10-K

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

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
                   FOR THE FISCAL YEAR ENDED MARCH 31, 2007
                                      OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM __________ TO __________
                         COMMISSION FILE NUMBER 1-9601
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                          K-V PHARMACEUTICAL COMPANY
            (Exact name of registrant as specified in its charter)
         DELAWARE                                                43-0618919
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)

               2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
         (Address of principal executive offices, including ZIP code)
      Registrant's telephone number, including area code: (314) 645-6600

          Securities Registered Pursuant to Section 12(b) of the Act:
  CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE      NEW YORK STOCK EXCHANGE
  CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE      NEW YORK STOCK EXCHANGE
          Securities Registered Pursuant to Section 12(g) of the Act:
         7% CUMULATIVE CONVERTIBLE PREFERRED, PAR VALUE $.01 PER SHARE
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). (Check
one):

 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 ]

The aggregate market value of the shares of Class A and Class B Common Stock
held by non-affiliates of the registrant as of September 30, 2006, the last
business day of the registrant's most recently completed second fiscal
quarter, was $764,402,618 and $108,099,019, respectively. As of January 15,
2008, the registrant had outstanding 37,708,248 and 12,233,802 shares of Class
A Common Stock and Class B Common Stock, respectively. Documents incorporated
by reference: None




     EXPLANATORY NOTE REGARDING RESTATEMENT OF OUR CONSOLIDATED FINANCIAL
                                  STATEMENTS

This Annual Report on Form 10-K contains the restatement of our consolidated
statements of income, comprehensive income, shareholders' equity and cash
flows for the fiscal years ended March 31, 2006 and 2005, and our consolidated
balance sheet as of March 31, 2006. In addition, because the impacts of the
restatement adjustments extend back to the fiscal year ended March 31, 1996,
we have recognized the cumulative restatement adjustments through March 31,
2004 as a net decrease to beginning shareholders' equity as of April 1, 2004.
In addition, for purposes of Item 6, Selected Financial Data for the years
ended March 31, 2004 and 2003, the cumulative restatement adjustments through
March 31, 2002 have been recognized as a net decrease to beginning
shareholders' equity as of April, 1 2002 and the fiscal years 2003 and 2004
impacts associated with such items have been reflected in our consolidated
balance sheet and statement of income data set forth in Item 6, Selected
Financial Data in this Form 10-K. 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. We have amended our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006, the first quarter of our fiscal 2007 year, and filed Quarterly
Reports on Form 10-Q for the quarters ended September 30, 2006 and December
31, 2006, that contain the restatement of our consolidated financial
statements for certain interim periods as discussed therein.

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

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

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

                                      2




Please see "Review of Stock Option Grant Practices," "Review of Tax Positions"
and "Other Adjustments" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 "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, including the unaudited quarterly data
and selected financial data included in this Annual Report on Form 10-K.
Financial information included in reports previously filed or furnished by K-V
Pharmaceutical Company for the fiscal periods 1996 through 2006 should not be
relied upon and are superseded by the information in this Annual Report on
Form 10-K.

Management also has determined that as of March 31, 2007, we had material
weaknesses in our internal control over financial reporting related to the
accounting for stock-based compensation, the accounting for income taxes
(unrelated to stock-based compensation) and revenue recognition. As described
in more detail in Item 9A of this Annual Report on Form 10-K, the Company has
undertaken measures designed to remedy these material weaknesses.


                                      3




          CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-K, including the documents that we incorporate herein by
reference, contains various forward-looking statements within the meaning of
the U.S. 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," "anticipate," "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 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, regulatory and technological factors which,
among others, could cause actual results or events to differ materially from
those set forth or implied by the forward-looking statements and related
assumptions.

Such factors include (but are not limited to) the following: (1) changes in
the current and future business environment, including interest rates and
capital and consumer spending; (2) the difficulty of predicting FDA approvals,
including timing, and that any period of exclusivity may not be realized; (3)
acceptance and demand for new pharmaceutical products; (4) the impact of
competitive products and pricing, including as a result of so-called
authorized-generic drugs; (5) new product development and launch, including
the possibility that any product launch may be delayed or that product
acceptance may be less than anticipated; (6) reliance on key strategic
alliances; (7) the availability of raw materials and/or products manufactured
for 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 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 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 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 grant and
accounting practices; (16) the risks detailed from time to time in our filings
with the Securities and Exchange Commission; (17) actions by 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 not exhaustive, but is designed to highlight important
factors that may impact the Company's outlook.

Because the factors referred to above, as well as the statements included
under the captions "Narrative Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-K, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any forward-looking statements. Further, any forward-looking statement speaks
only as of the date on which it is made and, unless applicable law requires to
the contrary, we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict
which factors will arise, when they will arise and/or their effects. In
addition, we cannot assess the impact of each factor on our future business or
financial condition or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.


                                      4




ITEM 1.  BUSINESS
         --------

(A)      GENERAL DEVELOPMENT OF BUSINESS
         -------------------------------

         Unless the context otherwise indicates, when we use the words "we,"
         "our," "us," "our company" or "KV" we are referring to K-V
         Pharmaceutical Company and its wholly-owned subsidiaries, including
         Ther-Rx Corporation, ETHEX Corporation and Particle Dynamics, Inc.

         We were incorporated under the laws of Delaware in 1971 as a
         successor to a business originally founded in 1942. Victor M.
         Hermelin, our Founder and Chairman Emeritus, invented and obtained
         initial patents for early controlled release and enteric coating
         which became part of our core business in the 1950's to 1970's and a
         platform for later drug delivery emphasis in the 1980's and 1990's.

         We believe we are a leader in the development of proprietary drug
         delivery systems and formulation technologies which enhance the
         effectiveness of new therapeutic agents, existing pharmaceutical
         products and nutritional supplements. We have developed and patented
         a wide variety of drug delivery and formulation technologies which
         are primarily focused in four principal areas: SITE RELEASE(R)
         bioadhesives; tastemasking; oral controlled release; 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. In 1990, we established a generic,
         non-branded marketing capability through a wholly-owned subsidiary,
         ETHEX Corporation ("ETHEX"), which we believe makes us one of the
         only drug delivery research and development companies that also
         markets its own "technologically distinguished" generic products. In
         1999, we established a wholly-owned subsidiary, Ther-Rx Corporation
         ("Ther-Rx"), to market branded pharmaceuticals directly to physician
         specialists. Today, we believe we are a leading, vertically
         integrated specialty pharmaceutical marketer.

         Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
         acquired in 1972. Through PDI, we develop and market specialty
         value-added raw materials, including drugs, directly compressible and
         microencapsulated products, and other products used in the
         pharmaceutical, nutritional, food, personal care and other markets.

(B)      SIGNIFICANT BUSINESS DEVELOPMENTS
         ---------------------------------

         In June 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 $200.0 million principal amount
         of Convertible Subordinated Notes due 2033. Interest is charged under
         the facility at the lower of the prime rate or one-month LIBOR plus
         62.5 to 150 basis points depending on the ratio of senior debt to
         EBITDA. The credit agreement contains financial covenants that impose
         limits on dividend payments, require minimum equity, and restrict our
         maximum senior leverage ratio and minimum fixed charge coverage
         ratio. The credit facility has a five-year term expiring in June
         2011.

         In September 2006, we expanded our generic/non-branded cardiovascular
         product line when we received approval from the U.S. Food and Drug
         Administration ("FDA") to market six strengths of diltiazem
         hydrochloride extended-release capsules, the generic version of
         Tiazac(R). Incremental sales volume from these new products was $11.5
         million in fiscal 2007.

         In May 2007, we acquired the U.S. marketing rights to Evamist(TM), a
         new low-dose estrogen transdermal spray, from VIVUS, Inc. The product
         was formulated with a patented metered-dose transdermal spray system
         which is designed to provide an easy, once-daily dose of estrodial
         via the skin. Evamist(TM) is the first transdermal spray estrogen
         replacement therapy product approved for use in the United States.
         Under the terms of the Asset Purchase Agreement, we paid $10.0
         million in cash at closing and agreed to make an additional cash
         payment of


                                      5




         $140.0 million upon final approval of the product by the FDA. Because
         the product had not obtained FDA approval when the initial payment
         was made at closing, we recorded $10.0 million of in-process research
         and development expense during the three months ended June 30, 2007.
         The agreement also provides for two future payments upon achievement
         of certain net sales milestones. If Evamist(TM) achieves $100.0
         million of net sales in a fiscal year, a one-time payment of $10.0
         million will be made, and if net sales levels reach $200.0 million in
         a fiscal year, a one-time payment of up to $20.0 million will be
         made. In July 2007, FDA approval for Evamist(TM) was received and we
         paid $140.0 million to VIVUS, Inc. We are in the process of
         determining the allocation of the $140.0 million payment and we plan
         to launch the product during the fourth quarter of fiscal 2008.

         In May 2007, we 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, we received a favorable court ruling in a Paragraph IV patent
         infringement action filed against us by AstraZeneca based on our ANDA
         submissions to market these generic formulations. Since we were the
         first company to file with the FDA for generic approval of the 100 mg
         and 200 mg dosage strengths, we were accorded the opportunity for a
         180-day exclusivity period for marketing these two dosage strengths.
         We began shipping these two products in July 2007. The total branded
         sales volume in the U.S. of Toprol-XL(R) in calendar year 2006 was
         $1.7 billion, of which the 100 mg and 200 mg strengths represented
         nearly half. We expect to eventually offer all four dosage strengths
         of metoprolol succinate extended-release tablets having received the
         approval of the 25 mg strength on March 20, 2008 and the anticipated
         approval of the 50 mg strength pending FDA approval of our ANDA
         application.

         In July 2007, we entered into an additional licensing arrangement to
         market Clindesse(R) in the People's Republic of China. We have
         previously entered into licensing arrangements for the right to
         market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
         Scandinavian markets and 18 Eastern European countries.

         In January 2008, the Company entered into a definitive asset purchase
         agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
         acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
         hydroxyprogesterone caproate). The New Drug Application ("NDA") for
         Gestiva(TM) is currently before the FDA, pending approval for use in
         the prevention of preterm birth in certain categories of pregnant
         women. The proposed indication is for women with a history of at
         least one spontaneous preterm delivery (i.e., less than 37 weeks),
         who are pregnant with a single fetus. Under the terms of the asset
         purchase agreement, the Company agreed to pay $82.0 million for
         Gestiva(TM), $7.5 million of which was paid at closing. The remainder
         is payable on the completion of two milestones: (1) $2.0 million on
         the earlier to occur of CYTYC's receipt of acknowledgement from the
         FDA that their response to the FDA's October 20, 2006 "approvable"
         letter is sufficient for the FDA to proceed with their review of the
         NDA or the receipt of FDA's approval of the Gestiva(TM) NDA and (2)
         $72.5 million on FDA approval of a Gestiva(TM) NDA, transfer of all
         rights in the NDA to the Company and receipt by the Company of
         defined launch quantities of finished Gestiva(TM) suitable for
         commercial sale. Because the product is not expected to have received
         FDA approval by the closing of the transaction, the Company expects
         to record $7.5 million when the initial payment is made and $2.0
         million when the subsequent milestone payment is made of in-process
         research and development expenses.


(C)      INDUSTRY SEGMENTS
         -----------------

         We operate principally in three industry segments, consisting of
         branded products marketing, specialty generics marketing and
         specialty raw materials marketing. We derive revenues primarily from
         directly marketing our own technologically distinguished brand-name
         and generic/non-branded products. Revenues may also be received in
         the form of licensing revenues and/or royalty payments based upon a
         percentage of the licensee's sales of the product, in addition to
         manufacturing revenues, when marketing rights to products using our
         advanced drug delivery technologies are licensed. See Note 23 to our
         Consolidated Financial Statements.


