




                                      8

<PAGE>
<PAGE>

On October 11, 2007, the Company filed a Current Report on Form 8-K announcing
the Special Committee had completed its investigation. The investigation
concluded that there was not evidence that any employee, officer or director
of the Company engaged in any intentional wrongdoing or was aware 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 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 that 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, with 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

                                      9

<PAGE>
<PAGE>

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 investigation indicated
----------------
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 and 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
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, 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 $150 and $293, net of tax, on 1,376 stock option grants for the three and
six months ended September 30, 2005, respectively.

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. 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 $9 and $17, net
of tax, on 14 stock option grants for the three and six months ended September
30, 2005, respectively.

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

                                      10

<PAGE>
<PAGE>

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. 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
fiscal year-end for 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 terminated employment
voluntarily or involuntarily (other than by retirement, death or disability)
during the two-year forfeiture period the option plans provided 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 did not previously 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) 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)
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 $2 and $4, net
of tax, on two stock option grants for the three and six months ended
September 30, 2005, respectively.

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 13.



                                      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 also 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
repurchased the shares during the two-year forfeiture period, compensation
expense for those options is reversed as a forfeiture.

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 the
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.

Income Tax Benefit. The Company reviewed the income tax effect of the
------------------
stock-based compensation charges, and it believes that 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. The income 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

                                      12

<PAGE>
<PAGE>

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.

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

<TABLE>
<CAPTION>
                                                                                                               CUMULATIVE
                                                                                                             APRIL 1, 1995
                                                      THREE MONTHS ENDED          SIX MONTHS ENDED              THROUGH
CATEGORY OF ADJUSTMENTS:                              SEPTEMBER 30, 2005         SEPTEMBER 30, 2005          MARCH 31, 2004
------------------------                            ------------------------   ------------------------  -----------------------
                                                                                                                  (a)
<C>                                                  <C>                        <C>                       <C>
Pretax income impact:
  Stock-based compensation expense
    related to measurement date changes (b)          $                  232     $                  453    $              13,626
  Payroll tax expense and penalties (b)                                 675                        847                      439
  Other adjustments                                                   2,595                      2,860                    1,666
                                                    ------------------------   ------------------------  -----------------------
   Decrease in pretax income                                          3,502                      4,160                   15,731
                                                    ------------------------   ------------------------  -----------------------

Income tax impact:
  Measurement date changes                                              (71)                      (139)                  (1,050)
  Payroll taxes                                                        (187)                      (234)                    (123)
  Other income tax adjustments (c)                                      550                      1,040                    1,689
  Other adjustments                                                    (869)                      (958)                    (584)
                                                    ------------------------   ------------------------  -----------------------
   Decrease in income tax expense                                      (577)                      (291)                     (68)
                                                    ------------------------   ------------------------  -----------------------

Decrease in net income                               $                2,925     $                3,869    $              15,663
                                                    ========================   ========================  =======================
<FN>
---------------------
  (a) The cumulative effect of the restatement adjustments from fiscal 1996
      through fiscal 2004 is summarized below:

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

<C>                  <C>             <C>            <C>               <C>        <C>            <C>
1996                 $       829 (d) $         -    $            -    $      -   $         -    $        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
                    =============   =============  ================  ========== =============  ==============


                                      13

<PAGE>
<PAGE>

<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) Includes additional expense totaling $636, the affect of which on the
      consolidated financial statements for 1996 and for each year 1986 to
      1995 was not material.
</TABLE>

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 and six
months ended September 30, 2005:

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

<C>                                          <C>          <C>               <C>           <C>         <C>                <C>
Net revenues                                 $   96,321   $    (3,999)      $ 92,322      $ 181,795   $    (4,431)       $ 177,364
Cost of sales                                    34,044        (1,404)        32,640         60,246        (1,571)          58,675
                                            -----------------------------------------  --------------------------------------------
Gross profit                                     62,277        (2,595)        59,682        121,549        (2,860)         118,689
                                            -----------------------------------------  --------------------------------------------
Operating expenses:
    Research and development                      6,420             -          6,420         14,052             -           14,052
    Purchased in-process research and
        development and transaction costs             -             -              -         30,441             -           30,441
    Selling and administrative                   36,940           907         37,847         74,299         1,300           75,599
    Amortization of intangibles                   1,211             -          1,211          2,391             -            2,391
                                            -----------------------------------------  --------------------------------------------
Total operating expenses                         44,571           907         45,478        121,183         1,300          122,483
                                            -----------------------------------------  --------------------------------------------
Operating income (loss)                          17,706        (3,502)        14,204            366        (4,160)          (3,794)
                                            -----------------------------------------  --------------------------------------------
Other expense (income):
    Interest expense                              1,467             -          1,467          2,844             -            2,844
    Interest and other income                    (1,077)            -         (1,077)        (2,130)            -           (2,130)
                                            -----------------------------------------  --------------------------------------------
Total other expense                                 390             -            390            714             -              714
                                            -----------------------------------------  --------------------------------------------
Income (loss) before income taxes                17,316        (3,502)        13,814           (348)       (4,160)          (4,508)
    Provision for income taxes                    5,801          (577)         5,224         10,081          (291)           9,790
                                            -----------------------------------------  --------------------------------------------
    Net income (loss)                        $   11,515   $    (2,925)      $  8,590      $ (10,429)  $    (3,869)       $ (14,298)
                                            =========================================  ============================================

Earnings per share:
    Basic - Class A common                   $     0.24   $     (0.06)      $   0.18      $   (0.21)  $     (0.08)       $   (0.29)
    Basic - Class B common                         0.20         (0.05)          0.15          (0.21)        (0.08)           (0.29)
    Diluted - Class A common (a)                   0.21         (0.05)          0.16          (0.21)        (0.08)           (0.29)
    Diluted - Class B common (a)                                                0.14                                         (0.29)

Shares used in per share calculation:
    Basic - Class A common                       36,184          (497) (b)    35,687         36,076          (510) (b)      35,566
    Basic - Class B common                       13,127          (178) (b)    12,949         13,222          (179) (b)      13,043
    Diluted - Class A common (a)                 59,158          (659) (b)    58,499         49,298          (689) (b)      48,609
    Diluted - Class B common (a)                                              13,135                                        13,043

<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>


                                      14

<PAGE>
<PAGE>

Consolidated Balance Sheets Impact

The following table reconciles the consolidated balance sheets previously
reported as of March 31, 2006 and September 30, 2005 to the restated amounts:

<TABLE>
<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) (f)                      53,571
Inventories, net                                                  70,778             388  (f)                      71,166
Prepaid and other assets                                           6,963              49  (a)                       7,012
Deferred tax asset                                                 8,034           2,038  (b)(c)(f)(g)             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  (b)(c)(d)(e)(f)(g)       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)                  145,180
Retained earnings                                                233,496         (22,086) (a)(b)(c)(e)(f)(g)      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
                                                          ================================================================

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

<C>                                                        <C>                 <C>                              <C>
Current assets:
Cash and cash equivalents                                  $      59,144       $         -                      $  59,144
Marketable securities                                             95,185                 -                         95,185
Receivables, net                                                  69,975            (5,628) (f)                    64,347
Inventories, net                                                  58,247             1,999  (f)                    60,246
Prepaid and other assets                                           5,614                34  (a)                     5,648
Deferred tax asset                                                 8,891             1,356  (b)(c)(f)              10,247
                                                          ----------------------------------------------------------------
      Total current assets                                       297,056            (2,239)                       294,817
Property and equipment, net                                      163,103                 -                        163,103
Intangible assets and goodwill, net                               74,946                 -                         74,946
Other assets                                                      18,931                 -                         18,931
                                                          ----------------------------------------------------------------
Total assets                                               $     554,036       $    (2,239)                     $ 551,797
                                                          ================================================================

Current liabilities:
Accounts payable                                           $      12,343       $         -                      $  12,343
Accrued liabilities                                               23,823             5,212  (b)(c)(d)(e)(f)        29,035
Current maturities of long-term debt                                 973                 -                            973
                                                          ----------------------------------------------------------------
      Total current liabilities                                   37,139             5,212                         42,351
Long-term debt                                                   209,281                 -                        209,281
Other long-term liabilities                                        5,067                 -                          5,067
Deferred tax liability                                            20,011                 -                         20,011
                                                          ----------------------------------------------------------------
Total liabilities                                                271,498             5,212                        276,710
                                                          ----------------------------------------------------------------

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                                       128,632            14,137  (b)(d)                142,769
Retained earnings                                                207,315           (21,584) (a)(b)(c)(e)(f)       185,731
Accumulated other comprehensive income                              (147)                -                           (147)
Less: Treasury stock                                             (53,787)                -                        (53,787)
                                                          ----------------------------------------------------------------
Total shareholders' equity                                       282,538            (7,451)                       275,087
                                                          ----------------------------------------------------------------
Total liabilities and shareholders' equity                 $     554,036       $    (2,239)                     $ 551,797
                                                          ================================================================
<FN>
(a)      Adjustment for accrued interest associated with certain expected tax
         refunds.
(b)      Adjustment for stock-based compensation expense pursuant to APB 25
         ($15,632 at March 31, 2006 and $15,158 at September 30, 2005) and
         related income tax impact ($1,658 at March 31, 2006 and $1,512 at
         September 30, 2005), partially offset by the net effect of tax
         benefits realized in accrued taxes ($2,432 at March 31, 2006 and
         $1,333 at September 30, 2005) and excess tax benefits reflected in
         paid-in capital ($2,094 at March 31, 2006 and $1,202 at September 30,
         2005).
(c)      Adjustment for payroll taxes, interest and penalties associated with
         stock-based compensation expense ($3,278 at March 31, 2006 and $1,832
         at September 30, 2005) and the related income tax impact ($909 at
         March 31, 2006 and $508 at September 30, 2005).
(d)      Adjustment for exercise deposits received by the Company for stock
         options in the two-year forfeiture period ($1,916 at March 31, 2006
         and $2,227 at September 30, 2005).
(e)      Adjustment for additional liabilities associated with tax positions
         taken, partially offset by certain expected tax refunds ($5,407 at
         March 31, 2006 and $4,261 at September 30, 2005).
(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 $1,175 at March 31, 2006 and
         $5,628 at September 30, 2005; increase in

                                      15

<PAGE>
<PAGE>

         inventories of $388 at March 31, 2006 and $1,999 at September 30,
         2005; decrease in deferred tax assets of $125 at March 31, 2006 and
         $533 at September 30, 2005; decrease in accrued liabilities of $414
         at March 31, 2006 and $1,775 at September 30, 2005; and decrease in
         retained earnings of $498 at March 31, 2006 and $2,387 at September
         30, 2005).

(g)      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>

Consolidated Statements of Cash Flows Impact

The following table reconciles the consolidated statement of cash flows
previously reported for the six months ended September 30, 2005 to the
restated amounts:

<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED SEPTEMBER 30, 2005
                                                        ---------------------------------------------------------------------
                                                                 AS
                                                             PREVIOUSLY                                                AS
                                                              REPORTED           ADJUSTMENTS                        RESTATED
                                                              --------           -----------                        --------
<C>                                                      <C>                     <C>                               <C>
Operating Activities:
Net loss                                                 $      (10,429)         $    (3,869) (a)(b)(c)(d)(e)      $ (14,298)
Adjustments to reconcile net loss to
      net cash provided by operating activities:
      Acquired in-process research
          and development                                        29,570                    -                          29,570
      Depreciation, amortization and
          other non-cash charges                                  8,389                    -                           8,389
      Deferred income tax provision                                  56                   37  (a)(b)(d)(e)                93
      Deferred compensation                                         590                    -                             590
      Stock-based compensation                                        -                  453  (a)                        453
Changes in operating assets and liabilities:
      Decrease (increase) in receivables, net                    (7,614)               4,431  (d)                     (3,183)
      Increase in inventories                                    (4,302)              (1,570) (d)                     (5,872)
      Decrease (increase) in prepaid
           and other assets                                       4,156                  (24) (c)                      4,132
      Increase in accounts payable
          and accrued liabilities                                 2,422                  542  (b)(c)(d)(e)             2,964
                                                        ---------------------------------------------------------------------
Net cash provided by operating activities                        22,838                    -                          22,838
                                                        ---------------------------------------------------------------------
Investing Activities:
      Purchase of property and equipment                        (36,856)                   -                         (36,856)
      Purchase of marketable securities                         (49,513)                   -                         (49,513)
      Purchase of preferred stock                               (11,300)                   -                         (11,300)
      Product acquisition                                       (25,643)                   -                         (25,643)
                                                        ---------------------------------------------------------------------
Net cash used in investing activities                          (123,312)                   -                        (123,312)
                                                        ---------------------------------------------------------------------
Financing Activities:
      Principal payments on long-term debt                         (486)                   -                            (486)
      Dividends paid on preferred stock                             (35)                   -                             (35)
      Purchase of common stock for treasury                        (136)                   -                            (136)
      Cash deposits received for stock options                      450                    -                             450
                                                        ---------------------------------------------------------------------
Net cash used in
      financing activities                                         (207)                   -                            (207)
                                                        ---------------------------------------------------------------------
Decrease in cash and cash equivalents                          (100,681)                   -                        (100,681)
Cash and cash equivalents:
      Beginning of year                                         159,825                    -                         159,825
                                                        ---------------------------------------------------------------------
      End of period                                      $       59,144          $         -                       $  59,144
                                                        =====================================================================

<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
         taken, partially offset by certain expected tax refunds.