                                      6




(D)      NARRATIVE DESCRIPTION OF BUSINESS
         ---------------------------------

         OVERVIEW

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

         We have developed a diverse portfolio of drug delivery technologies
         which we leverage to create technologically distinguished brand name
         and specialty generic/non-branded products. We have 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.

         We have a long history of developing drug delivery technologies. In
         the 1950's, we received what we believe to be the first patents for
         sustained release delivery systems which enhance the convenience and
         effectiveness of pharmaceutical products. In our early years, we used
         our technologies to develop products for other drug marketers. Our
         technologies have been used in several well known products, including
         Actifed(R) 12-hour, Sudafed(R) SA, Centrum Jr.(R) and Kaopectate(R)
         Chewable. Since the 1990's, we have chosen to focus our drug
         development expertise on internally developed products for our
         branded and generic/non-branded pharmaceutical businesses.

         For example, since its inception in 1999, Ther-Rx has successfully
         launched 11 internally developed branded pharmaceutical products, all
         of which incorporate our drug delivery technologies. We have also
         introduced several technology-improved versions of the four product
         franchises acquired by us. Furthermore, most of the internally
         developed generic/non-branded products marketed by ETHEX incorporate
         one or more of our drug delivery technologies.

         Our drug delivery technologies play a vital role in our ability to
         offer improved and differentiated products in our branded products
         portfolio and allow us to develop hard to replicate products that are
         marketed through our generic/non-branded products business. We
         believe that this differentiation provides substantial competitive
         advantages for our products, which has allowed us to establish a
         strong record of growth and profitability and a leadership position
         in certain segments of our industry. As a result, we have grown net
         revenues at a compounded annual growth rate of 15.7% over the four
         fiscal years in the period ended March 31, 2007. Ther-Rx has grown
         substantially since its inception in 1999 and continues to gain
         market share in its women's healthcare and hematinic family of
         products. Also, by focusing on the development and marketing of
         technology-distinguished, multisource drugs, ETHEX has been able to
         identify and bring to market niche products that leverage our
         portfolio of drug delivery technologies in a way that produces
         relatively high gross margin generic/non-branded products.

         THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS

         We established Ther-Rx in 1999 to market brand name pharmaceutical
         products which incorporate our proprietary technologies. Since its
         inception, Ther-Rx has introduced 11 products into two principal
         therapeutic categories - women's health and oral hematinics - where
         physician specialists can be reached using a highly focused sales
         force. By targeting physician specialists, we believe Ther-Rx can
         compete successfully without the need for a sales force as large as
         pharmaceutical companies with less specialized product lines.
         Ther-Rx's net revenues

                                      7




         grew from $145.5 million in fiscal 2006 to $188.7 million in fiscal
         2007 and represented 42.5% of our fiscal 2007 total net revenues.

         Ther-Rx's cardiovascular product line consists of Micro-K(R), an
         extended-release potassium supplement used to replenish electrolytes,
         that is used primarily in patients who are on medication which
         depletes the levels of potassium in the body. We acquired Micro-K(R)
         in 1999 from the pharmaceutical division of Wyeth. Sales of
         Micro-K(R) were $7.9 million in fiscal 2007.

         We established our women's healthcare franchise through our 1999
         acquisition of PreCare(R), a prescription prenatal vitamin, from UCB
         Pharma, Inc. Since the acquisition, Ther-Rx has reformulated the
         original product using proprietary technologies, and subsequently has
         launched six internally developed products as extensions to the
         PreCare(R) product line. Building upon the PreCare(R) acquisition, we
         have developed a line of proprietary products which makes Ther-Rx the
         leading provider of branded prescription prenatal vitamins in the
         U.S.

         The first of our internally developed, patented line extensions to
         PreCare(R) was PreCare(R) Chewables, the world's first prescription
         chewable prenatal vitamin. Ther-Rx's second internally developed
         product, PremesisRx(R), is an innovative prenatal prescription
         product that incorporates our controlled release Vitamin B6. This
         product is designed for use in conjunction with a
         physician-supervised program to reduce pregnancy-related nausea and
         vomiting, which is experienced by 50% to 90% of women who become
         pregnant. The third product, PreCare(R) Conceive(TM), is the first
         product designed as a prescription nutritional pre-conception
         supplement. The fourth product, PrimaCare(R), is the first
         prescription prenatal/postnatal nutritional supplement with essential
         fatty acids specially designed to help provide nutritional support
         for women during pregnancy, postpartum recovery and throughout the
         childbearing years. The fifth product, PrimaCare(R) ONE, was launched
         in fiscal 2005 as a proprietary line extension to PrimaCare(R) and is
         the first prenatal product to contain essential fatty acids in a
         one-dose-per-day dosage form. The PrimaCare(R) franchise has grown to
         be the number one branded prenatal prescription vitamin in the U.S.
         Our sixth product line extension, PreCare Premier(R), provides a wide
         range of vitamins and minerals, plus a stool softener, in a small,
         easy-to-swallow, once-daily caplet. Sales of our branded prescription
         prenatal vitamins increased 44.1% in fiscal 2007 to $72.5 million.

         In 2000, Ther-Rx launched its first NDA approved product,
         Gynazole-1(R), the only one-dose prescription cream treatment for
         vaginal yeast infections. Gynazole-1(R) incorporates our patented
         drug delivery technology, VagiSite(TM), which we believe is the only
         clinically proven and FDA approved controlled release bioadhesive
         system. Sales of Gynazole-1(R) were $24.7 million in fiscal 2007. We
         have also entered into licensing agreements for the right to market
         Gynazole-1(R) in over 50 markets in Europe, Latin America, the Middle
         East, Asia, Indonesia, the People's Republic of China, Australia, New
         Zealand, Mexico and Scandinavia.

         We established our hematinic product line by acquiring two leading
         hematinic brands, Chromagen(R) and Niferex(R), in 2003. We
         re-launched technology-improved versions of these products mid-way
         through fiscal 2004. In fiscal 2006, we introduced two new hematinic
         products - Repliva 21/7(TM) and Niferex Gold(R). We believe Repliva
         21/7(TM) is a product offering that represents a revolutionary
         advancement in iron therapy. Repliva 21/7(TM) has been uniquely
         formulated to promote maximum red blood cell regeneration while
         minimizing uncomfortable side effects that patients have typically
         endured with traditional iron supplements. With Repliva 21/7(TM)
         becoming the number one branded oral iron product in the U.S., sales
         of our hematinic product line grew to $48.2 million in fiscal 2007, a
         31.0% increase over fiscal 2006.

         In January 2005, Ther-Rx introduced its second NDA approved product,
         Clindesse(R), the first approved single-dose therapy for bacterial
         vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
         proprietary VagiSite(TM) bioadhesive drug delivery technology. Since
         its launch, Clindesse(R) has gained 26.4% of the intravaginal
         bacterial vaginosis market in the U.S. Clindesse(R) generated a 44.6%
         increase in sales to $31.8 million in fiscal 2007. We have also
         entered into licensing agreements for the right to market
         Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
         Scandinavian markets, 18 Eastern European countries and the People's
         Republic of China.


                                      8




         In fiscal 2006, we expanded our prescription nutritional franchise
         when Ther-Rx introduced Encora(R), a twice-daily prescription
         nutritional supplement designed to meet the key nutritional and
         preventative health needs of women past their childbearing years.

         In May 2007, we acquired the U.S. marketing rights to Evamist(TM), a
         new low-dose estrogen transdermal spray, from VIVUS, Inc. The product
         was formulated with a patented metered-dose transdermal spray system
         which is designed to provide an easy, once-daily dose of estrodial
         via the skin. Evamist(TM) is the first transdermal spray estrogen
         replacement therapy product approved for use in the United States.
         Under the terms of the Asset Purchase Agreement, we paid $10.0
         million in cash at closing and agreed to make an additional cash
         payment of $140.0 million upon final approval of the product by the
         FDA. Because the product had not obtained FDA approval when the
         initial payment was made at closing, we recorded $10.0 million of
         in-process research and development expense during the three months
         ended June 30, 2007. The agreement also provides for two future
         payments upon achievement of certain net sales milestones. In July
         2007, FDA approval for Evamist(TM) was received and we paid $140.0
         million to VIVUS, Inc. We are in the process of determining the
         allocation of the $140.0 million payment and we plan to launch the
         product during the fourth quarter of fiscal 2008. We believe
         Evamist(TM) will significantly augment the women's health offerings
         of our branded segment as we leverage the promotion of this product
         through our expanded branded sales force.

         Based on the addition and development of new products and our
         expectation of continued growth in our branded business, Ther-Rx has
         expanded its branded sales force to approximately 340 specialty sales
         representatives and sales management personnel. Ther-Rx's sales force
         focuses on physician specialists who are identified through available
         market research as frequent prescribers of our prescription products.
         Ther-Rx also has a corporate sales and marketing management team
         dedicated to planning and managing Ther-Rx's sales and marketing
         efforts.

         ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED DRUG
         BUSINESS

         We established ETHEX, currently our largest business segment, in 1990
         to utilize our portfolio of drug delivery systems to develop and
         market hard-to-copy generic/non-branded pharmaceuticals. We believe
         many of our ETHEX products enjoy higher gross margins than other
         generic pharmaceutical companies due to our approach of selecting
         products that benefit from our proprietary drug delivery systems and
         our specialty manufacturing capabilities. These advantages can
         differentiate our products and reduce the rate of price erosion
         typically experienced in the generic market. ETHEX's net revenues
         were $235.6 million for fiscal 2007, which represented 53.1% of our
         total net revenues.

         We have used our proprietary drug delivery technologies in many of
         our generic/non-branded pharmaceutical products. For example, we have
         used METER RELEASE(R), one of our proprietary controlled release
         technologies, in the only generic equivalent to Norpace(R) CR, an
         antiarrhythmic that is taken twice daily. Further, we have used
         KV/24(TM) once daily technology in the generic equivalent to
         IMDUR(R), a cardiovascular drug that is taken once per day.


                                      9




         To capitalize on ETHEX's unique product capabilities, we continue to
         expand our ETHEX product portfolio. In fiscal 2006, we launched a new
         InveAmp(TM) line extension to our pain management business.
         InveAmp(TM), a unique one unit dose ampoule, was designed to make
         dispensing of narcotic pain relievers more effective.

         Over the past several years, we have introduced a number of new
         generic/non-branded products. During the latter part of fiscal 2006,
         we received ANDA approvals for five strengths of oxycodone
         hydrochloride tablets, three strengths of hydromorphone hydrochloride
         tablets and the 30 mg strength of morphine sulfate extended-release
         tablets, while in fiscal 2007 we received ANDA approval for six
         strengths of diltiazem hydrochloride extended-release capsules. These
         generic products generated incremental net revenues of $19.3 million
         in fiscal 2007.

         In May 2007, we 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). In fiscal 2006, we received a
         favorable court ruling in a Paragraph IV patent infringement action
         filed against us by AstraZeneca based on our ANDA submissions to
         market these generic formulations. Since we were the first company to
         file with the FDA for generic approval of the 100 mg and 200 mg
         dosage strengths, we were accorded the opportunity for a 180-day
         exclusivity period for marketing these two dosage strengths. We began
         shipping these two products in July 2007. The total branded sales
         volume in the U.S. of Toprol-XL(R) in 2006 was $1.7 billion, of which
         the 100 mg and 200 mg strengths represented nearly half. We expect to
         eventually offer all four dosage strengths of metoprolol succinate
         extended-release tablets having received the approval of the 25 mg
         strength on March 20, 2008 and the anticipated approval of the 50 mg
         strength pending FDA approval of our ANDA application.