(d)      Adjustment for revenue recognition errors related to shipments made
         to certain customers.

(e)      Adjustment for reduction in estimated liability associated with
         employee medical claims incurred but not reported.
</TABLE>

                                      16

<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. During the six months ended September 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 $10,698 at September
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
September 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 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

                                      17

<PAGE>
<PAGE>

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.

The following table sets forth the computation of basic and diluted earnings
per share for the three months ended September 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                THREE MONTHS ENDED
                                                                SEPTEMBER 30, 2006                SEPTEMBER 30, 2005
                                                        ---------------------------------  ---------------------------------
                                                            CLASS A          CLASS B           CLASS A          CLASS B
                                                        ---------------- ----------------  ---------------- ----------------
                                                                                                     (AS RESTATED)
<C>                                                      <C>              <C>               <C>              <C>
Basic earnings per share:
    Numerator:
      Allocation of undistributed earnings               $        9,410   $        2,658    $        6,583   $        1,990
                                                        ---------------- ----------------  ---------------- ----------------
    Denominator:
      Weighted average shares outstanding                        37,066           12,503            36,184           13,127
      Less - weighted average unvested
        common shares subject to repurchase                        (322)             (47)             (497)            (178)
                                                        ---------------- ----------------  ---------------- ----------------
      Number of shares used in per
        share computations                                       36,744           12,456            35,687           12,949
                                                        ================ ================  ================ ================

Basic earnings per share                                 $         0.26   $         0.21    $         0.18   $         0.15
                                                        ================ ================  ================ ================

Diluted earnings per share:
    Numerator:
      Allocation of undistributed earnings
        for basic computation                            $        9,410   $        2,658    $        6,583   $        1,990
      Reallocation of undistributed earnings as a
        result of conversion of Class B to
        Class A shares                                            2,658                -             1,990                -
      Reallocation of undistributed earnings to
        Class B shares                                                -             (259)                -             (134)
      Add - preferred stock dividends                                17                -                17                -
      Add - interest expense convertible notes                      948                -               958                -
                                                        ---------------- ----------------  ---------------- ----------------
      Allocation of undistributed earnings               $       13,033   $        2,399    $        9,548   $        1,856
                                                        ================ ================  ================ ================
    Denominator:
      Number of shares used in basic computation                 36,744           12,456            35,687           12,949
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares                  12,456                -            12,949                -
        Employee stock options (2)                                  687               96               833              186
        Convertible preferred stock                                 338                -               338                -
        Convertible notes                                         8,692                -             8,692                -
                                                        ---------------- ----------------  ---------------- ----------------
      Number of shares used in per share
        computations                                             58,917           12,552            58,499           13,135
                                                        ================ ================  ================ ================

Diluted earnings per share (1)                           $         0.22   $         0.19    $         0.16   $         0.14
                                                        ================ ================  ================ ================

<FN>
---------------------
(1)      Excluded from the computation of diluted earnings per share were
         outstanding stock options whose exercise prices were greater than the
         average market price of the common shares for the period reported.
         For the three months ended September 30, 2006 and 2005, excluded from
         the computation were options to purchase 889 and 1,360 shares of
         Class A and Class B Common Stock, respectively.
(2)      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>


                                      18

<PAGE>
<PAGE>

The following table sets forth the computation of basic and diluted earnings
(loss) per share for the six months ended September 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED SEPTEMBER 30,
                                                             -----------------------------------------------------------------------
                                                                             2006                                2005
                                                             ------------------------------------ ----------------------------------
                                                                 CLASS A            CLASS B           CLASS A           CLASS B
                                                             -----------------  ----------------- ----------------- ----------------
                                                                                                             (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                                             $        15,719    $         4,453   $       (10,487)  $       (3,846)
      Allocation of cumulative effect of
        change in accounting principle                                  1,540                436                 -                -
                                                             -----------------  ----------------- ----------------- ----------------
      Allocation of undistributed earnings (loss)             $        17,259    $         4,889   $       (10,487)  $       (3,846)
                                                             =================  ================= ================= ================
    Denominator:
      Weighted average shares outstanding                              37,005             12,527            36,076           13,221
      Less - weighted average unvested
        common shares subject to repurchase                              (334)               (62)             (510)            (178)
                                                             -----------------  ----------------- ----------------- ----------------
      Number of shares used in per
        share computations                                             36,671             12,465            35,566           13,043
                                                             =================  ================= ================= ================

Basic earnings (loss) per share before cumulative
    effect of change in accounting principle                  $          0.43    $          0.36   $         (0.29)  $        (0.29)
Per share effect of cumulative effect of
    change in accounting principle                                       0.04               0.03                 -                -
                                                             -----------------  ----------------- ----------------- ----------------
Basic earnings (loss) per share                               $          0.47    $          0.39   $         (0.29)  $        (0.29)
                                                             =================  ================= ================= ================

Diluted earnings (loss) per share:
    Numerator:
      Allocation of undistributed earnings (loss)
        for basic computation before cumulative
        effect of change in accounting principle              $        15,719    $         4,453   $       (10,487)  $       (3,846)
      Reallocation of undistributed earnings (loss) as a
        result of conversion of Class B to
        Class A shares                                                  4,453                  -            (3,846)               -
      Reallocation of undistributed earnings to
        Class B shares                                                      -               (372)                -                -
      Add - preferred stock dividends                                      35                  -                 -                -
      Add - interest expense convertible notes                          1,888                  -                 -                -
                                                             -----------------  ----------------- ----------------- ----------------
      Allocation of undistributed earnings (loss)
        for diluted computation before cumulative
        effect of change in accounting principle                       22,095              4,081           (14,333)          (3,846)
      Allocation of cumulative effect of
        change in accounting principle                                  1,976                365                 -                -
                                                             -----------------  ----------------- ----------------- ----------------
      Allocation of undistributed earnings (loss)             $        24,071    $         4,446   $       (14,333)  $       (3,846)
                                                             =================  ================= ================= ================
                                                                (CONTINUED)

                                      19

<PAGE>
<PAGE>

<CAPTION>
                                                                                    SIX MONTHS ENDED SEPTEMBER 30,
                                                              ----------------------------------------------------------------------
                                                                              2006                               2005
                                                              ----------------------------------  ----------------------------------
                                                                  CLASS A           CLASS B           CLASS A            CLASS B
                                                              -----------------  ---------------  ----------------  ----------------
                                                                                                             (AS RESTATED)
<C>                                                            <C>                <C>              <C>               <C>
Diluted earnings (loss) per share (continued):
    Denominator:
      Number of shares used in basic computation                        36,671           12,465            35,566            13,043
      Weighted average effect of dilutive securities:
        Conversion of Class B to Class A shares                         12,465                -            13,043                 -
        Employee stock options (2)                                         716              122                 -                 -
        Convertible preferred stock                                        338                -                 -                 -
        Convertible notes                                                8,692                -                 -                 -
                                                              -----------------  ---------------  ----------------  ----------------
      Number of shares used in per share
        computations                                                    58,882           12,587            48,609            13,043
                                                              =================  ===============  ================  ================

Diluted earnings (loss) per share before cumulative
    effect of change in accounting principle                   $          0.38    $        0.32    $        (0.29)   $        (0.29)
Per share effect of cumulative effect of
    change in accounting principle                                        0.03             0.03                 -                 -
                                                              -----------------  ---------------  ----------------  ----------------
Diluted earnings (loss) per share (1)                          $          0.41    $        0.35    $        (0.29)   $        (0.29)
                                                              =================  ===============  ================  ================

<FN>
---------------------
(1)      Excluded from the computation of diluted earnings per share were
         outstanding stock options whose exercise prices were greater than the
         average market price of the common shares for the period reported.
         For the six-months ended September 30, 2006, excluded from the
         computation were options to purchase 908 shares of Class A and Class
         B Common Stock. For the six months ended September 30, 2005, there
         were stock options to purchase 3,856 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.
(2)      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 or modified on or
subsequent to the effective date of SFAS 123R based on the grant date fair
value estimated in accordance with the provisions of this statement. Prior to
the adoption of SFAS 123R, the Company measured compensation expense for its
employee stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"). The
Company also applied the disclosure provisions of SFAS 123, as amended by SFAS
148, as if the fair-value-based method had been applied in measuring
compensation expense. Under APB 25, compensation cost for stock options was
recognized based on the excess, if any, of the quoted market price of the
stock at the grant date of the award or other measurement date over the amount
an employee must pay to acquire the stock. 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.

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

                                      20

<PAGE>
<PAGE>

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

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

The Company's stock option agreements include a post-exercise service
condition which provides that exercised options are to be held by the Company
for a two-year period during which time the shares can not be sold by the
employee. If the employee terminates employment voluntarily or involuntarily
(other than by retirement, death or disability) during the two-year period the
stock option agreements provide the Company with the option of repurchasing
the shares at the lower of the exercise price or the fair market value of the
stock on the date of termination. This repurchase option is considered a
forfeiture provision and the two-year period is included in determining the
requisite service period over which stock-based compensation expense is
recognized. The requisite service period initially is equal to the expected
term (as discussed above) 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 (loss) 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 for the six months ended
September 30, 2006 by $1,976, net of tax, and increased diluted earnings per
share for Class A and Class B shares by $0.03 and $0.03, respectively.

The Company recognized, in accordance with SFAS 123R, stock-based compensation
of $983 and $1,919, respectively, and related tax benefits of $294 and $570,
respectively, for the three and six months ended September 30, 2006. As a
result of the restatement discussed in Note 2, stock-based compensation
totaling $232 and $453 and related tax benefits of $71 and $139 were
recognized during the three and six months ended September 30, 2005,
respectively. There was no stock-based employee compensation cost capitalized
as of September 30, 2006. Cash received from stock option deposits was $1,988
and $351 for the three months ended September 30, 2006 and 2005, respectively,
and $2,420 and $450 for the six months ended September 30, 2006 and 2005,
respectively. The actual tax benefit realized from tax deductions associated
with stock option exercises (at expiration of two-year forfeiture period) was
$145 and $492 for the three months ended September 30, 2006 and 2005,
respectively, and $423 and $610 for the six months ended September 30, 2006
and 2005, respectively.

                                      21

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                  SEPTEMBER 30,                   SEPTEMBER 30,
                                                               ------------------               ----------------
                                                               2006            2005           2006           2005
                                                               ----            ----           ----           ----
                                                                           (AS RESTATED)                 (AS RESTATED)
<S>                                                           <C>          <C>             <C>            <C>
     Dividend yield...............................               None           None            None           None
     Expected volatility..........................                 --            48%             46%            48%
     Risk-free interest rate......................                 --          4.93%           4.93%          4.93%
     Expected term ...............................                 --      9.0 years       9.0 years      9.0 years
     Weighted average fair value per share
       at grant date..............................                 --       $  11.37        $  11.34       $  10.60
</TABLE>

A summary of the changes in the Company's stock option plan during the six
months ended September 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..........................           (302)            9.33                   $     3,666
Options canceled...........................           (195)           15.57
                                               -----------
Balance, September 30, 2006................          3,658            15.36         5.3       $    20,516
                                               ===========

Vested and expected to vest at
     September 30, 2006....................          2,834       $    15.36         5.3       $    15,900

Options exercisable at
     September 30, 2006 (excluding shares
     in the two-year forfeiture period)....          1,491       $    14.31         4.0       $    14,320
</TABLE>


As of September 30, 2006, the Company had $34,119 of total unrecognized
compensation expense related to stock option grants, which will be recognized
over the remaining weighted average period of 5.2 years.


                                      22

<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                        SIX MONTHS ENDED
                                                      SEPTEMBER 30, 2005                       SEPTEMBER 30, 2005
                                           -------------------------------------     --------------------------------------
                                                AS                                        AS
                                            PREVIOUSLY                    AS          PREVIOUSLY                    AS
                                             REPORTED   ADJUSTMENTS    RESTATED        REPORTED   ADJUSTMENTS    RESTATED
                                             --------   -----------    --------        --------   -----------    --------
<C>                                         <C>         <C>            <C>            <C>         <C>            <C>
Net income (loss)                           $   11,515  $    (2,925)   $  8,590       $  (10,429) $    (3,869)   $ (14,298)
Add: Stock-based compensation
    expense included in reported
    net income, net of tax                           -          161         161                -          314          314
Deduct: Stock-based compensation
    using the fair value based
    method for all awards                         (132)        (490)       (622)            (262)      (1,013)      (1,275)
                                           -------------------------------------     --------------------------------------
Pro forma net income (loss)                 $   11,383  $    (3,254)   $  8,129       $  (10,691) $    (4,568)   $ (15,259)
                                           =====================================     ======================================

Earnings (loss) per share:
    Basic - Class A common                  $     0.24  $     (0.06)   $   0.18       $    (0.21) $     (0.08)   $   (0.29)
    Basic - Class B common                        0.20        (0.05)       0.15            (0.21)       (0.08)       (0.29)
    Diluted - Class A common                      0.21        (0.05)       0.16            (0.21)       (0.08)       (0.29)
    Diluted - Class B common                                               0.14                                      (0.29)

Earnings (loss) per share - pro forma:
    Basic - Class A common                  $     0.24  $     (0.07)   $   0.17       $    (0.22) $     (0.09)   $   (0.31)
    Basic - Class B common                        0.20        (0.05)       0.15            (0.22)       (0.09)       (0.31)
    Diluted - Class A common                      0.21        (0.05)       0.16            (0.22)       (0.09)       (0.31)
    Diluted - Class B common                                               0.13                                      (0.31)
</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 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.

                                      23

<PAGE>
<PAGE>

Accruals for sales provisions are presented in the consolidated financial
statements as reductions to net revenues and accounts receivable. Sales
provisions totaled $36,224 and $40,184 (as restated) for the three months
ended September 30, 2006 and 2005, respectively, and $72,194 and $77,230 (as
restated) for the six months ended September 30, 2006 and 2005, respectively.
The reserve balances related to the sales provisions totaled $31,476 and
$28,697 (as restated) at September 30, 2006 and March 31, 2006, respectively,
and are included in "Receivables, less allowance for doubtful accounts" in the
accompanying consolidated balance sheets.

7.   INVENTORIES

     Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30, 2006     MARCH 31, 2006
                                                                 ------------------     --------------
                                                                                         (AS RESTATED)
<C>                                                                  <C>                  <C>
                  Finished goods.....................                $    30,606          $    29,365
                  Work-in-process....................                     10,268                7,969
                  Raw materials......................                     35,623               33,832
                                                                     -----------          -----------
                                                                     $    76,497          $    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>
                                                      SEPTEMBER 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        $ (13,611)      $    36,140         $ (12,708)
Product rights - PreCare(R)................          8,433           (3,022)            8,433            (2,811)
Trademarks acquired:
     Niferex(R)............................         14,834           (2,596)           14,834            (2,225)
     Chromagen(R)/StrongStart(R)...........         27,642           (4,837)           27,642            (4,147)
License agreements.........................          4,400             (390)            4,400              (300)
Covenant not to compete....................            375              (53)              375               (34)
Trademarks and patents.....................          3,913             (718)            3,403              (604)
                                               -----------        ---------       -----------         ---------
  Total intangible assets..................         95,737          (25,227)           95,227           (22,829)
Goodwill...................................            557                -               557                 -
                                               -----------        ---------       -----------         ---------
                                               $    96,294        $ (25,227)      $    95,784         $ (22,829)
                                               ===========        =========       ===========         =========
</TABLE>

As of September 30, 2006, the Company's intangible assets have a weighted
average useful life of approximately 19 years. Amortization expense for
intangible assets was $1,201 and $1,211 for the three months ended September
30, 2006 and 2005, respectively, and $2,398 and $2,391 for the six months
ended September 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 $2,400 for the remainder of fiscal 2007 and
approximately $4,800 in each of the four succeeding fiscal years.


                                      24

<PAGE>
<PAGE>

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 September 30, 2006, there were no borrowings outstanding under the new
credit facility.

10.   LONG-TERM DEBT

     Long-term debt consists of the following:

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

<C>                                                                  <C>                     <C>
                  Building mortgages..........................       $    42,269             $   43,000
                  Convertible notes...........................           200,000                200,000
                                                                     -----------             ----------
                                                                         242,269                243,000
                  Less current portion........................            (1,848)                (1,681)
                                                                     -----------             ----------
                                                                     $   240,421             $  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 this 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:


                                      25

<PAGE>
<PAGE>

         *     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 day trading period in which the trading price
               of the Notes per $1,000 principal amount for each day of such
               period was less than 95% of the product of the closing sale
               price of our Class A Common Stock on that day multiplied by the
               number of shares of our Class A Common Stock issuable upon
               conversion of $1,000 principal amount of the Notes; or
         *     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
minimis value of them at the time of issuance and at September 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 September 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 $12,158 and $8,576 (as
restated) for the three months ended September 30, 2006 and 2005,
respectively, and $22,224 and $(14,312) (as restated) for the six months ended
September 30, 2006 and 2005, respectively.

                                      26

<PAGE>
<PAGE>

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 facilities including manufacturing and
distribution property and equipment, intangible and other assets and all
income tax related assets.

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

<TABLE>
<CAPTION>
                              THREE MONTHS
                                 ENDED          BRANDED     SPECIALTY     SPECIALTY      ALL
                              SEPTEMBER 30,    PRODUCTS      GENERICS     MATERIALS     OTHER     ELIMINATIONS    CONSOLIDATED
                              -------------    --------      --------     ---------     -----     ------------    ------------
<C>                                             <C>          <C>            <C>       <C>          <C>             <C>
   Net revenues
                     2006                       $47,828      $56,926        $3,780    $     449    $        -      $   108,983
                     2005 (as restated)          32,563       55,398         4,101          260             -           92,322

   Segment profit (loss)
                     2006                        22,212       28,523           277      (31,357)            -           19,655
                     2005 (as restated)           9,094       27,225           803      (23,308)            -           13,814

   Identifiable assets - at period-end
                     2006                        28,244       72,528         8,182      546,803        (1,158)         654,599
                     2005 (as restated)          25,003       71,256         8,835      447,861        (1,158)         551,797

   Property and equipment additions
                     2006                             -            -             -        3,139             -            3,139
                     2005                             3           43            25       14,393             -           14,464

   Depreciation and amortization
                     2006                           178           85            40        5,377             -            5,680
                     2005                           147           80            42        4,229             -            4,498
</TABLE>


                                      27

<PAGE>
<PAGE>

<TABLE>
<CAPTION>

                               SIX MONTHS
                                 ENDED          BRANDED     SPECIALTY     SPECIALTY      ALL
                              SEPTEMBER 30,    PRODUCTS      GENERICS     MATERIALS     OTHER     ELIMINATIONS    CONSOLIDATED
                              -------------    --------      --------     ---------     -----     ------------    ------------
<C>                                             <C>          <C>             <C>      <C>          <C>            <C>
   Net revenues
                     2006                       $90,142      $105,327        $8,661   $   1,053    $        -     $    205,183
                     2005 (as restated)          64,754       102,768         8,953         889             -          177,364

   Segment profit (loss)
                     2006                        40,214        52,386         1,322     (60,932)            -           32,990
                     2005 (as restated)          21,256        51,681         1,984     (79,429)            -           (4,508)

   Property and equipment additions
                     2006                            93             -             -      18,246             -           18,339
                     2005                           124            43           216      36,473             -           36,856

   Depreciation and amortization
                     2006                           355           169            81      10,443             -           11,048
                     2005                           286           151            82       7,870             -            8,389
</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 is named as a defendant a patent infringement case filed in the
U.S. District Court for the District of New Jersey by Janssen, L.P., Janssen
Pharmaceutica N.V. and Ortho-McNeil Neurologics, Inc. (collectively,
"Janssen") on December 14, 2007 and styled Janssen, L.P. et al. v. KV
Pharmaceutical Company. After the Company filed an ANDA with the FDA seeking
permission to market a generic version of the 8 mg and 16 mg strengths of
Razadyne(R) ER (formerly Reminyl(R)) galantamine hydrobromide extended-release
capsules, Janssen filed these lawsuits for patent infringement under a patent
owned by Janssen. In the Company's Paragraph IV certification, KV contended
that its proposed generic versions do not infringe Janssen's patent. Pursuant
to the Hatch-Waxman Act, the filing date of the suit against the Company
instituted an automatic stay of FDA approval of the Company's ANDA until the
earlier of a judgment, or 30 months from the date of the suit. The Company has
filed an answer and counterclaim for declaratory judgment of non-infringement
and patent invalidity. The case is just commencing and no trial date has yet
been set. The Company intends to vigorously defend its interests; however, it
cannot give any assurance that it will prevail.

The Company is named as a defendant in a patent infringement case filed in the
U.S. District Court for the District of New Jersey by Celgene Corporation
("Celgene") and Novartis Pharmaceuticals Corporation and Novartis Pharma AG
(collectively, "Novartis") on October 4, 2007 and styled Celgene Corporation
et al. v. KV Pharmaceutical Company. After the Company filed an ANDA with the
FDA seeking permission to market a generic version of the 10 mg, 20 mg, 30 mg,
and 40 mg strengths of Ritalin LA(R) methylphenidate hydrochloride
extended-release capsules, Celgene and Novartis filed this lawsuit for patent
infringement under the provisions of the Hatch-Waxman Act with respect to two
patents owned by Celgene and licensed to Novartis. In the Company's Paragraph
IV certification, KV contended that its proposed generic versions do not
infringe Celgene's patents. We believe we were the first company to file with
the FDA for generic approval of the 10mg dosage strength of Ritalin LA(R), a
position that may, upon approval, afford as the opportunity for a six-month
exclusivity period for marketing this generic version. Pursuant to the
Hatch-Waxman Act, the filing date of the suit against the Company instituted
an automatic stay of FDA approval of the Company's ANDA until the earlier of a
judgment, or 30 months from the date of the suit. The Company has been served
with this complaint and has filed its answer and a counterclaim in the case,
seeking a declaratory judgment of non-infringement, patent invalidity, and
inequitable conduct in obtaining the patents. The case is just commencing and
no trial date has yet been set. The Company intends to vigorously defend its
interests; however, it cannot give any assurance that it will prevail.