         In fiscal 2008, we have received ANDA approval for ondansetron 4 mg
         and 8 mg orally disintegrating tablets, two new strengths of morphine
         sulfate extended-release tablets, the generic equivalent of MS
         Contin(R), and the 100 mg and 200 mg strengths of benzonatate USP
         capsules, the generic equivalent to Tessalon(R).

         In addition to our internal product development efforts, we have
         entered into several long-term product development and marketing
         license agreements with various generic pharmaceutical developers and
         manufacturers. Under these arrangements, the other parties are
         responsible for developing, submitting for regulatory approval and
         manufacturing the products and we are responsible for exclusively
         marketing these products in the territories covered by the
         in-licensing agreements. We expect certain products under these
         agreements to be filed and/or approved beginning in fiscal 2008.

         With the majority of our internal generic/non-branded product
         development efforts primarily focused on building our pipeline with
         products that use one or more of our 15 drug delivery technologies,
         we believe this additional product source will provide an opportunity
         to grow our generic/non-branded business by participating in larger
         market opportunities which we have not historically pursued. These
         new product sources have increased the scope of our
         generic/non-branded product pipeline to more than 50 product
         opportunities.

         ETHEX primarily focuses on the therapeutic categories of
         cardiovascular, women's health, pain management and respiratory,
         leveraging our expertise in developing and manufacturing products in
         these areas. In addition, we pursue opportunities outside of these
         categories where we also may differentiate our products based upon
         our proprietary drug delivery systems and our specialty manufacturing
         expertise.

         CARDIOVASCULAR. ETHEX currently markets over 60 products in its
         cardiovascular line, including products to treat angina, arrhythmia
         and hypertension, as well as for potassium supplementation. The
         cardiovascular line accounted for $101.4 million, or 43.0% of ETHEX's
         net revenues in fiscal 2007.

         PAIN MANAGEMENT. ETHEX currently markets over 30 products in its pain
         management line. Included in this line are several controlled
         substance drugs, such as morphine, hydromorphone and oxycodone. Pain
         management products accounted for $46.8 million, or 19.9% of ETHEX's
         net revenues in fiscal 2007.

         RESPIRATORY. ETHEX currently markets approximately 30 products in its
         respiratory line, which consists primarily of cough/cold products.
         ETHEX is the leading provider, on a unit basis, of prescription
         cough/cold


                                      10




         products in the U.S. today. The cough/cold line accounted for $42.5
         million, or 18.0% of ETHEX's net revenues in fiscal 2007.

         WOMEN'S HEALTH CARE. ETHEX currently markets over 20 products in its
         women's healthcare line, all of which are prescription prenatal
         vitamins. The women's healthcare line accounted for $15.1 million, or
         6.4% of ETHEX's net revenues in fiscal 2007.

         OTHER THERAPEUTICS. In addition to our core therapeutic lines, ETHEX
         markets over 40 products in the gastrointestinal, dermatological,
         anti-anxiety, digestive enzyme and dental categories. These
         categories accounted for $29.8 million, or 12.7% of ETHEX's net
         revenues in fiscal 2007.

         ETHEX has a dedicated sales and marketing team, which includes an
         outside sales team of regional managers and national account managers
         and an inside sales team. The outside sales force calls on
         wholesalers, distributors and national drugstore chains, as well as
         hospitals, nursing homes, independent pharmacies and mail order
         firms. The inside sales force makes calls to independent pharmacies
         to create demand at the wholesale level.

         PDI - OUR VALUE-ADDED RAW MATERIAL BUSINESS

         PDI develops and markets specialty raw material products for the
         pharmaceutical, nutritional, food, personal care and other
         industries. Its products include value-added active drug molecules,
         vitamins, minerals and other raw material ingredients that provide
         benefits such as improved taste, altered or controlled release
         profiles, enhanced product stability or more efficient and other
         manufacturing process advantages. PDI is also a significant supplier
         of value-added raw materials for the development and manufacture of
         both existing and new products at Ther-Rx and ETHEX. Net revenues for
         PDI were $17.4 million in fiscal 2007, which represented 3.9% of our
         total net revenues.

         BUSINESS STRATEGY

         Our goal is to enhance our position as a leading fully integrated
         specialty pharmaceutical company that utilizes its expanding drug
         delivery expertise to bring technologically distinguished brand name
         and generic/non-branded products to market. Our strategies
         incorporate the following key elements:

         INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
         delivery technologies, research and development and manufacturing
         expertise to introduce new brand name products which can expand our
         existing franchises. During fiscal 2007, Ther-Rx introduced PreCare
         Premier(R), a new prescription prenatal vitamin product. We plan to
         continue to use our research and development, manufacturing and
         marketing expertise to create unique brand name products within our
         core therapeutic areas and, possibly, new therapeutic areas. We have
         in place a strong pipeline of potential new products, including our
         unique new product for treating endometriosis which is expected to
         begin new Phase III trials in fiscal 2008.

         CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek acquisition
         opportunities for both Ther-Rx and ETHEX. In May 2007, we completed
         the acquisition of the U.S. marketing rights to Evamist(TM), a new
         low-dose estrogen transdermal spray, from VIVUS, Inc. The NDA for
         this product was approved by the FDA in July 2007 and we plan to
         introduce Evamist(TM) during the fourth quarter of fiscal 2008.

         In January 2008, we entered into a definitive purchase agreement that
         gives us full U.S. and worldwide rights to Gestiva(TM) (17-alpha
         hydroxyprogesterone caproate) upon approval of the pending
         Gestiva(TM) NDA by FDA. Gestiva(TM) is seeking an indication for use
         in the prevention of preterm birth in certain categories of pregnant
         women. The FDA issued an "approvable" letter for Gestiva(TM) in
         October 2006, and a final approval is anticipated in late 2008. The
         FDA has granted an Orphan Drug Designation for Gestiva(TM).


                                      11




         Ther-Rx is also continually looking for platform acquisition
         opportunities similar to PreCare(R) around which it can build
         franchises. We believe that consolidation among large pharmaceutical
         companies, coupled with cost-containment pressures, has increased the
         level of sales necessary for an individual product to justify active
         marketing and promotion. This has led large pharmaceutical companies
         to focus their marketing efforts on drugs with higher volume sales,
         newer or novel drugs which have the potential for high volume sales
         and products which fit within core therapeutic or marketing
         priorities. As a result, major pharmaceutical companies have sought
         to divest small or non-strategic product lines, which can be
         profitable for specialty pharmaceutical companies like us.

         In making acquisitions, we apply several important criteria in our
         decision-making process. We pursue products with the following
         attributes:

         o    products which we believe have relevance for treatment of
              significant clinical needs;

         o    promotionally sensitive maintenance drugs which require
              continual use over a long period of time, as opposed to more
              limited use products for acute indications;

         o    products that have strong patent protection or can be protected;

         o    products which are predominantly prescribed by physician
              specialists, which can be cost-effectively marketed by a focused
              sales force; and

         o    products which we believe have potential for technological
              enhancements and line extensions based upon our drug delivery
              technologies.

         FOCUS SALES EFFORTS ON HIGH-VALUE NICHE MARKETS. We focus our Ther-Rx
         sales efforts on niche markets where we believe we can target a
         relatively narrow physician specialist audience. Because our products
         are sold to specialty physician groups that tend to be relatively
         concentrated, we believe that we can address these markets cost
         effectively with a focused sales force. Based on the addition and
         development of new products and our expectation of continued growth
         in our branded business, Ther-Rx has expanded its branded sales force
         to approximately 340 specialty sales representatives and sales
         management personnel. We plan to continue to build our sales force as
         necessary to accommodate current and future expansions of our product
         lines.

         PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
         We plan to continue introducing generic and non-branded alternatives
         to select drugs whose patents have expired, particularly where we can
         use our drug delivery technologies. Such generic or off-patent
         pharmaceutical products are generally sold at significantly lower
         prices than the branded product. Accordingly, generic pharmaceuticals
         provide a cost-efficient alternative to users of branded products. We
         believe the health care industry will continue to support growth in
         the generic pharmaceutical market and that industry trends favor
         generic product expansion into the managed care, long-term care and
         government contract markets. We further believe that we are uniquely
         positioned to capitalize on this growing market given our large base
         of proprietary drug delivery technologies and our proven ability to
         lead the therapeutic categories we enter.

         In May 2007, we 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). In fiscal 2006, we received a
         favorable court ruling in a Paragraph IV patent infringement action
         filed against us by AstraZeneca based on our ANDA submissions to
         market these generic formulations. Since we were the first company to
         file with the FDA for generic approval of the 100 mg and 200 mg
         dosage strengths, we were accorded the opportunity for a 180-day
         exclusivity period for marketing these two dosage strengths. We began
         shipping these two products in July 2007. The total branded sales
         volume in the U.S. of Toprol-XL(R) in 2006 was $1.7 billion, of which
         the 100 mg and 200 mg strengths represented nearly half. We expect to
         eventually offer all four dosage strengths of metoprolol succinate
         extended-release tablets having received the approval of the 25 mg
         strength on March 20, 2008 and the anticipated approval of the 50 mg
         strength pending FDA approval of our ANDA application.


                                      12




         ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We
         believe our drug delivery platform of 15 distinguished technologies
         has unique breadth and depth. These technologies have enabled us to
         create innovative products, including Gynazole-1(R) and Clindesse(R),
         which incorporate VagiSite(TM), our proprietary bioadhesive
         controlled release system. In addition, our tastemasking and
         controlled release systems are incorporated into our prenatal
         vitamins, providing them with differentiated benefits over other
         products on the market.

         We are actively advancing our existing portfolio of drug delivery
         technologies and developing or acquiring exciting new technologies
         with substantial growth potential. In May 2007, we completed the
         acquisition of the U.S. marketing rights to Evamist(TM), a new
         low-dose estrogen transdermal spray, from VIVUS, Inc. The product was
         formulated with a patented metered-dose transdermal spray system
         which is designed to provide an easy, once-daily dose of estrodial
         via the skin. Evamist(TM) is the first transdermal spray estrogen
         replacement therapy product approved for use in the U.S. The NDA for
         this product was approved by the FDA in July 2007 and we plan to
         introduce Evamist(TM) during the fourth quarter of fiscal 2008.

         In June 2007, we acquired Particle and Coating Technologies Inc.
         ("PCT"), a privately held, St. Louis-based company. PCT is a particle
         coating company which uses its proprietary processes to develop
         products for the pharmaceutical, nutritional, veterinary, industrial
         and cosmetic markets. PCT's technologies include novel particle
         coatings, controlled release, buccal release, fast dissolving
         tablets, tastemasking, inhalable particle delivery and PLGA
         (polylactic-co-glycolic acid)-based depot-type deliveries, among
         others, and are applied to products developed and marketed
         internally, as well as out-licensed.

         OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES

         We believe we are a leader in the development of proprietary drug
         delivery systems and formulation technologies which enhance the
         effectiveness of new therapeutic agents, existing pharmaceutical
         products and nutritional supplements. We have used many of these
         technologies to successfully commercialize technologically
         distinguished branded and generic/non-branded products. Additionally,
         we continue to invest our resources in the development or acquisition
         of new technologies. The following describes our principal drug
         delivery technologies.

         SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family
         of technologies and includes eight systems designed specifically for
         oral, topical or interorificial use. These systems rely on controlled
         bioadhesive properties to optimize the delivery of drugs to either
         wet mucosal tissue or the skin and are the subject of issued patents
         and pending patent applications. Of the technologies developed,
         products using the VagiSite(TM) and DermaSite(TM) technologies have
         been successfully commercialized.

         ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological leadership of
         our advanced drug delivery systems was established in the development
         of our three oral controlled release technologies, all of which have
         been commercialized. Our systems can be individually designed to
         achieve the desired release profile for a given drug. The release
         profile is dependent on many parameters, such as drug solubility,
         protein binding and site of absorption. Some of the products
         utilizing our oral controlled release systems in the market include
         isosorbide-5-mononitrate (an AB rated generic equivalent to
         IMDUR(R)), disopyramide phosphate (an AB rated generic equivalent of
         Norpace(R) CR) diltiazem extended-release capsules (an AB rated
         generic equivalent to Tiazac(R)) and metoprolol succinate
         extended-release tablets (an AB rated generic equivalent to
         Toprol-XL(R)).

         TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve the
         taste of unpleasant drugs. Our three patented tastemasking systems
         can be applied to liquids, chewables or dry powders. We first
         introduced tastemasking technologies in 1991 and have utilized them
         in a number of Ther-Rx and ETHEX products, including PreCare(R)
         Chewables and most of the liquid products that are sold in ETHEX's
         cough/cold line.


                                      13




         ORAL QUICK DISSOLVING TECHNOLOGY. Our quick dissolving oral tablet
         technology provides the ability to tastemask, yet dissolves in the
         mouth in a matter of seconds. Most other quick-dissolving
         technologies offer either quickness at the expense of poor
         tastemasking or excellent tastemasking at the expense of quickness.
         While still under development, this system allows for a drug to be
         quickly dissolved in the mouth, and can be combined with tastemasking
         capabilities that offer a unique dosage form for the most bitter
         tasting drug compounds. We have been issued patents and have patents
         pending for this system with the U.S. Patent and Trademark Office, or
         PTO.

         SALES AND MARKETING

         Ther-Rx has a national sales and marketing infrastructure which
         includes approximately 340 sales representatives and sales management
         personnel dedicated to promoting and marketing our branded
         pharmaceutical products to targeted physician specialists. The
         Ther-Rx sales force focuses on physician specialists who are
         identified through available market research as frequent prescribers
         of products in our therapeutic categories. Ther-Rx also has a
         corporate sales and marketing management team dedicated to planning
         and managing Ther-Rx's sales and marketing efforts.

         We attempt to increase sales of our branded pharmaceutical products
         through physician sales calls and promotional efforts, including
         sampling, advertising and direct mail. For acquired branded products,
         we generally increase the level of physician sales calls and
         promotion relative to the previous owner. For example, with the
         PreCare(R) prenatal sales efforts, we increased the level of
         physician sales calls and sampling to the highest prescribers of
         prenatal vitamins. We also have enhanced our PreCare(R) brand
         franchise by launching six additional line extensions to address
         unmet needs, including the launch of PreCare(R) Chewables, Premesis
         Rx(R), PreCare(R) Conceive(TM), PrimaCare(R), PrimaCare(R) ONE and
         PreCare Premier(TM). The PreCare(R) product line enables us to
         deliver a full range of nutritional products for physicians to
         prescribe to women in their childbearing years. In addition, we added
         to our women's health care family of products in June 2000 with the
         introduction of our first NDA approved product, Gynazole-1(R), the
         only one-dose prescription cream treatment for vaginal yeast
         infections. In fiscal 2004, we further expanded our branded product
         offerings when we launched technology improved versions of the
         Chromagen(R) and Niferex(R) oral hematinic product lines that were
         acquired at the end of fiscal 2003. In January 2005, we introduced
         our second NDA approved product, Clindesse(R), the first approved
         single-dose therapy for bacterial vaginosis. In fiscal 2006, we
         introduced Encora(R), a new prescription nutritional supplement
         product, and two new hematinic products, Repliva 21/7(TM) and Niferex
         Gold(R). In May 2007, we completed the acquisition of the U.S.
         marketing rights to Evamist(TM), a new low-dose estrogen transdermal
         spray, from VIVUS, Inc. The NDA for this product was approved by the
         FDA in July 2007 and we plan to introduce Evamist(TM) during the
         fourth quarter of fiscal 2008. By offering multiple products to the
         same group of physician specialists, we believe we are able to
         maximize the effectiveness of our experienced sales force.

         ETHEX has an experienced sales and marketing team, which includes an
         outside sales team, regional account managers, national account
         managers and an inside sales team. The outside sales force calls on
         wholesalers, distributors and national drugstore chains, as well as
         hospitals, nursing homes, mail order firms and independent
         pharmacies. The inside sales team calls on independent pharmacies to
         create demand at the wholesale level.

         We believe that industry trends favor generic product expansion into
         the managed care, long-term care and government contract markets.
         Further, we believe that our competitively priced,
         technology-distinguished generic/non-branded products can fulfill the
         increasing need of these markets to contain costs and improve patient
         compliance. Accordingly, we intend to continue to devote significant
         marketing resources to the penetration of those markets.

         During fiscal 2007, our three largest customers accounted for 26%,
         21% and 14% of gross revenues. These customers were McKesson Drug
         Company, Cardinal Health and Amerisource Corporation, respectively.
         In fiscal


                                      14




         2006 and 2005, these customers accounted for gross revenues of 27%,
         16% and 13%, and 27%, 17% and 12%, respectively.

         Although we sell internationally, we do not have material operations
         or sales in foreign countries and our sales are not subject to
         significant geographic concentration.

         RESEARCH AND DEVELOPMENT

         We have long recognized that development of successful new products
         is critical to achieving our goal of sustainable growth over the long
         term. As such, our investment in research and development, which
         increased at a compounded annual growth rate of 24.1% over the past
         five fiscal years, reflects our continued commitment to develop new
         products and/or technologies through our internal development
         programs, and with our external strategic partners.

         Our research and development activities include the development of
         new and next generation drug delivery technologies, the formulation
         of brand name proprietary products and the development of
         technologically distinguished generic/non-branded versions of
         previously approved brand name pharmaceutical products. In fiscal
         2007, 2006 and 2005, total research and development expenses were
         $31.5 million, $28.9 million and $23.5 million, respectively.

         All applications for FDA approval must contain information relating
         to product formulation, raw material suppliers, stability,
         manufacturing processes, packaging, labeling and quality control.
         Information to support the bioequivalence of generic drug products or
         the safety and effectiveness of new drug products for their intended
         use is also required to be submitted. There are generally two types
         of applications used for obtaining FDA approval of new products:


               *  New Drug Application ("NDA"). An NDA is filed when approval
                  is sought to market a drug with active ingredients that have
                  not been previously approved by the FDA. NDAs are filed for
                  newly developed brand products and, in certain instances,
                  for a new dosage form, a new delivery system or a new
                  indication for previously approved drugs.

               *  Abbreviated New Drug Application ("ANDA"). An ANDA is filed
                  when approval is sought to market a generic equivalent of a
                  drug product previously approved under an NDA and listed in
                  the FDA's "Orange Book" or for a new dosage strength or a
                  new delivery system for a drug previously approved under an
                  ANDA.


         One requirement for FDA approval of NDAs and ANDAs is that our
         manufacturing procedures and operations conform to FDA requirements
         and guidelines, generally referred to as current Good Manufacturing
         Practices ("cGMP"). The requirements for FDA approval encompass all
         aspects of the production process, including validation and
         recordkeeping, and involve changing and evolving standards.

         BRANDED PRODUCT DEVELOPMENT. The process required by the FDA before a
         pharmaceutical product, with active ingredients that have not been
         previously approved, may be marketed in the United States generally
         involves the following:

               *  laboratory and preclinical tests;
               *  submission of an Investigational New Drug ("IND")
                  application, which must become effective before clinical
                  studies may begin;
               *  adequate and well-controlled human clinical studies to
                  establish the safety and efficacy of the proposed product
                  for its intended use;

                                      15




               *  submission of an NDA containing the results of the
                  preclinical tests and clinical studies establishing the
                  safety and efficacy of the proposed product for its intended
                  use, as well as extensive data addressing matters such as
                  manufacturing and quality assurance;
               *  scale-up to commercial manufacturing; and
               *  FDA approval of an NDA.


         Preclinical tests include laboratory evaluation of the product, its
         chemistry, formulation and stability, as well as toxicology and
         pharmacology studies to help define the pharmacological profile of
         the drug and assess the potential safety and efficacy of the product.
         The results of these studies are submitted to the FDA as part of the
         IND. They must demonstrate that the product delivers sufficient
         quantities of the drug to the bloodstream or intended site of action
         to produce the desired therapeutic results before human clinical
         trials may begin. These studies must also provide the appropriate
         supportive safety information necessary for the FDA to determine
         whether the clinical studies proposed to be conducted under the IND
         can safely proceed. The IND automatically becomes effective 30 days
         after receipt by the FDA unless the FDA, during that 30-day period,
         raises concerns or questions about the conduct of the proposed trials
         as outlined in the IND. In such cases, the IND sponsor and the FDA
         must resolve any outstanding concerns before clinical trials may
         begin. In addition, an independent institutional review board must
         review and approve any clinical study prior to initiation.


         Human clinical studies are typically conducted in three sequential
         phases, which may overlap:

               *  Phase I: The drug is initially introduced into a relatively
                  small number of healthy human subjects or patients and is
                  tested for safety, dosage tolerance, mechanism of action,
                  absorption, metabolism, distribution and excretion.
               *  Phase II: Studies are performed with a limited patient
                  population to identify possible adverse effects and safety
                  risks, to assess the efficacy of the product for specific
                  targeted diseases or conditions, and to determine dosage
                  tolerance and optimal dosage.
               *  Phase III: When Phase II evaluations demonstrate that a
                  dosage range of the product is effective and has an
                  acceptable safety profile, Phase III trials are undertaken
                  to evaluate further dosage and clinical efficacy and to test
                  further for safety in an expanded patient population at
                  geographically dispersed clinical study sites.


         The results of the product development, preclinical studies and
         clinical studies are then submitted to the FDA as part of the NDA.
         The NDA drug development and approval process could take from three
         to more than 10 years.

         In January 2005, we introduced our second NDA approved product,
         Clindesse(R), the first approved single-dose therapy for bacterial
         vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
         proprietary VagiSite(TM) bioadhesive drug delivery technology. In
         fiscal 2006, we introduced Encora(R), a new prescription nutritional
         supplement product, and two new hematinic products, Niferex Gold(R)
         and Repliva 21/7(TM). Ther-Rx currently has a number of products in
         its research and development pipeline at various stages of
         development. We believe we have the technological expertise required
         to develop unique products to meet currently unmet needs in the area
         of women's health, as well as other therapeutic areas.

         As part of the May 2005 acquisition of FemmePharma, we assumed
         development responsibility and secured full worldwide marketing
         rights to an endometriosis product that had successfully completed
         Phase II clinical trials. We believe that this transaction allows us
         to best monitor the drug's continued development to ultimately
         capitalize on an attractive opportunity in this therapeutic area. The
         initial Phase III clinical studies began during the latter part of
         fiscal 2006. We are currently in the process of modifying and
         redefining these protocols. We are negotiating final protocol details
         under a Special Protocol Assessment ("SPA") with the FDA to ensure
         alignment prior to restarting the new Phase III study. In the
         meantime, the Company is testing a next generation formula in a Phase
         II study. In connection with the FemmePharma acquisition, the Company
         recorded expense in fiscal 2006

                                      16




         of $30.4 million that consisted of $29.6 million for acquired
         in-process research and development and $0.9 million in direct
         expenses related to the transaction.