The Company is named as a defendant in a patent infringement case brought by
Purdue Pharma L.P., The P.F. Laboratories, Inc., and Purdue Pharmaceuticals
L.P. ("Purdue") on January 17, 2007 against it and an unrelated third party
and styled Purdue Pharma L.P. et al. v. KV Pharmaceutical Company et al. filed
in the U.S. District Court for the District of Delaware. After the Company
filed an ANDA with the FDA seeking permission to market a generic version of
the 10 mg, 20 mg, 40 mg, and 80 mg strengths of OxyContin(R) in
extended-release tablet form, Purdue filed a

                                      28

<PAGE>
<PAGE>

lawsuit against KV for patent infringement under the provisions of the
Hatch-Waxman Act with respect to three Purdue patents. We belive we were the
first company to file with the FDA for generic approval of the 30 mg and 60 mg
dosage strengths of OxyContin(R), a position that may, upon approval, afford
us the opportunity for a six-month exclusivity period for marketing these
generic versions. In the Company's Paragraph IV certification, KV contended
that its proposed generic versions do not infringe Purdue's patents. On
February 12, 2007, a second patent infringement lawsuit was filed in the same
court against the Company by Purdue, asserting patent infringement under the
same three patents with respect to the Company's filing of an amendment to its
ANDA with FDA to sell a generic equivalent of Purdue's OxyContin(R), 30 mg and
60 mg strengths, products. On June 6, 2007, a third patent infringement
lawsuit was filed against the Company by Purdue in the U.S. District Court for
the Southern District of New York, asserting patent infringement under the
same three patents with respect to the Company's filing of an amendment to its
ANDA with FDA to sell a generic equivalent of Purdue's OxyContin(R), 15 mg
strength, product. The two lawsuits filed in federal court in Delaware have
been transferred to the federal court in New York for multi-district
litigation purposes together with an additional lawsuit by Purdue against
another unrelated company, also in federal court in New York. Purdue currently
has a similar lawsuit pending against an additional unrelated company in
federal court in Delaware.

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

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

The Company and ETHEX are named as defendants in a case brought by CIMA LABS,
Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et. al. v. KV
Pharmaceutical Company et. al. filed in U.S. District Court in Minnesota. CIMA
alleged that the Company and ETHEX infringed on a CIMA patent in connection
with the manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable
Tablets, 0.125 mg. The court has entered a stay pending the outcome of the
U.S. Patent and Trademark Office's reexamination of a patent at issue in the
suit. The Patent and Trademark Office has, to date, issued a final office
action rejecting all existing and proposed new claims by CIMA with respect to
this patent. CIMA has certain rights of appeal of this rejection of its claims
and has exercised those rights. ETHEX will continue to market the product
during the stay. The Company intends to vigorously defend its interests if and
when the stay is lifted; however, it cannot give any assurance it will
prevail.

The Company and ETHEX were named as defendants in a case brought by Solvay
Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals, Inc. v. ETHEX
Corporation, filed in U.S. District Court in Minnesota. In general, Solvay
alleged 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. The
court has previously 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, and an order denying a second
motion by the Company for partial summary judgment on plaintiff's remaining
allegations under the Lanham Act and state law. Settlement discussions
required by federal court processes were not fruitful. Trial took place in
federal court in Minneapolis and on March 6, 2007, the jury held for the
Company and ETHEX on all counts and the complaint has been dismissed. The time
for appeal by Solvay has now passed.

The Company and ETHEX are named as defendants in a case brought by Axcan
ScandiPharm Inc. and styled Axcan ScandiPharm Inc. v. ETHEX Corporation et.
al., filed in U.S. District Court in Minnesota on June 1, 2007. In general,
Axcan alleges that ETHEX's comparative promotion of its Pangestyme(TM) UL12 and
Pangestyme(TM) UL18 products to Axcan's Ultrase(R) MT12 and Ultrase(R) MT18
products resulted in false advertising and misleading statements under various
federal and state laws, and constituted unfair and deceptive trade practices.
The Company filed a motion for

                                      29

<PAGE>
<PAGE>

judgment on the pleadings in its favor on several grounds. The motion has been
granted in part and denied in part by the court on October 19, 2007, with the
court applying the statute of limitations to cut off Axcan's claims concerning
conduct prior to June 2001, determining that it was too early to determine
whether laches or res judicata barred the suit, and rejecting the remaining
bases for dismissal. Discovery has since commenced and a trial date has been
set for January 2010. The Company intends to vigorously defend its interests;
however, it cannot give any assurance that it will prevail.

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

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

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 United States District Court in
Missouri alleging, among other things, that AstraZeneca's patent is invalid
and unenforceable. These motions were granted and AstraZeneca appealed. On
July 23, 2007, the Court of Appeals for the Federal Circuit affirmed the
decision of the District Court below with respect to the invalidity of
AstraZeneca's patent but reversed and remanded with respect to inequitable
conduct by AstraZeneca. AstraZeneca filed for rehearing by the Federal
Circuit, which was denied and the time has now run with respect to any
petition for certiorari to the United States Supreme Court. As a result, the
Company no longer faces the prospect of any liability to AstraZeneca in
connection with this lawsuit. KV is, however, proceeding with its counterclaim
against AstraZeneca for inequitable conduct in obtaining the patents that have
been ruled invalid, in order to recover the Company's defense costs, including
legal fees; 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 States of Massachusetts, Alabama, Mississippi, Utah and
Iowa, New York City, and approximately 45 counties in New York State. The
State of Mississippi effectively voluntarily dismissed the Company and ETHEX
without prejudice on October 5, 2006 by virtue of the State's filing an
Amended Complaint on such date that does not name either the Company or ETHEX
as a defendant. In the remaining cases, only ETHEX is a named defendant. On
August 13, 2007, ETHEX settled the Massachusetts lawsuit for $575 in cash and
$150 in free pharmaceuticals over the next two years and received a general
release; no admission of liability was made. The New York City case and all
New York county cases (other than the Erie, Oswego and Schenectady County
cases) have been transferred to the U.S. District Court for the District of
Massachusetts for coordinated or consolidated pretrial proceedings under the
Average Wholesale Price Multidistrict

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Litigation (MDL No. 1456). The cases pertaining to the State of Alabama, Erie
County, Oswego County, and Schenectady County were removed to federal court by
a co-defendant in October 2006, but all of these cases have since been
remanded to the state courts in which they originally were filed. A motion is
pending in New York state courts to coordinate the Oswego, Erie and
Schenectady Counties cases. Each of these actions is in the early stages, with
fact discovery commencing or ongoing in the Alabama case and the federal cases
involving New York City and 42 New York counties. On October 24, 2007, ETHEX
was served with a complaint filed in Utah state court by the State of Utah
naming it and nine other pharmaceutical companies as defendants in a pricing
suit. On November 19, 2007, the State of Utah filed an amended complaint. The
Utah suit has been removed to federal court and a motion has been filed to
transfer the case to the MDL litigation for pretrial coordination. The State
is seeking to remand the case to state court, and the decision is pending
before the court. The time for ETHEX to answer or respond to the Utah
complaint has not yet run. On October 9, 2007, the State of Iowa filed a
complaint in federal court in Iowa naming ETHEX and 77 other pharmaceutical
companies as defendants in a pricing suit. ETHEX and the other defendants have
filed a motion to dismiss the Iowa complaint. The Company intends to
vigorously defend its interests in the actions described above; however, it
cannot give any assurance it will prevail.

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

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

On September 15, 2006, a shareholder derivative suit, captioned Fuhrman v.
Hermelin et al., was filed in state court in St. Louis, Missouri against the
Company, as nominal defendant, and seven present or former officers and
directors, alleging that defendants had breached their fiduciary duties and
engaged in unjust enrichment in connection with the granting, dating,
expensing and accounting treatment of past grants of stock options between
1995 and 2002 to six current or former directors or officers. Relief sought
included damages, disgorgement of backdated stock options and their proceeds,
attorneys' fees, and equitable relief. On February 26, 2007, the Fuhrman
lawsuit was dismissed without prejudice by the plaintiff in state court, and a
lawsuit, captioned Krasick v. Hermelin et al., was filed in the U.S. District
Court for the Eastern District of Missouri by the same law firms as in the
Fuhrman lawsuit, with a different plaintiff. The Krasick lawsuit was also a
shareholder derivative suit filed against the Company, as nominal defendant,
and 19 present or former officers and directors. The complaint asserted within
its fiduciary duties claims allegations that the officers and/or directors of
KV improperly (including through collusion and aiding and abetting) backdated
stock option grants in violation of shareholder-approved plans, improperly
recorded and accounted for the allegedly backdated options in violation of
GAAP, improperly took tax deductions under the Internal Revenue Code,
disseminated and filed false financials and false SEC filings in violation of
federal securities laws and rules thereunder, and engaged in insider trading
and misappropriation of information. Relief sought included damages, a demand
for accounting and recovery of the benefits allegedly improperly received,
rescission of the allegedly backdated stock options and disgorgement of their
proceeds, and reasonable attorney's fees, in addition to equitable relief,
including an injunction to require the Company to change certain of its
corporate governance and internal control procedures. On May 11, 2007, the
Company learned of the filing of another lawsuit, captioned Gradwell v.
Hermelin et al., also in the U.S. District Court for the Eastern District of
Missouri. The complaint was brought by the same law firms that brought

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the Krasick litigation and was substantively the same as in the Krasick
litigation, other than being brought on behalf of a different plaintiff and
eliminating one individual defendant from the suit. On July 18, 2007, the
Krasick and Gradwell suits were refiled as a consolidated action in U.S.
District Court for the Eastern District of Missouri, styled in re K-V
Pharmaceutical Company Derivative Litigation, which was substantively the same
as the Krasick and Gradwell suits. The Company has moved to terminate the
litigation based on a determination by members of a Special Committee of the
Board of Directors, as described more fully in Note 2, that continuation of
the litigation was not in the best interest of KV and its shareholders. All
individual officer and director defendants have joined in that motion.
Plantiffs filed a motion for rule to show cause why the defendants' motion to
terminate the lawsuit should not be stricken and dismissed. The Company has
filed an opposition and the matter is pending before the court. On February
15, 2008, the court stayed proceedings in the case until April 9, 2008, to
permit mediation pursuant to the parties' stipulation. Mediation is scheduled
to occur April 2, 2008. No formal discovery has yet commenced, and no trial
date has been set.

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

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

From time to time, the Company is involved in various other legal proceedings
in the ordinary course of its business. While it is not feasible to predict
the ultimate outcome of such other proceedings, the Company believes 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 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 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded
in the financial statements. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on
derecognition of tax positions, financial statement classification,
recognition of interest and penalties, accounting in interim periods, and
disclosure and transition requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 on April 1,
2007.

In September 2006, FASB issued SFAS 157, "Fair Value Measurements" ("SFAS
157") which provides enhanced guidance for using fair value to measure assets
and liabilities. SFAS 157 clarifies the principle that fair value should be
based on the assumptions that market participants would use when pricing an
asset or liability, provides a framework for measuring fair value under GAAP
and expands disclosures requirements about fair value measurements. SFAS 157
is effective for financial statements issued in fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
plans to adopt SFAS 157 at the beginning of fiscal 2009 and is evaluating the
impact, if any, the adoption of SFAS 157 will have on its financial condition
and results of operations.

In March 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force ("EITF") in Issue No.

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

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

In September 2007, the EITF reached a consensus on Issue No. 07-1 ("Issue
07-1"), "Accounting for Collaborative Arrangements." The scope of Issue 07-1
is limited to collaborative arrangements where no separate legal entity exists
and in which the parties are active participants and are exposed to
significant risks and rewards that depend on the success of the activity. The
EITF concluded that revenue transactions with third parties and associated
costs incurred should be reported in the appropriate line item in each
company's financial statements pursuant to the guidance in Issue 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." The EITF also
concluded that the equity method of accounting under Accounting Principles
Board Opinion 18, "The Equity Method of Accounting for Investments in Common
Stock," should not be applied to arrangements that are not conducted through a
separate legal entity. The EITF also concluded that the income statement
classification of payments made between the parties in an arrangement should
be based on a consideration of the following factors: the nature and terms of
the arrangement; the nature of the entities' operations; and whether the
partners' payments are within the scope of existing GAAP. To the extent such
costs are not within the scope of other authoritative accounting literature,
the income statement characterization for the payments should be based on an
analogy to authoritative accounting literature or a reasonable, rational, and
consistently applied accounting policy election. The provisions of Issue 07-1
are effective for fiscal years beginning on or after December 15, 2007, and
companies will be required to apply the provisions through retrospective
application. The Company plans to adopt Issue 07-1 at the beginning of fiscal
2009 and is currently evaluating the impact of the adoption of Issue 07-1 on
its financial condition and results of operations.

In December 2007, the FASB issued SFAS 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"), which replaces SFAS 141 but retains the
fundamental concept of purchase method of accounting in a business combination
and improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other users of
financial statements. To achieve this goal, the new standard requires the
acquiring entity in a business combination to recognize all the assets
acquired and liabilities assumed in the transaction and any non-controlling
interest at the acquisition date measured at their fair value as of that date.
This statement requires measuring a non-controlling interest in the acquiree
at fair value which will result in recognizing the goodwill attributable to
the non-controlling interest in addition to that attributable to the acquirer.
This statement also requires the recognition of assets acquired and
liabilities assumed arising from contractual contingencies as of the
acquisition date, measured at their acquisition fair values. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company
plans to adopt SFAS 141(R) at the beginning of fiscal 2010 and is evaluating
the impact of SFAS 141(R) on its financial condition and results of
operations.

In December 2007, the FASB issued SFAS 160, "Non-controlling Interests in
Consolidated Financial Statements"

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

16.  SUBSEQUENT EVENTS

In May 2007, the Company acquired the U.S. marketing rights to EvaMist(TM), a
new low-dose estrogen replacement therapy product delivered with a patented
metered-dose transdermal spray system, from VIVUS, Inc. Under terms of the
Asset Purchase Agreement, the Company paid $10,000 in cash at closing and
agreed to make an additional cash payment of $140,000 upon final approval of
the product by the U.S. Food and Drug Administration ("FDA"). The agreement
also provides for two future payments upon achievement of certain net sales
milestones. If EvaMist(TM) achieves at least $100,000 of net sales in a fiscal
year, a one-time payment of $10,000 will be made, and if net sales levels
reach $200,000 in a fiscal year, a one-time payment of up to $20,000 will be
made. In July 2007, FDA approval for EvaMist(TM) was received and a payment of
$140,000 was subsequently made to VIVUS, Inc. The Company is in the process of
determining the appropriate allocation of the $140,000 payment. Since the
product had not yet obtained FDA approval when the initial payment was made at
closing, the Company recorded $10,000 of in-process research and development
expense during the three months ended June 30, 2007.

In May 2007, the Company received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the generic
version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal 2006, the Company
received a favorable court ruling in a Paragraph IV patent infringement action
filed against the Company by AstraZeneca based on our ANDA submissions to
market these generic formulations. Since KV was the first company to file with
the FDA for generic approval of the 100 mg and 200 mg dosage strengths, the
Company was accorded the opportunity for a 180-day exclusivity period for
marketing these two dosage strengths.

In January 2008, the Company entered into a definitive asset purchase
agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to acquire
the U.S. and worldwide rights to Gestiva(TM) (17-alpha hydroxyprogesterone
caproate). Gestiva(TM) is used in the prevention of preterm birth in certain
categories of pregnant women. The proposed indication is for women with a
history of at least one spontaneous preterm delivery (i.e., less than 37
weeks), who are pregnant with a single fetus. Under the terms of the asset
purchase agreement, the Company agreed to pay a total of $82,000 for
Gestiva(TM), $7,500 of which was paid at closing. The remainder is payable on
the completion of two milestones: (1) $2,000 on CYTYC's receipt of
acknowledgement from the FDA that their response to the FDA's October 20, 2006
Approval letter is sufficient for the FDA to proceed with their review of the
NDA and (2) $72,500 on FDA approval of a Gestiva(TM) NDA and receipt by the
Company of 15,000 units of finished Gestiva(TM) suitable for commercial sale.
Because the product is not expected to have received FDA approval by the
closing of the transaction, the Company expects to record $7,500 when the
initial payment is made and $2,000 when the subsequent milestone payment is
made of in-process research and development expenses.

On January 9, 2008 the Company has received a subpoena from the Office of
Inspector General of HHS, seeking documents with respect to two of ETHEX's
nitroglycerin products. The subpoena states that it is in connection with an
investigation into potential false claims under Title 42 of the U.S. Code, and
the inquiry appears to pertain to whether these nitroglycerin products are
eligible for reimbursement under federal health care programs, such as
Medicaid and VA programs. The Company is in the process of gathering the
relevant documents in response to the subpoena.

On January 23, 2008, the 133 employees represented by the Teamsters Union
voted to decertify union representation effective February 7, 2008. As a
result of the decertification, the Company incurred a withdrawal liability for
the portion of the unfunded benefit obligation associated with the
multi-employer pension plan administered by the union applicable to its
employees covered by the plan. The withdrawal liability of $923 will be
recorded as an expense in fiscal year 2008.

As of February 24, 2008, the Company held auction rate debt securities in the
aggregate principal amount of $83,900. The auction rate securities are AAA
rated, long-term debt obligations secured by student loans, which are
guaranteed by the U.S. Government. Liquidity for these securities has been
provided by an auction process that resets the applicable interest rate at
pre-determined intervals, up to 35 days. In the past, the auction process has
allowed investors to obtain immediate liquidity by selling the securities at
their face amounts. The value of these securities was not impaired as of March
31, 2007. Disruptions in credit markets, subsequent to March 31, 2007,
however, have adversely affected the auction market for these types of
securities. During the period from February 11, 2008 to March 6, 2008 auctions
for all of the auction rate securities held by the Company failed to produce
sufficient bidders to allow

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for successful auctions. The Company cannot predict how long the current
imbalance in the auction market will continue. As a result, for a period
of time, the Company may or may not be able to liquidate any of its
auction-rate securities prior to their maturities at prices
approximating their face amounts. The Company is currently evaluating
the market for these securities to determine if impairment of the carrying
value of the securities has occurred due to the loss of liquidity. If such
impairment has occurred and is not temporary, the Company would recognize an
impairment loss in the statement of income for fiscal year 2008.


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          CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-Q, including the documents that we incorporate herein by
reference, contains various forward-looking statements within the meaning of
the United States Private Securities Litigation Reform Act of 1995, 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 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 and/or products manufactured
for the Company under contract manufacturing arrangements with third parties;
(8) the regulatory environment, including regulatory agency and judicial
actions and changes in applicable law or regulations; (9) fluctuations in
revenues 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, and for the first,
second and third quarters of fiscal 2008; (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; (16) the risks
detailed from time to time in our filings with the Securities and Exchange
Commission; (17) actions by the NYSE Regulation, Inc. with respect to the
continued listing of the Company's stock on the New York Stock Exchange; and
(18) the impact of credit market disruptions on the fair value of auction rate
securities that the Company has acquired as short-term investments.

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 FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

Except for the historical information contained herein, the following
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties, and other factors that may cause our actual
results to differ materially from those expressed or implied by such
forward-looking statements. These risks, uncertainties and other factors are
discussed throughout this report and specifically under the captions
"Cautionary Statement Regarding Forward-Looking Information" and "Risk
Factors." In addition, the following discussion and analysis of 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.

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 officers and directors 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 the grants reflected incorrect measurement dates for
financial accounting purposes. The "measurement date" under applicable
accounting principles, namely Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("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 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.



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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. 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 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

                                      38

<PAGE>
<PAGE>

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 4's 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 permitted him the
-------------
alternative of electing incentive stock options, restricted stock or
discounted stock options in lieu of the cash payment of part or all of the
annual incentive bonus due to him. In the event of an election to receive
options in lieu of the cash incentive due, 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 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 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.

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

                                      39

<PAGE>
<PAGE>

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 fiscal year-end for 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 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 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 not considered
material, individually or in the aggregate. 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 option 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 (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.



                                      40

<PAGE>
<PAGE>

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 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 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
Company estimates that the 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 $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 No. 123
("SFAS 123") in Note 1 of the Notes to Consolidated Financial Statements of
this Form 10-Q to reflect the impact of these adjustments for the three and
six months ended September 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 prices
have been increased to the market prices 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.


                                      41

<PAGE>
<PAGE>

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 reflects the restatement of our consolidated balance sheets as
of March 31, 2006 and September 30, 2005, the related consolidated statements
of operations for the three and six months ended September 30, 2005, and the
related consolidated statement of cash flows for the six months ended
September 30, 2005. In our Form 10-K for the fiscal year ended March 31, 2007
filed with the Securities and Exchange Commission (the "2007 Form 10-K"), we
restated 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 reflects 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 a Quarterly Report on Form 10-Q for the quarter ended December 31,
2006, that contains the restatement of our consolidated statements for certain
interim periods as discussed therein.



                                      42

<PAGE>
<PAGE>

The table below reflects the impacts of the restatement adjustments discussed
above on the Company's consolidated statements of operations for the periods
presented below:

<TABLE>
<CAPTION>
                                                                                                               CUMULATIVE
                                                                                                             APRIL 1, 1995
                                                      THREE MONTHS ENDED          SIX MONTHS ENDED              THROUGH
CATEGORY OF ADJUSTMENTS:                              SEPTEMBER 30, 2005         SEPTEMBER 30, 2005          MARCH 31, 2004
------------------------                            ------------------------   ------------------------  -----------------------
                                                                                                                   (a)
<C>                                                  <C>                        <C>                       <C>
Pretax income impact:
  Stock-based compensation expense
    related to measurement date changes (b)          $                  232     $                  453    $              13,626
  Payroll tax expense and penalties (b)                                 675                        847                      439
  Other adjustments                                                   2,595                      2,860                    1,666
                                                    ------------------------   ------------------------  -----------------------
   (Increase) decrease in pretax income                               3,502                      4,160                   15,731
                                                    ------------------------   ------------------------  -----------------------

Income tax impact:
  Measurement date changes                                              (71)                      (139)                  (1,050)
  Payroll taxes                                                        (187)                      (234)                    (123)
  Other income tax adjustments (c)                                      550                      1,040                    1,689
  Other adjustments                                                    (869)                      (958)                    (584)
                                                    ------------------------   ------------------------  -----------------------
   Increase (decrease) in income tax expense                           (577)                      (291)                     (68)
                                                    ------------------------   ------------------------  -----------------------

Increase (decrease) in net income                    $                2,925     $                3,869    $              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
YEARS ENDED         -----------------------------    OTHER INCOME    ------------------------  (INCREASE) TO
MARCH 31,              PRETAX        INCOME TAX     TAX ADJUSTMENTS   PRETAX     INCOME TAX      NET INCOME
-----------         -------------   -------------  ----------------  ---------- -------------  --------------
<C>                  <C>             <C>            <C>               <C>        <C>            <C>
1996                 $       829 (d) $         -    $            -    $      -   $         -    $        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) Represents liabilities associated with tax positions taken in previous
      years, partially offset by certain tax refunds and is not related to
      accounting for stock options.

  (d) Includes additional expense 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>

                                      43

<PAGE>
<PAGE>

GOVERNMENT REGULATION

In June 2006, May 2007 and September 2007, the FDA issued Notices to the
pharmaceutical industry stating that manufacture of all unapproved drug
products containing carbinoxamine, carbinoxamine labeled for children under
two, timed-released guaifenesin, hydrocodone labeled for children under six
and all other unapproved products containing hydrocodone, respectively, cease
by September 6, 2006, July 9, 2006, August 26, 2007, October 31, 2007, and
December 31, 2007, respectively. These Notices affect the continued
manufacture and sale of ETHEX's Hydro-Tussin(TM) CBX Syrup, Tri-Vent(TM) HC
Liquid, Guaifenex(R) DM ER Tablets, Guaifenex(R) PSE 60 ER Tablets,
PhenaVent(TM) D Capsules, Guaifenex(R) PSE 80 ER Tablets, Pseudovent(TM) DM
Tablets, Histinex(R) PV Syrup, Hydrocodone Bitartrate & Guaifenesin Liquid,
Hydro-Tussin(TM) HC Syrup, Histinex(R) HC Syrup and Hydro-Tussin(TM) Syrup.