         In May 2007, we acquired the U.S. marketing rights to Evamist(TM), a
         new low-dose estrogen transdermal spray, from VIVUS, Inc. The product
         was formulated with a patented metered-dose transdermal spray system
         which is designed to provide an easy, once-daily dose of estrodial
         via the skin. Evamist(TM) is the first transdermal spray estrogen
         replacement therapy product approved for use in the United States.
         Under the terms of the Asset Purchase Agreement, we agreed to pay
         $10.0 million in cash at closing and agreed to make an additional
         cash payment of $140.0 million upon final approval of the product by
         the FDA. Because the product had not obtained FDA approval when the
         initial payment was made at closing, we recorded $10.0 million of
         in-process research and development expense during the three months
         ended June 30, 2007. The agreement also provides for two future
         payments upon achievement of certain net sales milestones. In July
         2007, FDA approval for Evamist(TM) was received and we paid $140.0
         million to VIVUS, Inc. We are in the process of determining the
         allocation of the $140.0 million payment and we plan to launch the
         product during the fourth quarter of fiscal 2008.

         GENERIC/NON-BRANDED PRODUCT DEVELOPMENT. FDA approval of an ANDA is
         required before marketing a generic equivalent of a drug approved
         under an NDA in the United States or for a previously unapproved
         dosage strength or delivery system for a drug approved under an ANDA.
         The ANDA development process is generally less time consuming and
         complex than the NDA development process. It typically does not
         require new preclinical and clinical studies because it relies on the
         studies establishing safety and efficacy conducted for the drug
         previously approved through the NDA process. The ANDA process,
         however, does require one or more bioequivalency studies to show that
         the ANDA drug is bioequivalent to the previously approved drug.
         Bioequivalence compares the bioavailability of one drug product with
         that of another formulation containing the same active ingredient.
         When established, bioequivalence confirms that the rate of absorption
         and levels of concentration in the bloodstream of a formulation of
         the previously approved drug and the generic drug are equivalent.
         Bioavailability indicates the rate and extent of absorption and
         levels of concentration of a drug product in the bloodstream needed
         to produce the same therapeutic effect.

         Supplemental ANDAs are required for approval of various types of
         changes to an approved application, and these supplements may be
         under review for six months or more. In addition, certain types of
         changes may be approved only once new bioequivalence studies are
         conducted or other requirements are satisfied.

         PATENTS AND OTHER PROPRIETARY RIGHTS

         We actively seek, when appropriate and available, protection for our
         products and proprietary information by means of U.S. and foreign
         patents, trademarks, trade secrets, copyrights and contractual
         arrangements. Patent protection in the pharmaceutical field, however,
         can involve complex legal and factual issues. Moreover, broad patent
         protection for new formulations or new methods of use of existing
         chemical compounds is sometimes difficult to obtain, primarily
         because the active ingredient and many of the formulation techniques
         have been known for some time. Consequently, some patents claiming
         new formulations or new methods of use for old drugs may not provide
         meaningful protection against competition. Nevertheless, we intend to
         continue to seek patent protection when appropriate and available and
         otherwise to rely on regulatory-related exclusivity and trade secrets
         to protect certain of our products, technologies and other scientific
         information. There can be no assurance, however, that any steps taken
         to protect such proprietary information will be effective.

         Our policy is to file patent applications in appropriate situations
         to protect and preserve, for our own use, technology, inventions and
         improvements that we consider important to the development of our
         business. We currently hold domestic and foreign issued patents the
         last of which expires in fiscal 2023 relating to our
         controlled-release, site-specific, quick dissolve and taste-masking
         technologies. We have been granted 43 U.S. patents and have 39 U.S.
         patent applications pending. In addition, we have 67 foreign issued
         patents and a total of 203 patent applications pending primarily in
         Canada, Europe, Australia, Japan, South America, Mexico and

                                      17




         South Korea (see Item 1A "Risk Factors - We depend on our patents and
         other proprietary rights and cannot be certain of their
         confidentiality and protection" for additional information).

         We currently own more than 200 U.S. and foreign trademark
         registrations and have also applied for trademark protection for the
         names of our proprietary controlled-release, tastemasking,
         site-specific and quick dissolve technologies. We intend to continue
         to trademark new technology and product names as they are developed.

         To protect our trademark, domain name, and related rights, we
         generally rely on 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.

         MANUFACTURING AND FACILITIES

         We believe that our research, manufacturing, distribution and
         administrative facilities are an important factor in achieving our
         long-term growth objectives. All facilities at March 31, 2007,
         aggregating approximately 1.2 million square feet, are located in the
         St. Louis, Missouri metropolitan area. We own facilities with
         approximately 1.1 million square feet, with the balance under various
         leases at pre-determined annual rates under agreements expiring from
         fiscal 2008 through fiscal 2017, subject in most cases to renewal at
         our option. In June 2006, we exercised the purchase option on a
         126,168 square foot building in accordance with a previous lease
         agreement and acquired it for $4.9 million.

         We manufacture drug products in liquid, semi-solid, tablet, capsule
         and caplet forms for distribution by Ther-Rx, ETHEX and our corporate
         licensees and value-added specialty raw materials for distribution by
         PDI. We believe that all of our facilities are in material compliance
         with applicable regulatory requirements.

         We seek to maintain inventories at sufficient levels to support
         current production and sales levels. During fiscal 2007, we
         encountered no serious shortage of any particular raw materials.
         Although there can be no assurance that raw material supply will not
         adversely affect our future operations, we do not believe that any
         shortages will occur in the foreseeable future.

         COMPETITION

         Competition in the development and marketing of pharmaceutical
         products is intense and characterized by extensive research efforts
         and rapid technological progress. Many companies, including those
         with financial and marketing resources and development capabilities
         substantially greater than our own, are engaged in developing,
         marketing and selling products that compete with those that we offer.
         Our branded pharmaceutical products may also be subject to
         competition from alternate therapies during the period of patent
         protection and thereafter from generic equivalents. In addition, our
         generic/non-branded pharmaceutical products may be subject to
         competition from pharmaceutical companies engaged in the development
         of alternatives to the generic/non-branded products we offer or of
         which we undertake development. Our competitors may develop generic
         products before we do or may have pricing advantages over our
         products. In our specialty pharmaceutical businesses, we compete
         primarily on the basis of product efficacy, breadth of product line
         and price. We believe that our patents, proprietary trade secrets,
         technological expertise, product development and manufacturing
         capabilities will enable us to maintain a leadership position in the
         field of advanced drug delivery technologies and to continue to
         develop products to compete effectively in the marketplace.

         In addition, we compete for product acquisitions with other
         pharmaceutical companies. Many of these competitors have
         substantially greater financial and marketing resources than we do.
         Accordingly, our competitors may succeed in product line acquisitions
         that we seek to acquire.


                                      18




         We also compete with drug delivery companies engaged in the
         development of alternative drug delivery systems. We are aware of a
         number of companies currently seeking to develop new non-invasive
         drug delivery systems, including oral delivery and transmucosal
         systems. Many of these companies may have greater research and
         development capabilities, experience, manufacturing, marketing,
         financial and managerial resources than we do. Accordingly, our
         competitors may succeed in developing competing technologies,
         obtaining FDA approval for products or gaining market acceptance more
         rapidly than we do.

         GOVERNMENT REGULATION

         All pharmaceutical manufacturers are subject to extensive regulation
         by the federal government, principally the FDA, and, to a lesser
         extent, by state, local and foreign governments. The Federal Food,
         Drug and Cosmetic Act, or FDCA, and other federal statutes and
         regulations govern or influence, among other things, the development,
         testing, manufacture, safety, labeling, storage, recordkeeping,
         approval, advertising, promotion, sale and distribution of
         pharmaceutical products. Pharmaceutical manufacturers are also
         subject to certain record-keeping and reporting requirements,
         establishment registration and product listing, and FDA inspections.

         With respect to any non-biological "new drug" product with active
         ingredients not previously approved by the FDA, a prospective
         manufacturer must submit a full NDA, including complete reports of
         preclinical, clinical and other studies to prove the product's safety
         and efficacy. A full NDA may also need to be submitted for a drug
         product with a previously approved active ingredient if, among other
         things, the drug will be used to treat an indication for which the
         drug was not previously approved, or if the abbreviated procedure
         discussed below is otherwise not available. A manufacturer intending
         to conduct clinical trials in humans for a new drug may be required
         first to submit a Notice of Claimed Investigational Exception for a
         New Drug, or IND, to the FDA containing information relating to
         preclinical and clinical studies. INDs and full NDAs may be required
         to be filed to obtain approval of certain of our products, including
         those that do not qualify for abbreviated application procedures. The
         full NDA process, including clinical development and testing, is
         expensive, time consuming and subject to inherent uncertainties (see
         "Research and Development" above).

         The Drug Price Competition and Patent Restoration Act of 1984, known
         as the Hatch-Waxman Act, established ANDA procedures for obtaining
         FDA approval for generic versions of many non-biological drugs for
         which patent or marketing exclusivity rights have expired and which
         are bioequivalent to previously approved drugs. "Bioequivalence" for
         this purpose, with certain exceptions, generally means that the
         proposed generic formulation is absorbed by the body at the same rate
         and extent as a previously approved "reference drug." Approval to
         manufacture these drugs is obtained by filing abbreviated
         applications, such as ANDAs. As a substitute for clinical studies,
         the FDA requires data indicating the ANDA drug formulation is
         bioequivalent to a previously approved reference drug among other
         requirements. The same abbreviated application procedures apply to
         antibiotic drug products that are bioequivalent to previously
         approved antibiotics, except that products containing certain older
         antibiotic ingredients are not subject to the special patent or
         marketing exclusivity protections afforded by the Hatch-Waxman Act to
         other drug products. The advantage of the ANDA approval mechanism,
         compared to an NDA, is that an ANDA applicant is not required to
         conduct preclinical and clinical studies to demonstrate the product
         is safe and effective for its intended use and may rely, instead, on
         studies demonstrating bioequivalence to a previously approved
         reference drug.

         In addition to establishing ANDA approval mechanisms, the
         Hatch-Waxman Act fosters pharmaceutical innovation through such
         incentives as non-patent exclusivity and patent restoration. The Act
         provides two distinct exclusivity provisions that either preclude the
         submission or delay the approval of an ANDA. A five-year exclusivity
         period is provided for new chemical compounds, and a three-year
         marketing exclusivity period is provided for changes to previously
         approved drugs which are based on new clinical investigations
         essential to the approval. The three-year marketing exclusivity
         period may be applicable to the approval of a novel drug delivery
         system. The marketing exclusivity provisions apply equally to
         patented and non-patented drug products, but do not apply to products
         containing antibiotic ingredients first submitted for approval on or
         before November 20, 1997. These provisions do not delay or otherwise
         affect the approvability of full NDAs even when effective

                                      19




         ANDA approvals are not available. For drugs covered by patents,
         patent extension may be provided for up to five years as compensation
         for reduction of the effective life of the patent resulting from time
         spent in conducting clinical trials and in FDA review of a drug
         application.