On March 13, 2008, representatives of the Missouri Department of Health and
Senior Services, accompanied by representatives of the FDA, notified the
Company of a hold on the Company's inventory of certain unapproved drug
products, restricting the Company's ability to remove or dispose of those
inventories without permission. KV believes that the hold relates to a
potential misunderstanding by KV about the intended scope of recent FDA
notices setting limits on the marketing of unapproved guaifenesin products. In
response to notices issued by FDA in 2002 and 2003 with respect to
single-entity timed-release guaifenesin products, and a further notice issued
in 2007 with respect to combination timed-released guaifenesin products, KV
timely discontinued a number of its guaifenesin products and believed that, by
doing so, it had complied with those notices. The recent action to place a
hold on certain KV products may indicate, however, that additional guaifenesin
products may have to be discontinued. Pursuant to discussions with the
Missouri Department, and with the FDA, seeking to clarify the status of
products that were initially placed on hold, certain categories of those
products were released from the hold later in the day on March 13, 2008. These
discussions are continuing with respect to the status of the remaining
products subject to the hold. In fiscal 2007, ETHEX reported net sales of
$39.2 million from the products remaining subject to the hold. Of this amount,
approximately 84%, or $33.0 million, are cough/cold and allergy products sold
by ETHEX as part of its respiratory product line, 90% of which contain
guaifenesin. We believe this hold will not materially affect our results of
operations for fiscal 2008. If the hold continues for an extended period or if
it becomes permanent, it would substantially eliminate ETHEX's respiratory
product line. The Company believes that the potential loss of these revenues
will be more than offset by increases in revenues expected in our existing
branded and generic product lines and by anticipated new product approvals.

BACKGROUND

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

We have a 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 non-branded/generic pharmaceutical areas.
We believe that this differentiation provides substantial competitive
advantages for our products, allowing us to establish a strong record of
growth and profitability and a leadership position in certain segments of our
industry.

RESULTS OF OPERATIONS

Net revenues for the three months ended September 30, 2006 increased $16.7
million, or 18.0%, from the prior year quarter as we experienced sales growth
of 46.9% in our branded products segments. The resultant $10.4 million
increase in gross profit was offset in part by a $5.0 million increase in
operating expenses. The increase in operating expenses was primarily due to an
increase in personnel costs, expansion of our facilities and the impact of
stock-based compensation expense recorded in conjunction with the adoption of
SFAS 123R (see Note 5 to the Consolidated Financial Statements). As a result,
net income for the second quarter increased $3.5 million, or 40.7%, to $12.1
million compared to the prior year quarter.

Net revenues for the six months ended September 30, 2006 increased $27.8
million, or 15.7%, as we experienced sales growth of 39.2% in our branded
products segment. The resulting $14.2 million increase in gross profit was
offset in part by a $7.7 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 was primarily
due to an increase in personnel costs, expansion of our facilities and the
impact of stock-based compensation expense recorded in conjunction with the
adoption of SFAS 123R.

For the six months ended September 30, 2006, we reported net income of $22.2
million compared to a net loss of $14.3 million for the six months ended
September 30, 2005. During the prior year six-month period, 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. As a result of this, we incurred a
net loss of $14.3 million, or $0.29 per Class A and Class B diluted share for
the six months ended September 30, 2005. Excluding the $30.4 million of
expense associated with the prior year acquisition of FemmePharma, net income
for the six months ended September 30, 2006 would have increased $6.0 million,
or 37.4%.

                                      44

<PAGE>
<PAGE>
NET REVENUES BY SEGMENT
-----------------------
  ($ IN THOUSANDS)
-----------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                            (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
   Branded products               $ 47,828     $32,563       46.9%    $ 90,142    $ 64,754       39.2%
     as % of total net revenues       43.9%       35.3%                   43.9%       36.5%
   Specialty generics/non-branded   56,926      55,398        2.8%     105,327     102,768        2.5%
     as % of total net revenues       52.2%       60.0%                   51.3%       57.9%
   Specialty materials               3,780       4,101       (7.8)%      8,661       8,953       (3.3)%
     as % of total net revenues        3.5%        4.4%                    4.2%        5.0%
   Other                               449         260       72.7%       1,053         889       18.4%
     Total net revenues           $108,983     $92,322       18.0%    $205,183    $177,364       15.7%
</TABLE>

The growth in branded product sales of $15.3 million and $25.4 million
for the three- and six-month periods, respectively, was due primarily
to:  increased sales volume from our two anti-infective brands,
Clindesse(TM) and Gynazole-1(R); continued sales growth from our
hematinic and prescription prenatal product lines; and various branded
product price increases that have occurred over the proceeding 12
months.  Clindesse(TM) continued to experience sales growth as our share
of the prescription intravaginal bacterial vaginosis market increased to
21.3% at the end of the fiscal 2006 second quarter.  The sales increase
in Clindesse(TM) was also impacted by larger-than-normal customer
purchases during the quarter in anticipation of a September price
increase.  Sales of Gynazole-1(R), our vaginal antifungal cream product,
increased 69.7% to $6.3 million for the quarter and increased $1.6
million, or 13.8%, to $13.4 million for the six-month period.  The
change in Gynazole-1(R) sales was partially the result of $3.0 million
of customer purchases made during the three months ended June 30, 2005
in anticipation of a July 2005 price increase.  Sales from our
PreCare(R) product line increased 56.0% to $16.9 million and 93.8% to
$37.0 million during the three- and six-month periods, respectively.
These increases were primarily due to sales growth experienced by
PrimaCare(R) ONE, 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 $7.0 million, or
183.5%, for the quarter and $14.6 million, or 235.6%, for the six-month
period due to $5.4 million and $10.4 million of sales volume growth,
respectively, coupled with $1.6 million and $4.2 million, respectively,
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.  Sales
from our hematinic products increased 48.1% to $12.4 million and 23.0%
to $20.7 million during the three- and six-month periods, respectively.
For the quarter, the increase in hematinic product sales was primarily
due to higher sales from our reformulated Chromagen(R) product line
coupled with the impact of larger-than-normal customer purchases during
the fiscal 2006 quarter in anticipation of a September price increase.
For the six-month period, the increase in hematinic sales also reflected
the impact of Repliva 21/7(TM), a new product introduced in the second
quarter of fiscal 2005, and an increase in sales from our Niferex(R)
product line.

The increases in specialty generic sales of $1.5 million and $2.6
million for the three- and six-month periods, respectively, resulted
primarily from sales volume growth in our pain management and cough/cold
product lines and price increases on certain cardiovascular and
cough/cold products, offset in part by a decline in sales volume from
certain products in our cardiovascular and prenatal vitamin product
lines.  The pain management product line contributed $2.2 million and
$4.7 million in increased revenue for the three- and six-month periods,
respectively, due primarily to incremental sales from three product
approvals which were received late in fiscal 2006.  In September 2006,
we expanded our cardiovascular product line when we received approval to
market six strengths of Diltiazem HCI ER Capsules (AB rated to
Tiazac(R)).  Although we launched the six strengths of Diltiazem HCI ER
Capsules late in September 2006, we were able to generate incremental
revenues for the second quarter of $1.3 million.

                            45


<PAGE>
<PAGE>
GROSS PROFIT BY SEGMENT
-----------------------
  ($ IN THOUSANDS)
-----------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                            (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
  Branded products                $42,464     $28,153        50.8%     $79,765     $57,733       38.2%
     as % of  net revenues           88.8%       86.5%                    88.5%       89.2%
   Specialty generics/non-branded  32,047      30,009         6.8%      59,424      57,233        3.8%
     as % of net revenues            56.3%       54.2%                    56.4%       55.7%
   Specialty materials              1,066       1,547       (31.1)%      3,063       3,572      (14.3)%
     as % of net revenues            28.2%       37.7%                    35.4%       39.9%
  Other                            (5,473)        (27)         NM       (9,394)        151         NM
   Total gross profit             $70,104     $59,682        17.5%    $132,858    $118,689       11.9%
   as % of total net revenues        64.3%       64.6%                    64.8%       66.9%
</TABLE>

The increases in gross profit of $10.4 million and $14.2 million for the
three- and six-month periods, respectively, were primarily  due to the
sales growth experienced by our branded products segment. The higher
branded product gross profit percentage for the quarter reflected a
favorable shift in the mix of product sales toward higher margin anti-
infective products.  For the six-month period, 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 in fiscal 2006.  The increases in the
specialty generic gross profit percentages for the three- and six-month
periods were primarily attributable to the impact of price increases on
certain cardiovascular and cough/cold products.  Impacting the Other
category were contract manufacturing revenues, pricing and production
variances, and changes to inventory reserves associated with production.
Any inventory reserve changes associated with finished goods were
reflected in the applicable segment. The fluctuation in the Other
category was primarily due to the impact of higher production costs that
resulted from lower than expected production volume, coupled with an
increase in the provisions for obsolete inventory on certain existing
products in various stages of production.  During the second quarter of
fiscal 2007, we also recorded provisions associated with certain new
products where production occurred prior to receiving FDA approval and
the upcoming expiration dates made them unsaleable.  The provision for
obsolete inventory for the six months ended September 30, 2006 and 2005
was $6.3 million and $1.7 million, respectively.


RESEARCH AND DEVELOPMENT
------------------------
  ($ IN THOUSANDS)
-----------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Research and development        $6,396      $6,420       (0.4)%    $ 14,287     $14,052        1.7%
        as % of total net revenues     5.9%        7.0%                     7.0%        7.9%
</TABLE>

Research and development expense for the first six months of fiscal 2007
grew at a slower rate than management anticipated due to the timing of
certain clinical studies that have been re-scheduled. Although the level
of research and development expense for the first six months was below
management's expectation, we continue to project that future research
and development costs will increase  based on our growing product
development pipeline.

                            46

<PAGE>
<PAGE>

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
---------------------------------------------
          ($ IN THOUSANDS)
--------------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
<C>                              <C>          <C>          <C>         <C>        <C>         <C>
Purchased in-process research
     and development                  $  -        $  -          -  %    $ -        $30,441          NM
        as % of total net revenues       -    %      -    %               -    %       17.2%
</TABLE>

During the six months ended September 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.


SELLING AND ADMINISTRATIVE
--------------------------
   ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                           (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Selling and administrative     $42,855     $37,847       13.2%     $83,008     $75,599        9.8%
        as % of total net revenues    39.3%       41.0%                   40.5%       42.6%
</TABLE>

The increases in selling and administrative expense of $5.0 million and
$7.4 million for the three- and six-month periods were primarily due to
greater personnel costs associated with increases in management and
other personnel and increases in expense resulting from facility
expansion. The increases in personnel costs were 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 during the three- and six-month periods
of $0.8 million and $1.5 million, respectively.  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" in the Notes to
Consolidated Financial Statements of this Form 10-Q).  For the six-month
period, the increase in selling and administrative expense was offset in
part by a $0.8 million reimbursement of legal fees received during the
first quarter.

OPERATING INCOME (LOSS)
--------------------------
   ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                            (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Operating income (loss)        $19,652     $14,204       38.4%     $33,165    $(3,794)          NM
</TABLE>

For the six-month period, the improvement in operating income (loss) was
primarily due to the $30.4 million of expense we recorded during the six
months ended September 30, 2005 in connection with the FemmePharma
acquisition. Excluding the effect of this $30.4 million of expense,
operating income for the six months ended September 30, 2006 would have
increased $6.5 million, or 24.5%.

                                 47



<PAGE>
<PAGE>
INTEREST EXPENSE
----------------
   ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Interest expense                $2,305      $1,467       57.1%      $4,541      $2,844       60.0%
     as % of total net revenues        2.1%        1.6%                    2.2%        1.6%
</TABLE>

The increases in interest expense for the three- and six-month periods
resulted from 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.


INTEREST AND OTHER INCOME
--------------------------
    ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Interest and other income       $2,308      $1,077      114.3%      $4,366      $2,130      105.0%
     as % of total net revenues        2.1%        1.2%                    2.1%        1.2%
</TABLE>

The increases in interest and other income for the three- and six-month
periods were primarily due to an increase in interest income on short-
term investments and dividends earned on the Strides redeemable
preferred stock investment.  The increases in interest income on short-
term investments resulted from an increase in the average balance of
invested cash and an increase in short-term interest rates.


PROVISION FOR INCOME TAXES
--------------------------
     ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                            (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
   Provision for income taxes      $7,570      $5,224       44.9%     $12,783      $9,790       30.6%
   Effective tax rate                38.5%       37.8%                   38.7%       37.8%
</TABLE>

The effective tax rates for the three- and six-month periods were
adversely affected by the expiration of Federal research and
experimentation tax credits on December 31, 2005.  Additional credits
could not be recognized until passed by Congress and signed into law.
The effective tax rates for all periods were 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
(see Note 2 to the Consolidated Financial Statements).  For the six
months ended September 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 37.8% for that period was applied to a pre-tax
income amount for the six months ended September 30, 2005 that excluded
the FemmePharma acquisition expense of $30.4 million.

                               48




<PAGE>
<PAGE>

NET INCOME (LOSS) AND DILUTED EARNINGS (LOSS) PER SHARE
-------------------------------------------------------
   ($ IN THOUSANDS)
--------------------------
<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED                  SIX MONTHS ENDED
                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                 ----------------------------------  ----------------------------------
                                                               %                                   %
                                    2006        2005        CHANGE      2006        2005        CHANGE
                                 ---------    ---------    --------  ---------   ----------   ---------
                                            (AS RESTATED)                       (AS RESTATED)
<C>                              <C>         <C>          <C>         <C>        <C>         <C>
    Net income (loss)              $12,085      $8,590       40.7%     $22,183   $(14,298)          NM
    Diluted earnings (loss) per
    Class A share                     0.22        0.16       37.5%        0.41      (0.29)          NM
    Diluted earnings (loss) per
    Class B share                     0.19        0.14       35.7%        0.35      (0.29)          NM
</TABLE>

For the fiscal 2007 six-month period, the improvement in net income per
share was primarily due to the $30.4 million of expense we recorded
during the six months ended September 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 six months ended September 30, 2006 would have increased
$6.0 million, or 37.4%.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and working capital were $58.7 million and
$324.2 million, respectively, at September 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 $46.7
million of additional short-term marketable securities that were
purchased and classified as available for sale during the six months
ended September 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 six months ended September
30, 2006, our net cash flow from operations of $23.3 million resulted
primarily from net income.

In addition, we had $115.8 million invested in auction rate securities
("ARS") at September 30, 2006. The ARS held by the Company are AAA rated
securities with long-term 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.
Subsequent to September 30, 2006 the ARS market has experienced
liquidity issues due to emerging instability in the broader credit and
capital markets. As a result, all of the ARS held by the Company have
recently experienced failed auctions as the amount of securities
submitted for sale has exceeded the amount of purchase orders. Given the
failed auctions, the Company's ARS are illiquid until there is a
successful auction for them. We cannot predict how long the current
imbalance in the auction rate market will continue. We are currently
evaluating the market for these securities to determine if impairment of
the carrying value of the securities has occurred due to the loss of
liquidity.   However, the Company believes that as of December 31, 2007,
based on its current cash, cash equivalents and marketable securities
balances of $112 million (exclusive of ARS) and its current borrowing
capacity under its credit facility of $290 million, the current lack of
liquidity in the auction rate market will not have a material impact on
its ability to fund its operations or interfere with the Company's
external growth plans.  (See Note 16 to the Notes to Consolidated
Financial Statements).

Net cash flow used in investing activities included capital expenditures
of $18.3 million for the six months ended September 30, 2006 compared to
$36.9 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 six-month period 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 six-month period consisted of $46.7 million in purchases of short-
term marketable securities that were classified as available for sale
and a $0.4 million payment for preferred stock.  For the prior year six-
month period, other investing activities included the acquisition of
FemmePharma for a $25.6 million cash payment and the purchase of Strides
redeemable preferred stock for $11.3 million (see Note 3 to the
Consolidated Financial Statements).

Our debt balance including current maturities, was $242.3 million at
September 30, 2006 compared to $243.0 million

                                    49

<PAGE>
<PAGE>
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 this mortgage loan was used for working
capital and general corporate purposes.  The mortgage loan bears
interest at a rate of 5.91% and matures on April 1, 2021.

In May 2003, we issued $200.0 million principal amount of Convertible
Subordinated Notes that are convertible, under certain circumstances,
into shares of our Class A Common Stock at a 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
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 September 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 May
31, 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 September 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


                                  50


<PAGE>
<PAGE>
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.


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 POLICIES AND 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 condition and results of operations
and require the application of significant judgment by our management.
As a result, amounts determined under these policies are subject to an
inherent degree of uncertainty. In applying these policies, we make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures.  We base our
estimates and judgments on historical experience, the terms of existing
contracts, observance of trends in the 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 16.0% and 13.5% of total gross revenues for the
six months ended September 30, 2006 and 2005, respectively.

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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 six months ended
September 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 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 six months ended
September 30, 2006 for each accounts receivable reserve:

<TABLE>
<CAPTION>
                                                     CURRENT        CURRENT        ACTUAL
                                                    PROVISION      PROVISION       RETURNS
                                                    RELATED TO     RELATED TO    OR CREDITS
                                                  SALES MADE IN   SALES MADE IN    IN THE
(in thousands)                       BEGINNING     THE CURRENT     THE PRIOR       CURRENT    ENDING
                                      BALANCE        PERIOD          PERIODS       PERIOD    BALANCE
                                     ---------    -------------    ------------   ---------  -------
SIX MONTHS ENDED
 SEPTEMBER 30, 2006                (as restated)
<C>                                 <C>             <C>           <C>           <C>         <C>
  Accounts Receivable Reserves:
    Chargebacks                       $14,312        $46,111       $       -     $(45,639)   $14,784
    Sales Rebates                       2,214          6,877               -       (5,670)     3,421
    Sales Returns                       2,127          5,952               -       (5,516)     2,563
    Cash Discounts and Other
      Allowances                        4,226          8,562               -       (8,329)     4,459
    Medicaid Rebates                    5,818          4,692               -       (4,261)     6,249
                                      -------        -------       ---------     --------    -------
      TOTAL                           $28,697        $72,194       $       -     $(69,415)   $31,476
                                      =======        =======       =========     ========    =======
</TABLE>

The increase in the reserve for chargebacks at September 30, 2006 was
primarily due to chargeback reserves established on certain specialty
generic products introduced in fiscal 2007.  The higher reserve for
sales rebates at September 30, 2006 resulted from increased reserves on
rebates associated with branded product sales to managed care
organizations that began late in fiscal 2006.  The increase in the
reserve for sales returns at September 30, 2006 was primarily due to an
increase in the estimated level of inventory in the distribution channel
at the end of the quarter.  The impact of increased utilization of our
branded products by state Medicaid programs during the past two years
resulted in a larger reserve for Medicaid rebates at September 30, 2006.

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

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

Chargeback transactions are almost exclusively related to our specialty
generics business segment. During the six months ended September 30,
2006 and 2005, the chargeback provision reduced the gross sales of our
specialty generics

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segment by $45.7 million and $48.7 million, respectively. These amounts
accounted for 99.2% and 99.3% of the total chargeback provisions
recorded during the six months ended September 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 six months ended September 30,
          2006, unit sales to our three major wholesaler customers
          accounted for 81% of our total unit sales to all
          wholesalers, and the aggregate inventory position of the
          three major wholesalers at September 30, 2006 was
          approximately equivalent to our last ten weeks of shipments
          during the fiscal year.  We currently use the last six weeks
          of our shipments as an estimate of the inventory held by the
          remaining wholesalers where we do not receive actual
          inventory data, as our experience and buying patterns
          indicate that our smaller wholesaler customers carry less
          inventory than our large wholesaler customers. As of
          September 30, 2006, each week of inventory for those
          remaining wholesalers represented approximately $0.2
          million, or 1.3%, 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 wholesale distribution channel.  As of September 30,
          2006, the aggregate weighted average percentage of sales to
          wholesalers assumed to result in chargebacks was
          approximately 95%, with each 1% representing approximately
          $0.2 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 September 30, 2006, a 5% shift in the calculated
          chargeback per unit in the same direction across all
          products and customers would result in a $0.8 million, or
          5.2%, impact on the reported reserve for chargebacks.

Shelf-Stock Adjustments - These adjustments represent credits issued to
-----------------------
our wholesale customers that result from a decrease in our WAC.
Decreases in our invoice prices are discretionary decisions we make to
reflect market conditions.  These credits are customary in the industry
and are intended to reduce a wholesale customer's inventory cost to
better reflect current market prices.  Generally, we provide credits to
customers at the time the price reduction occurs based on the inventory
that is owned by them on the effective date of the price reduction.
Since a reduction in WAC reduces the chargeback per unit, or the
difference between WAC and the contract price, shelf-stock adjustments
are typically included as part of the reserve for chargebacks because
the price reduction credits act essentially as accelerated chargebacks.
Although we have contractually agreed to provide price adjustment
credits to our major wholesale customers at the time they occur, the
impact of any such price reductions not included in the reserve for
chargebacks is immaterial to the amount of revenue recognized in any
given period. In the first quarter, our specialty generics segment
reduced the invoice price to our wholesale customers (referred to as
wholesale acquisition cost, or "WAC") on a number of generic products.
As a result of a WAC decrease to certain generic products, we paid
shelf-stock adjustments of $1.4 million and $5.9 million to our
wholesale customers during the three and six months ended September 30,
2006, respectively.  The $1.4 million of shelf-stock adjustments that we
paid during the second quarter were included in the June 30, 2006
reserve for chargebacks.

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

                                53

<PAGE>
<PAGE>
versus retail chain).  The calculated percentages are applied against
estimates of inventory in the distribution channel on a product specific
basis.  To determine the inventory levels in the wholesale distribution
channel, we utilize actual inventory information from our major
wholesale customers and estimate the inventory positions of the
remaining wholesalers based on historical buying patterns.  For
inventory held by our non-wholesale customers, we use the last two
months of sales to the direct buying chains and the indirect buying
retailers as an estimate.  A 10% change in the product specific
historical return rates used in the reserve analysis would have changed
the reserve balance at September 30, 2006 by approximately $0.2 million,
or 7.6%, of the reported reserve for sales returns.  A 10% change in the
amount of estimated inventory in the distribution channel would have
changed the reserve balance at September 30, 2006 by approximately $0.2
million, or 8.5%, of the reported reserve for sales returns.

Medicaid Rebates - Established in 1990, the Medicaid Drug Rebate Program
----------------
requires a drug manufacturer to provide to each state a rebate every
calendar quarter for covered outpatient drugs dispensed to Medicaid
patients. Medicaid rebates apply to both our branded and specialty
generic segments.  Individual states invoice us for Medicaid rebates on
a quarterly basis using statutorily determined rates for generic (11%)
and branded (15%) products, which are applied to the Average
Manufacturer's Price, or "AMP," for a particular product to arrive at a
Unit Rebate Amount, or "URA."  The amount owed is based on the number of
units dispensed by the pharmacy to Medicaid patients extended by the
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
September 30, 2006 by $0.7 million, or 11.0% of the reported reserve for
Medicaid rebates.  Similarly, a 10% change in estimated patient usage
would have changed the reserve at September 30, 2006 by $0.7 million, or
11.0% 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.

                                  54

<PAGE>
<PAGE>
STOCK-BASED COMPENSATION.  As discussed in Note 3 of the Notes to
------------------------
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 percentage of
share-based awards that are expected to be forfeited. We estimated the
fair value of stock options granted using the Black-Scholes option-
pricing model with assumptions based primarily on historical data. If
actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially
impacted.

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

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

Our accounting for income taxes 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 Notes to Consolidated Financial Statements.

CONTINGENCIES.  We are involved in various legal proceedings, some of
-------------
which involve claims for substantial amounts.  An estimate is made to
accrue for a loss contingency relating to any of these legal proceedings
if it is probable that a liability was incurred as of the date of the
financial statements and the amount of loss can be reasonably estimated.
Because of the subjective nature inherent in assessing the outcome of
litigation and because of the potential that an adverse outcome in legal
proceedings could have a material impact on our financial condition or
results of operations, such estimates are considered to be critical
accounting estimates.  After review, it was determined at September 30,
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.

                                     55

<PAGE>
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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 September 30, 2006.