         There has been substantial litigation in the biomedical,
         biotechnology and pharmaceutical industries with respect to the
         manufacture, use and sale of new products that are alleged to
         infringe outstanding patent rights. One or more patents cover most of
         the proprietary products for which we are developing generic
         versions. When we file an ANDA for such drug products, we will, in
         most cases, be required to certify to the FDA that any patent which
         has been listed with the FDA as covering the product is either
         invalid or will not be infringed by the sale of our product.
         Alternatively, we could certify that we would not market our proposed
         product until the applicable patent expires. A patent holder may
         challenge a notice of non-infringement or invalidity by filing suit,
         which would in most cases, prevent FDA approval until the suit is
         resolved or at least 30 months have elapsed (unless the patent
         expires, whichever is earlier). Should any entity commence a lawsuit
         with respect to any alleged patent infringement by us, the
         uncertainties inherent in patent litigation would make the outcome of
         such litigation difficult to predict.

         In addition to marketing drugs which are subject to FDA review and
         approval, we market certain drug products in the U.S. without FDA
         approval under certain "grandfather" clauses and statutory and
         regulatory exceptions to the pre-market approval requirement for "new
         drugs" under the FDCA. A determination as to whether a particular
         product does or does not require FDA pre-market review and approval
         can involve consideration of numerous complex and imprecise factors.
         If a determination is made by the FDA that any product marketed
         without approval requires such approval, the FDA may institute
         enforcement actions, including product seizure, or action seeking an
         injunction or hold against further marketing and may or may not allow
         sufficient time to obtain the necessary approvals before it seeks to
         curtail further marketing. We are not in a position to predict
         whether or when the FDA might choose to raise objections to the
         marketing without NDA or ANDA approval of a category or categories of
         drug products represented in our product lines. In the event such
         objections are raised, we could be required or could decide to cease
         distribution of affected products until pre-market approval is
         obtained. In addition, we may not be able to obtain any particular
         approval that may be required or such approval may not be obtained on
         a timely basis.

         In this regard, 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,
         certain of the Company's other unapproved products were placed on
         hold by representatives of the Missouri Department of Health and
         Senior Services. Please see "Government Regulation" in Item 7,
         Management's Discussion and Analysis of Financial Condition and
         Results of Operations, for a more detailed discussion related to the
         product hold.

         In October 2007, the FDA issued a Notice extending the period during
         which the FDA will exercise its enforcement discretion not to
         challenge continued marketing and distribution of pancreatic enzyme
         products, such as ETHEX's Pangestyme(TM) product. Under the
         extension, FDA will continue to exercise its enforcement discretion
         with respect to unapproved pancreatic enzyme products that have an
         active Investigational New Drug Application ("IND") on active status
         on or before April 28, 2008 and have submitted an NDA on or before
         April 28, 2009.

         In addition to obtaining pre-market approval for certain of our
         products, we are required to maintain all facilities in compliance
         with the FDA's current Good Manufacturing Practice, or cGMP,
         requirements. In addition to compliance with cGMP each pharmaceutical
         manufacturer's facilities must be registered with the FDA.


                                      20




         Manufacturers must also be registered with the U.S. Drug Enforcement
         Administration, or DEA, and similar state and local regulatory
         authorities if they handle controlled substances, with the EPA and
         similar state and local regulatory authorities if they generate toxic
         or dangerous wastes, and must comply with other applicable DEA and
         EPA requirements. Noncompliance with applicable requirements can
         result in fines, recall or seizure of products, total or partial
         suspension of production and distribution, refusal of the government
         to enter into supply contracts or to approve NDAs, ANDAs or other
         applications and criminal prosecution. The FDA also has the authority
         to revoke for-cause drug approvals previously granted.

         The Prescription Drug Marketing Act, or PDMA, which amended various
         sections of the FDCA, requires, among other things, state licensing
         of wholesale distributors of prescription drugs under federal
         guidelines that include minimum standards for storage, handling and
         record keeping. All of our facilities are registered with the State
         of Missouri, where they are located, as required by Federal and
         Missouri law. The PDMA also imposes detailed requirements on the
         distribution of prescription drug samples such as those distributed
         by the Ther-Rx sales force. The PDMA sets forth substantial civil and
         criminal penalties for violations of these and other provisions. Many
         states also require registration of out-of-state drug manufacturers
         and distributors who sell products in their states, and may also
         impose additional requirements or restrictions on out-of-state firms.
         These requirements vary widely from state-to-state and are subject to
         change with little or no direct notice to potentially affected firms.
         We believe that we are currently in compliance in all material
         respects with applicable state requirements. However, in the event
         that we are found to have failed to comply with applicable state
         requirements, we may be subject to sanctions, including monetary
         penalties and potential restrictions on our sales or other activities
         within particular states.

         For international markets, a pharmaceutical company is subject to
         regulatory requirements, inspections and product approvals
         substantially the same as those in the U.S. In connection with any
         future marketing, distribution and license agreements that we may
         enter into, our licensees may accept or assume responsibility for
         such foreign regulatory approvals. The time and cost required to
         obtain these international market approvals may be greater or less
         than those required for FDA approval.

         Product development and approval within this regulatory framework
         take a number of years, involve the expenditure of substantial
         resources and are uncertain. Many drug products ultimately do not
         reach the market because they are not found to be safe or effective
         or cannot meet the FDA's other regulatory requirements. In addition,
         the current regulatory framework may change and additional regulatory
         or approval requirements may arise at any stage of our product
         development that may affect approval, delay the submission or review
         of an application or require additional expenditures by us. We may
         not be able to obtain necessary regulatory clearances or approvals on
         a timely basis, if at all, for any of our products under development,
         and delays in receipt or failure to receive such clearances or
         approvals, the loss of previously received clearances or approvals,
         or failure to comply with existing or future regulatory requirements
         could have a material adverse effect on our business.

         EMPLOYEES

         As of March 31, 2007, we employed a total of 1,414 employees. We were
         a party to a collective bargaining agreement with the Teamsters Union
         covering 133 employees that would have expired on December 31, 2009.
         However, on January 23, 2008, the employee members of the union voted
         to decertify their union representation. The decertification became
         effective February 7, 2008.

         ENVIRONMENT

         We do not expect that compliance with Federal, state or local
         provisions regulating the discharge of materials into the environment
         or otherwise relating to the protection of the environment will have
         a material effect on our capital expenditures, earnings or
         competitive position.


                                      21




         AVAILABLE INFORMATION

         We make available, free of charge through our Internet website
         (http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
         Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
         amendments to these reports filed or furnished pursuant to Section
         13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
         soon as reasonably practicable after we electronically file these
         reports with, or furnish them to, the Securities and Exchange
         Commission. Also, copies of our Corporate Governance Guidelines,
         Audit Committee Charter, Compensation Committee Charter, Nominating
         and Corporate Governance Committee Charter, Code of Ethics for Senior
         Executives and Standards of Business Ethics for all Directors and
         employees are available on our Internet website, and available in
         print to any shareholder who requests them. The information posted on
         our website is not incorporated into this annual report.

         In addition, the SEC maintains an Internet website
         (http://www.sec.gov) that contains reports, proxy and information
         statements, and other information regarding registrants that file
         electronically with the SEC.

ITEM 1A. RISK FACTORS
         ------------

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

                         RISKS RELATED TO OUR BUSINESS

         THE MATTERS RELATING TO THE INVESTIGATION BY THE SPECIAL COMMITTEE
         AND THE RESTATEMENT OF THE COMPANY'S CONSOLIDATED FINANCIAL
         STATEMENTS MAY RESULT IN ADDITIONAL LITIGATION AND GOVERNMENT
         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-K, 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 3 "Restatement of
         Consolidated Financial Statements" in Notes to Consolidated Financial
         Statements in this Form 10-K.

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

         While we believe we have made appropriate judgments in determining
         the correct measurement dates for our stock option grants, based upon
         the Special Committee's findings and in consultation with outside
         experts and our


                                      22




         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 13 to our Consolidated Financial
         Statements, "Commitments and Contingencies," 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 2007 that it had issued a formal order of
         investigation 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 could 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 to some of our 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 there were material weaknesses, as
         defined in the Public Company Accounting Oversight Board's Auditing
         Standard No. 2, in our internal control over financial reporting as
         of March 31, 2007. 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 9A of this Report for additional
         information regarding our internal control over financial reporting.

         Our internal control over financial reporting may not prevent all
         errors 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,


                                      23




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

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

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

         OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

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

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

         Our success depends, in large part, on our ability to protect our
         current and future technologies and products, to defend our
         intellectual property rights and to avoid infringing on the
         proprietary rights of others. We have been issued numerous patents in
         the U.S. 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


                                      24




         invention in the U.S. 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 U.S. 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 U.S. 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 U.S. 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
         U.S. For example, methods of treating humans are not patentable in
         many countries outside of the U.S.

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

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

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

         WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.

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

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


                                      25




         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 U.S.
         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
         four patent infringement lawsuits pending against us. They could have
         a material adverse effect on our future business, financial
         condition, 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 posed, and is
         expected to continue to pose, significant challenges for 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 business, financial condition, 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 U.S. 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, 2007, our
         three largest customers, which are wholesale distributors, accounted
         for 26%, 21% and 14% of our gross sales, respectively. The loss of
         any of these customers could materially and adversely affect our
         business, financial condition, results of operations or cash flows.

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

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


                                      26




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

         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


                                      27




         anticipate making on our product. There are a number of factors we
         would need to consider in order to decide whether to launch our
         product prior to final resolution, including (1) outside legal
         advice, (2) the status of a pending lawsuit, (3) interim court
         decisions, (4) status and timing of a trial, (5) legal decisions
         affecting other competitors for the same product, (6) market factors,
         (7) liability sharing agreements, (8) internal capacity issues, (9)
         expiration dates of patents, (10) strength of lower court decisions
         and (11) potential triggering or forfeiture of exclusivity. An
         adverse determination in the litigation relating to a product we
         launch at risk could have a material adverse effect on our business,
         financial condition, results of operations or cash flows.

         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 business, financial condition, 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.

         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.


                                      28




         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, which
         increased at a compounded annual growth rate of 24.1% over the five
         fiscal year period ended March 31, 2007, 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 business, financial condition, results of
         operations or cash flows 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 business, financial
         condition, results of operations or cash flows 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 business, financial condition, 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


                                      29




         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 could be
         obligated to provide significant credits to our customers who are
         then holding inventories of such products, which could reduce sales
         revenue and gross margin for the period when the credits are accrued.
         Like our competitors, we also give credits for chargebacks to
         wholesale customers that have contracts with us for their sales to
         hospitals, group purchasing organizations, pharmacies or other retail
         customers. A chargeback is the difference between the price the
         wholesale customer pays and the price that the wholesale customer's
         end-customer pays for a product. Although we establish allowances
         based on our prior experience and our best estimates of the impact
         that these policies may have in subsequent periods, our allowances
         may not be adequate or our actual product returns, allowances and
         chargebacks may exceed our estimates.

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

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

         The Company and/or ETHEX have been named as defendants in certain
         multi-defendant cases alleging that the defendants reported improper
         or fraudulent pharmaceutical pricing information, i.e., 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 $0.58 million in cash and agreed to supply
         $0.15 million in free pharmaceuticals over the next two years and
         received a general release with no admission of liability. 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. In
         October 2007, ETHEX was 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 State of Utah filed
         an amended complaint in November 2007. This suit has been removed to
         federal court, where the State of Utah is seeking a remand to the
         state courts. A decision is pending before the court. 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 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.


                                      30




         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 business, 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 (the proportion of total sales
         between branded products and generic/non-branded products). Our sales
         of branded products generate higher gross margins than our sales of
         generic/non-branded products. In addition, the introduction of new
         generic products at any given time can involve significant initial
         quantities being purchased by our wholesaler customers, as they
         supply initial quantities to pharmacies and purchase product for
         their own wholesaler inventories. As a result, our sales mix will
         significantly impact our gross profit from period to period. During
         fiscal 2007, sales of our branded products and generic/non-branded
         products accounted for 42.5% and 53.1%, respectively, of our net
         revenues. During that year, branded products and generic/non-branded
         products contributed gross margins of 89.0% and 58.7%, respectively,
         to our consolidated gross profit margin of 66.8% in fiscal 2007.
         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.

         INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         At March 31, 2007, we had $241.3 million of outstanding debt,
         consisting of $200.0 million principal amount of 2.5% Contingent
         Convertible Subordinated Notes due 2033 (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 Notes. The new credit facility has a term expiring in
         June 2011. At March 31, 2007, we had no cash borrowings under our
         credit facility, but $0.9 million of letters of credit were issued
         under it. Our level of indebtedness may have several important
         effects on our future operations, including:


                                      31




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

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

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

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

         *  seek additional financing in the debt or equity markets;

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

         *  sell selected assets;

         *  reduce or delay planned capital expenditures; or

         *  reduce or delay planned research and development expenditures.

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

         We may also consider issuing additional debt or equity securities in
         the future to fund potential acquisitions or investments, to
         refinance existing debt, and/or for general corporate purposes. If a
         material acquisition or investment is completed, our operating
         results and financial condition 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 Notes as a current liability as of June 30, 2007 due
         to the right the holders have to require us to repurchase the 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 WILL 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.


                                      32




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

         The Company has funds invested in auction rate securities ("ARS").
         Consistent with the Company's investment policy guidelines, the ARS
         held by the Company are AAA rated securities with long-term nominal
         maturities secured by student loans which are guaranteed by the U.S.
         Government. The interest rates on these securities are reset through
         an auction process 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 securities held
         by the Company and 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. 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 24 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


                                      33




         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 POSITION AND RESULTS
         OF OPERATIONS.

         The 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.

                         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 U.S.;

         *  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


                                      34




         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 business, financial condition,
         results of operations or cash flows.

         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 and 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 government 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


                                      35




         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.

                       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 grant 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; 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
         U.S. 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, 2007, an aggregate of 3,435,565 shares of our Class A
         Common Stock and 230,842 shares of our Class B Common Stock were
         issuable upon exercise of outstanding stock options under our stock
         option plans, and an additional 563,750 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, 2007, 8,691,880 shares of Class A Common
         Stock were reserved for issuance upon conversion of $200.0 million
         principal amount of 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, 2007, our directors and executive officers beneficially
         own approximately 13% of our Class A Common Stock and approximately
         66% of our Class B Common Stock. As a result, these persons control
         approximately 59% 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


                                      36




         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.

         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 1B. UNRESOLVED STAFF COMMENTS
         -------------------------

         None.


                                      37




ITEM 2.  PROPERTIES
         ----------

         Our corporate headquarters is located at 2503 South Hanley Road in
         St. Louis County, Missouri, and contains approximately 35,000 square
         feet of floor space. We have a lease on the building for a period of
         five years expiring December 31, 2011, with one three-year renewal
         option. The building is leased from an affiliated partnership of an
         officer and director of the Company.

         In addition, we lease or own the facilities shown in the following
         table. All of these facilities are located in the St. Louis, Missouri
         metropolitan area.



                   SQUARE                                               LEASE              RENEWAL
                   FOOTAGE       USAGE                                  EXPIRES            OPTIONS
              --------------------------------------------------------------------------------------
                                                                                  
              Leased Facilities
                   30,150        PDI Mfg./Whse.                         11/30/12           5 Years(1)
                   10,000        PDI/KV Lab/Whse.                       11/30/08           None
                   15,000        KV/PDI Office                          02/29/08           2 Years(2)
                   23,000        KV Office/R&D/Mfg.                     12/31/12           5 Years(1)
                   41,770        KV Warehouse                           11/30/16           None
                  -------
                  119,920

              Owned Facilities
                    126,168      KV Office/Mfg(3)
                    121,472      KV Office/Whse./Lab(4)
                     87,250      KV Mfg.
                     88,850      KV Lab
                    302,940      KV Mfg/Whse/ETHEX/Ther-Rx Office(4)
                    259,990      ETHEX/Ther-Rx/PDI Distribution(4)
                     96,360      KV Warehouse
                  ---------
                  1,083,030


         ----------------------------------------
         (1)  Two five-year options.
         (2)  Two two-year options.
         (3)  The purchase option on this building was exercised by the
              Company in accordance with the lease agreement and was acquired
              for $4.9 million in June 2006.
         (4)  In March 2006, we entered into a $43.0 million mortgage loan
              agreement with one of our primary lenders secured, in part, by
              this property. This loan bears interest at a rate of 5.91% and
              matures on April 1, 2021.


         Properties used in our operations are considered suitable for the
         purposes for which they are used and are believed to be adequate to
         meet our needs for the reasonably foreseeable future. However, we
         will consider leasing or purchasing additional facilities from time
         to time, when attractive facilities become available, to accommodate
         the consolidation of certain operations and to meet future expansion
         plans.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         The information set forth under Note 13 - Commitments and
         Contingencies - to the Consolidated Financial Statements included in
         Item 8 of this report is incorporated in this Item 3 by reference.

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

         No matters were submitted to a vote of security holders during the
         fourth quarter of the Company's fiscal year ended March 31, 2007.


                                      38




ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
         ------------------------------------

         The following is a list of current executive officers of our Company,
         their ages, their positions with our Company and their principal
         occupations for at least the past five years.



NAME                       AGE      POSITION HELD AND PAST EXPERIENCE
- ------------------------------------------------------------------------------
                              
Marc S. Hermelin(1)        66       Chairman of the Board and Chief Executive
                                    Officer since August 2006; Vice Chairman
                                    and Chief Executive Officer from 1975 to
                                    August 2006; Vice Chairman of the Board
                                    from 1974 to 1975.

Richard H. Chibnall        51       Vice President, Finance and Chief
                                    Accounting Officer since June 2005; Vice
                                    President, Finance from February 2000 to
                                    June 2005.

David A. Van Vliet         52       Chief Administration Officer since
                                    September 2006; Director from August 2004
                                    to September 2006; President and Chief
                                    Operating Officer of Angelica Corporation
                                    from June 2005 to September 2006;
                                    President and Chief Executive Officer of
                                    Growing Family, Inc. from 1998 to June
                                    2005.

Gregory S. Bentley         58       Senior Vice President and General Counsel
                                    since April 2006; Executive Vice
                                    President, General Counsel and Corporate
                                    Compliance Officer, AAI Pharma, Inc. from
                                    1999 to April 2006.

Michael S. Anderson        58       Corporate Vice President, Industry
                                    Presence and Development since February
                                    2006; Chief Executive Officer, Ther-Rx
                                    Corporation from February 2000 to February
                                    2006.

Patricia K. McCullough     55       Chief Executive Officer, ETHEX Corporation
                                    since January 2006; Group Vice President,
                                    Business Development and Strategic
                                    Planning, Taro Pharmaceuticals from
                                    September 2003 to January 2006; Senior
                                    Vice President, Account Development,
                                    Cardinal Health from June 2000 to July
                                    2003.

Gregory J. Divis, Jr.      41       President, Ther-Rx Corporation since July
                                    2007; Vice President, Business Development
                                    and Life Cycle Management, Sanofi-aventis
                                    U.S. from February 2006 to July 2007; Vice
                                    President Sales, Respiratory East,
                                    Sanofi-aventis U.S. from June 2004 to
                                    February 2006; Executive Director, Sales
                                    and Marketing National Accounts, Reliant
                                    Pharmaceuticals from December 2003 to June
                                    2004; Vice President and Country Manager
                                    United Kingdom and Ireland,
                                    Schering-Plough from May 2002 to December
                                    2003; Vice President, Field Operations
                                    Oncology-Biotech Division, Schering-Plough
                                    from October 2000 to April 2002.

Raymond F. Chiostri        73       Corporate Vice President, KV
                                    Pharmaceutical since September 2006;
                                    Chairman and Chief Executive Officer of
                                    Particle Dynamics, Inc. from 1999 to
                                    September 2006.

Paul T. Brady              44       President, Particle Dynamics, Inc. since
                                    2003; Senior Vice President and General
                                    Manager, International Specialty Products
                                    Corporation from June 2002 to January
                                    2003; Senior Vice President, Commercial
                                    Director, North and South America
                                    International Specialty Products from 2000
                                    to 2002.

Rita E. Bleser             52       President, Pharmaceutical Manufacturing
                                    Division since April 2007; Vice President,
                                    Technology, Tyco Healthcare from September
                                    2001 to April 2007.

Ronald J. Kanterman        53       Vice President, Chief Financial Officer
                                    and Assistant Secretary since March 2008;
                                    Vice President, Strategic Financial
                                    Management, Treasurer, and Assistant
                                    Secretary from March 2006 to March
                                    2008; Vice President, Treasury from
                                    January 2004 to March 2006; Partner, Brown
                                    Smith Wallace, LLP from 1993 to January
                                    2004; Partner, Arthur Andersen & Co., from
                                    1987 to 1993.

Executive officers of the Company serve at the pleasure of the Board of
Directors.


- -------------------------------
(1) Marc S. Hermelin is the father of David S. Hermelin, Vice President,
Corporate Strategy & Operation Analysis, a member of the Board of Directors
since 2004.



                                      39




                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
         ----------------------------------------------------------------------
         AND ISSUER PURCHASES OF EQUITY SECURITIES
         -----------------------------------------

    A)   PRINCIPAL MARKET
         ----------------

         Our Class A Common Stock and Class B Common Stock are traded on the
         New York Stock Exchange under the symbols KV.A and KV.B,
         respectively.

    B)   APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
         ---------------------------------------------

         The number of holders of record of Class A and Class B Common Stock
         as of January 15, 2008, was 906 and 322, respectively (not separately
         counting shareholders whose shares are held in "nominee" or "street"
         names, which are estimated to represent approximately 5,000
         additional holders of Class A Common Stock and Class B Common Stock
         combined).

    C)   STOCK PRICE AND DIVIDEND INFORMATION
         ------------------------------------

         The high and low closing sales prices of our Class A and Class B
         Common Stock during each quarter of fiscal 2007 and 2006, as reported
         on the New York Stock Exchange were as follows:




                                                           CLASS A COMMON STOCK
                                                           --------------------

                                            FISCAL 2007                                     FISCAL 2006
                                            -----------                                     -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------

                                                                                            
         First...................... $24.31            $17.50                        $24.37             $16.75
         Second.....................  23.94             16.90                         18.27              15.53
         Third......................  24.91             21.74                         21.50              16.79
         Fourth.....................  26.28             22.83                         24.22              20.60


                                                           CLASS B COMMON STOCK
                                                           --------------------

                                            FISCAL 2007                                     FISCAL 2006
                                            -----------                                     -----------
         QUARTER                      HIGH               LOW                          HIGH                LOW
         -------                      ----------------------                          -----------------------

                                                                                            
         First...................... $24.27            $17.48                        $24.72             $16.79
         Second.....................  23.92             16.92                         18.24              15.53
         Third......................  24.86             21.78                         21.57              16.83
         Fourth.....................  26.21             22.71                         24.13              21.27


         Since 1980, we have not declared or paid any cash dividends on our
         common stock and we do not plan to do so in the foreseeable future.
         No dividends may be paid on Class A Common Stock or Class B Common
         Stock unless all dividends on the Cumulative Convertible Preferred
         Stock have been declared and paid. Dividends must be paid on Class A
         Common Stock when, and if, we declare and distribute dividends on the
         Class B Common Stock. Dividends of $70,000 were paid in fiscal 2007
         and 2006 on 40,000 shares of outstanding Cumulative Convertible
         Preferred Stock. There were no undeclared and unaccrued cumulative
         preferred dividends at March 31, 2007.