The majority of our investments in marketable securities are tax exempt
auction rate securities. The rates on these securities reset at pre-
determined interval up to 35 days.  As of September 30, 2006 we had
invested $115.8 million in auction rate securities, primarily in high
quality (AAA rated) bonds secured by student loans which are guaranteed
by the U.S. Government. Recent developments in the capital and credit
markets subsequent to September 30, 2006 have adversely affected the
market for auction rate securities, which has resulted in a loss of
liquidity for these investments. We are currently evaluating these
securities to determine if impairment of the carrying value of the
securities has occurred due to the loss of liquidity. (See Note 16 to
the Consolidated Financial Statements for further discussion of our
investment in auction rate securities). However, the Company believes
that as of December 31, 2007, based on its current cash, cash
equivalents and marketable securities balances of $112 million
(exclusive of auction rate securities) and its current borrowing
capacity of $290 million under its credit facility, the current lack of
liquidity in the auction rate market will not have a material impact on
its ability to fund its operations or interfere with the Company's
external growth plans.

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

                                 56

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<PAGE>
the following areas:

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

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

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

In addition, and unrelated to accounting for stock-based compensation,
in August, 2006 our management identified additional liabilities
associated with tax positions taken on filed tax returns 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.


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 I 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.

                                57


<PAGE>
<PAGE>
                      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, 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.
As described in Note 14 to our Consolidated Financial Statements,
"Contingencies - Litigation," several derivative lawsuits 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 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, management concluded that there were material

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weaknesses, as defined in the Public Company Accounting Oversight
Board's Auditing Standard No. 2, in our internal control over financial
reporting as of September 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/non-branded 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/non-branded
products, assuming they would be available for licensing, which could
decrease our profitability.  We may not be successful in pursuing this
strategy.

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

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

OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

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

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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 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.

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WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.

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

It is possible that third parties may own or could acquire rights in
trademarks or domain names in the 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.

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

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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. In addition, in the event that
FDA concludes that we have failed to comply with a notice setting deadlines
for discontinuation of the manufacture and sale of unapproved products, or
decides to take enforcement action against us on other grounds, such as for
alleged violations of current good manufacturing practice requirements or for
failure to obtain product approvals that FDA deems to be necessary, FDA
policies permit the agency to initiate broad action against the marketing of
additional categories of our unapproved drug products, even if the agency has
not instituted similar actions against the marketing of such products by other
parties.

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

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

We could invest a significant amount of time and expense in the
development of our generic products only to be subject to significant
additional delay and changes in the economic prospects for our products.
If we receive FDA approval for our pending ANDAs, we may consider
commercializing the product prior to the final resolution of any related
patent infringement litigation. The risk involved in marketing a product
prior to the final resolution of the litigation may be substantial
because the remedies available to the patent holder could include, among
other things, damages measured by the profits lost by such patent holder
and not by the profits earned by us. Patent holders may also recover
damages caused by the erosion of prices for its patented drug as a
result of the introduction of our generic drug in the marketplace.
Further, in the case of a willful infringement, which requires a complex
analysis of the totality of the circumstances, such damages may be
trebled. However, in order to realize 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

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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 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.

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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 AND/OR CERTAIN
FINISHED PRODUCTS 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 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

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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. In October 2007, the State of
Iowa filed a complaint naming ETHEX and 77 other pharmaceutical
companies as defendants in a pricing suit filed in federal court in the
State of Iowa. ETHEX and the other defendants have moved to dismiss the
Iowa complaint. The Company intends to vigorously defend its interests
in the actions described above; however, the outcome may have a material
adverse effect on our future business, financial condition, results of
operations or cash flows.

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

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


                                     65

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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 (the proportion of total sales between branded products and
generic/non-branded products) 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 same 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 relatively small 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
condition, results of operations or cash flows.

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

At September 30, 2006, we had $242.3 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 term expiring in June 2011.  At September 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;


                                      66

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     *    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.

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.

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 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.
As a result, the Company may not be able to liquidate some or all of its
auction rate securities prior to their maturities at prices
approximating their face amounts.

During 2008, disruption in the credit and capital markets have adversely
affected the auction market for the type of


                                   67

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<PAGE>
securities held by the Company. If uncertainties in these credit and
capital markets continue or these markets deteriorate further the
Company may incur impairments to the carrying value of its investments
in ARS, which could negatively affect the Company's financial condition,
cash flow and reported earnings. (See Note 16 to the Consolidated
Financial Statements for further discussion of the Company's investment
in ARS). However, the Company believes that as of December 31, 2007,
based on its current cash, cash equivalents and marketable securities
balances of $112 million (exclusive of auction rate securities) and its
current borrowing capacity of $290 million under its credit facility,
the current lack of liquidity in the auction rate market will not have a
material impact on its ability to fund its operations or interfere with
the Company's external growth plans.

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.

The consolidated and condensed consolidated financial statements that we
file with the SEC are prepared in accordance with GAAP. The preparation
of financial statements in accordance with GAAP involves making
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. The most significant estimates we are
required to make under GAAP include, but are not limited to, those
related to revenue recognition and reductions to gross revenues,
inventory valuation, intangible assets, stock-based compensation, income
taxes and loss contingencies related to legal proceedings. We
periodically evaluate estimates used in the preparation of the
consolidated financial statements for reasonableness, including
estimates provided by third parties. Appropriate adjustments to the
estimates will be made prospectively, as necessary, based on such
periodic evaluations. We base our estimates on, among other things,
currently available information, market conditions, historical
experience and various assumptions, which together form the basis of
making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Although we believe
that our assumptions are reasonable under the circumstances, estimates
would differ if different assumptions were utilized and these estimates
may prove in the future to have been inaccurate.

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                        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 review their reimbursement practices. In
addition, the following factors could significantly influence the
purchase of pharmaceutical products, which could result in lower prices
and a reduced demand for our products:

     *    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.

OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE.

The drug delivery industry is a rapidly evolving field.  A number of
companies, including major pharmaceutical companies, are developing and
marketing advanced delivery systems for the controlled delivery of
drugs.  Products currently on the market or under development by
competitors may deliver the same drugs, or other drugs to treat the same
indications, as many of the products we market or are developing.  The
first pharmaceutical branded or generic/non-branded product to reach the
market in a therapeutic area often obtains and maintains significant
market share relative to later entrants to the market.  Our products
also compete with drugs marketed not only in similar delivery systems
but also in traditional dosage forms.  New drugs, new therapeutic
approaches or future developments in alternative drug delivery
technologies may provide advantages over the drug delivery systems and
products that we are marketing, have developed or are developing.

Changes in drug delivery technology may require substantial investments
by companies to maintain their competitive position and may provide
opportunities for new competitors to enter the industry.  Developments
by others could render our drug delivery products or other technologies
uncompetitive or obsolete.  If others develop drugs which are cheaper or
more effective or which are first to market, sales or prices of our
products could decline.

EXTENSIVE INDUSTRY REGULATION HAS HAD, AND WILL CONTINUE TO HAVE, A
SIGNIFICANT IMPACT ON OUR INDUSTRY AND OUR BUSINESS, ESPECIALLY OUR PRODUCT
DEVELOPMENT, MANUFACTURING AND DISTRIBUTION CAPABILITIES.

All pharmaceutical companies, including us, are subject to extensive, complex,
costly and evolving regulation by the federal government, principally the FDA
and, to a lesser extent, the DEA and state government agencies. The Federal
Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal
statutes and regulations govern or influence the testing, manufacturing,
packing, labeling, storing, record keeping, safety, approval, advertising,
promotion, sale and distribution of our products. Failure to comply with
applicable FDA or other regulatory requirements may result in criminal
prosecution, civil penalties, injunctions or holds, recall or seizure of
                                          --------
products and total or partial suspension of production, as well as other
regulatory actions against our products and us.

In addition to compliance with current Good Manufacturing Practice, or cGMP,
requirements, drug manufacturers must register each manufacturing facility
with the FDA. Manufacturers and distributors of prescription drug products are
also required to be registered in the states where they are located in
certain states that require registration by out-of-state manufacturers and
distributors. Manufacturers also must be registered with the Drug Enforcement
Administration, or DEA, and similar applicable state and local regulatory
authorities if they handle controlled substances, and with the Environmental
Protection Agency, or EPA, and similar state and local regulatory authorities
if they generate toxic or dangerous wastes, and must also comply with other
applicable DEA and EPA requirements. We believe that we are currently in
material compliance with cGMP and are registered with the appropriate state
and federal agencies. Non-compliance with applicable cGMP requirements or
other rules and regulations of these agencies can result in fines, recall or
seizure of products, total or partial suspension of production and/or
distribution, refusal of governmental agencies to grant pre-market approval or
other product applications and criminal prosecution. Despite our ongoing
efforts, cGMP requirements and other regulatory requirements, and related
enforcement priorities and policies may evolve over time and we may not be
able to remain continuously in material compliance with all of these
requirements.

From time to time, governmental agencies have conducted investigations of
pharmaceutical companies relating to the distribution and sale of drug
products to government purchasers or subject to government or third party
reimbursement. We believe that we have marketed our products in compliance
with applicable laws and regulations. However, standards sought to be applied
in the course of governmental investigations can be complex and may not be
consistent with standards previously applied to our industry generally or
previously understood by us to be applicable to our activities.

The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and we cannot
predict the extent to which we may be affected by legislative and regulatory
developments. We are dependent on receiving FDA and other governmental or
third-party approvals prior to manufacturing, marketing and shipping many of
our products. Consequently, there is always the chance that we will not obtain
FDA or other necessary approvals, or that the rate, timing and cost of such
approvals, will adversely affect our product introduction plans or results of
operations.

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                    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 granting 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.

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

MANAGEMENT SHAREHOLDERS CONTROL OUR COMPANY.

At March 31, 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.

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.

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


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

PURCHASE OF EQUITY SECURITIES BY THE COMPANY

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


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

<C>                      <C>              <C>                <C>                      <C>

     July 1-31, 2006         96,965       $  18.01                --                       --

   August 1-31, 2006             --             --                --                       --

September 1-30, 2006            743       $  22.44                --                       --
                             ------

               Total         97,708       $  18.04                --                       --
                             ======

</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.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Our 2006 annual meeting of shareholders was held on August 4,
2006.  Of 49,499,736 shares of Class A and Class B Common Stock issued,
outstanding and eligible to be voted at the meeting, holders of
39,179,228 shares, constituting a quorum, were represented in person or
by proxy at the meeting.  Two matters were submitted to a vote of
security holders at the meeting, the election of three Class B director
nominees to our board of directors, each to continue in office until the
year 2009 or until their successors are elected and ratification of
engagement of our independent registered accounting firm.    The voting
results are set forth below:


Proposal 1.

CLASS B DIRECTOR NOMINEES
-------------------------

                                        71

<PAGE>
<PAGE>
                                                               ABSTENTIONS AND
NAME                          FOR             WITHHOLD        BROKER NON-VOTES
----                          ---             --------        ----------------
David S. Hermelin          12,662,542          21,539            55,557
Jonathon E. Killmer        12,657,227          26,854            55,557
Gerald R. Mitchell(1)      12,662,508          21,573            55,557


          Because we have a staggered board, the terms of office of the
following named Class A and Class C directors continue after the
meeting:

CLASS C (TO CONTINUE IN OFFICE UNTIL 2007 OR UNTIL SUCCESSORS ELECTED)
----------------------------------------------------------------------

Jean M. Bellin
Norman D. Schellenger
Terry B. Hatfield

CLASS A (TO CONTINUE IN OFFICE UNTIL 2008 OR UNTIL SUCCESSORS ELECTED)
----------------------------------------------------------------------

Kevin S. Carlie
Marc S. Hermelin
David A. Van Vliet(2)

<FN>
_____________
(1) Resigned March 23, 2008.
(2) Resigned September 29, 2006.

Proposal 2.

     To ratify the engagement of KPMG LLP to serve as the Company's
independent registered public accounting firm for the year ending March
31, 2007:

     Votes "For"         12,735,300
     Votes "Against"          2,494
     Votes "Abstained"        1,844


ITEM 6.   EXHIBITS

               Exhibits.  See Exhibit Index.

                                   72



<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)

                                 73

<PAGE>
<PAGE>
                      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.


                                          74