                                      40




         Also, under the terms of our credit agreement, we may not pay cash
         dividends in excess of 25% of the prior fiscal year's consolidated
         net income. For the foreseeable future, we plan to use cash generated
         from operations for general corporate purposes, including funding
         potential acquisitions, research and development and working capital.
         Our board of directors reviews our dividend policy periodically. Any
         payment of dividends in the future will depend upon our earnings,
         capital requirements, financial condition and other factors
         considered relevant by our board of directors. See also Note 17 of
         Notes to Consolidated Financial Statements for information relating
         to our equity compensation plans.




- ----------------------------------------------------------------------------------------------------------------------
                                         ISSUER PURCHASES OF EQUITY SECURITIES

- ----------------------------------------------------------------------------------------------------------------------
         PERIOD              TOTAL NUMBER OF            WEIGHTED            TOTAL NUMBER OF       MAXIMUM NUMBER OF
                            SHARES PURCHASED       AVERAGE PRICE PAID     SHARES PURCHASED AS     SHARES (OR UNITS)
                                   (a)                 PER SHARE           PART OF PUBLICLY       THAT MAY YET BE
                                                                          ANNOUNCED PLANS OR     PURCHASED UNDER THE
                                                                               PROGRAMS           PLANS OR PROGRAMS
- ----------------------------------------------------------------------------------------------------------------------
                                                                                         
1/1/07 - 1/31/07                    552                  $23.95                    -                      -
- ----------------------------------------------------------------------------------------------------------------------
2/1/07 - 2/28/07                  1,034                  $25.71                    -                      -
- ----------------------------------------------------------------------------------------------------------------------
3/1/07 - 3/31/07                    174                  $24.51                    -                      -
- ----------------------------------------------------------------------------------------------------------------------
Total                             1,760                  $25.04                    -                      -
- ----------------------------------------------------------------------------------------------------------------------

(a)  Shares were purchased from employees upon their termination pursuant to
     the terms of the Company's Stock Option Plan.



                                      41




         EQUITY COMPENSATION PLAN INFORMATION

         The following information regarding compensation plans of the Company
         is furnished as of March 31, 2007, the end of the Company's most
         recently completed fiscal year.



                                        EQUITY COMPENSATION PLAN INFORMATION
                                           REGARDING CLASS A COMMON STOCK

- --------------------------------------------------------------------------------------------------------------------
                                                                                              NUMBER OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                 NUMBER OF SECURITIES TO BE                                  FUTURE ISSUANCE UNDER
                                  ISSUED UPON EXERCISE OF     WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                    OUTSTANDING OPTIONS,         PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    WARRANTS AND RIGHTS      OPTIONS, WARRANTS AND RIGHTS   REFLECTED IN COLUMN (a))
                                    -------------------      ----------------------------   ------------------------
         PLAN CATEGORY                      (a)                          (b)                          (c)
                                                                                           
Equity compensation plans
approved by security holders(1)          3,435,565                      $16.25                      563,750

Equity compensation plans not
approved by security holders
                                                --                          --                           --
                                         ---------                      ------                      -------
             Total                       3,435,565                      $16.25                      563,750
                                         =========                                                  =======


(1)  Consists of the Company's 1991 and 2001 Incentive Stock Option Plans. See
     Note 17 of Notes to Consolidated Financial Statements.



                                        EQUITY COMPENSATION PLAN INFORMATION
                                           REGARDING CLASS B COMMON STOCK

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

                                                                                              NUMBER OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                 NUMBER OF SECURITIES TO BE                                  FUTURE ISSUANCE UNDER
                                  ISSUED UPON EXERCISE OF     WEIGHTED-AVERAGE EXERCISE    EQUITY COMPENSATION PLANS
                                    OUTSTANDING OPTIONS,         PRICE OF OUTSTANDING        (EXCLUDING SECURITIES
                                    WARRANTS AND RIGHTS      OPTIONS, WARRANTS AND RIGHTS   REFLECTED IN COLUMN (a))
                                    -------------------      ----------------------------   ------------------------
         PLAN CATEGORY                      (a)                          (b)                          (c)
                                                                                          
Equity compensation plans
approved by security holders(1)            230,842                      $13.92                     1,230,000

Equity compensation plans not
approved by security holders
                                                --                          --                            --
                                           -------                      ------                     ---------
             Total                         230,842                      $13.92                     1,230,000
                                           =======                                                 =========


(1)  Consists of the Company's 1991 and 2001 Incentive Stock Option Plans. See Note 17 of Notes to Consolidated
     Financial Statements.



                                   42




         STOCK PRICE PERFORMANCE GRAPH

         Set forth below is a line-graph presentation comparing cumulative
         shareholder returns for the last five fiscal years on an indexed
         basis with the NYSE Composite Index and the S&P Pharmaceuticals
         Index, a nationally recognized industry standard index. The graph
         assumes the investment of $100 in Company Class A Common Stock and
         $100 in Class B Common Stock, the NYSE Composite Index, and the S&P
         Pharmaceuticals Index on March 31, 2002, and reinvestment of all
         dividends. The Company's stock performance may not continue into the
         future with the same or similar trends depicted in the graph below.

                    COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
              Among KV Pharmaceutical Company, The NYSE Composite Index
                           And The S&P Pharmaceuticals Index


                                    [GRAPH]



                                                                   YEARS ENDED MARCH 31,
                                                                   ---------------------
                                               2003          2004          2005          2006          2007
                                               ----          ----          ----          ----          ----
                                                                                       
K-V PHARMACEUTICAL COMPANY                     59.66        124.54        113.07        117.09        120.01

NYSE COMPOSITE                                 79.61        117.94        135.71        164.25        196.85

S&P PHARMACEUTICALS                            80.68         84.81         80.98         81.91         91.33



                                      43




ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------

The following unaudited selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operation" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Form 10-K to fully understand factors that may
affect the comparability of the information presented below. The information
presented in the following tables has been adjusted to reflect the restatement
of our consolidated financial results which is 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 3 "Restatement of Consolidated Financial Statements" in
the Notes to Consolidated Financial Statements in this Form 10-K. We derived
the selected consolidated financial data as of March 31, 2007 and 2006 and for
the fiscal years ended March 31, 2007, 2006 and 2005 from our audited
Consolidated Financial Statements, and accompanying notes, in this report on
Form 10-K. The income statement data for the fiscal years ended March 31, 2006
and 2005, and the balance sheet data as of March 31, 2006 have been restated
in connection with the restatements discussed in Note 3 of the Notes to
Consolidated Financial Statements. The income statement data for the years
ended March 31, 2004 and 2003, and the balance sheet data as of March 31,
2005, 2004 and 2003 have been restated as discussed in footnote (b) below.

We have not amended our previously filed Annual Reports on Form 10-K or
Quarterly Reports on Form 10-Q for the periods affected by the restatement,
except for the Quarterly Report on Form 10-Q for the quarter ended June 30,
2006. The financial information that has been previously filed or otherwise
reported for these periods is superseded by the information in this Annual
Report on Form 10-K, and the financial statements and related financial
information contained in those previously filed reports should no longer be
relied upon.


BALANCE SHEET DATA

(unaudited, in thousands)                                                       MARCH 31,
                                                  ------------------------------------------------------------------------
                                                    2007         2006 (a)       2005 (b)        2004 (b)          2003 (b)
                                                  --------       --------       --------        --------          --------

                                                               (AS RESTATED)  (AS RESTATED)   (AS RESTATED)    (AS RESTATED)
                                                                                                   
Cash, cash equivalents and
     marketable securities                        $240,386       $207,469       $205,519        $226,911          $96,288
Working capital                                    372,291        304,958        296,240         301,604          136,696
Property and equipment, net                        186,900        178,042        131,624          75,777           51,903
Total assets                                       707,783        619,313        558,952         527,679          352,310
Current liabilities                                 59,179         44,332         41,577          55,745           76,462
Long-term debt                                     239,451        241,319        209,767         210,741           10,106
Shareholders' equity                               364,827        302,999        286,477         252,721          259,416


                                      44





INCOME STATEMENT DATA

(unaudited; in thousands, except per share data)                             YEARS ENDED MARCH 31,
                                                    -------------------------------------------------------------------------
                                                      2007         2006 (a)       2005 (a)         2004 (b)         2003 (b)
                                                    --------       --------       --------         ---------        ---------

                                                                 (AS RESTATED)  (AS RESTATED)     (AS RESTATED)    (AS RESTATED)

                                                                                                     
Net revenues                                        $443,627       $367,640       $304,656         $ 282,994        $ 247,958
Operating income (c)(d)                             $ 88,156       $ 36,157       $ 51,684          $ 70,600         $ 43,352
Net income (c)(d)                                   $ 58,090       $ 11,416       $ 31,217          $ 41,700           28,191
Earnings per share:
    Diluted - Class A common (e)                      $ 1.05         $ 0.23         $ 0.60            $ 0.78           $ 0.55
    Diluted - Class B common (f)                      $ 0.91         $ 0.20         $ 0.52            $ 0.68           $ 0.48
Shares used in per share calculation:
    Diluted - Class A common (e)                      58,953         49,997         58,633            57,792           51,155
    Diluted - Class B common (f)                      12,489         13,113         15,072            16,175           16,091
Preferred stock dividends                               $ 70           $ 70           $ 70             $ 436             $ 70


(a)  See Note 3 "Restatement of Consolidated Financial Statements" to the
     Notes to Consolidated Financial Statements included in this Form 10-K for
     additional information regarding the adjustments made to our restated
     consolidated financial statements.

(b)  The selected financial data as of March 31, 2005, 2004 and 2003 and for
     the fiscal years ended March 31, 2004 and 2003 have been adjusted to
     reflect the restatements described in Note 3, "Restatement of
     Consolidated Financial Statements," of the Notes to Consolidated
     Financial Statements. The cumulative after-tax impact of all restatement
     adjustments related to years prior to fiscal 2003 totaled $11.6 million,
     which is reflected as an adjustment to shareholders' equity as of April
     1, 2002. See page 47 for table reconciling the Company's previously
     reported results to the restated consolidated statements of income for
     the fiscal years ended March 31, 2004 and 2003.

(c)  Operating income in fiscal 2006 included an expense of $30.4 million
     recognized in connection with the FemmePharma acquisition that consisted
     of $29.6 million for acquired in-process research and development and
     $0.9 million for direct expenses related to the transaction (see Note 4
     to the Notes to Consolidated Financial Statements). The impact of this
     item, which is not deductible for tax purposes, was to decrease net
     income by $30.4 million in fiscal 2006.

(d)  Operating income in fiscal 2003 included a provision of $16.5 million for
     potential damages associated with the Healthpoint litigation. The impact
     of the litigation reserve, net of applicable income taxes, was to reduce
     net income by $10.4 million in fiscal 2003.

(e)  Previously reported amounts give effect to the three-for-two stock split
     effected in the form of a 50% stock dividend that occurred in September
     2003.

(f)  In fiscal 2007, we 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,
     we did not present diluted earnings per share for Class B Common Stock.



                                      45



The tables below reflect the impact of the restatement adjustments on our
balance sheet data as of March 31, 2005, 2004 and 2003 and our income
statement data for the fiscal years ended March 31, 2004 and 2003.


BALANCE SHEET DATA

(unaudited, in thousands)                                MARCH 31, 2005
                                      ------------------------------------------------------
                                          AS
                                      PREVIOUSLY                                     AS
                                       REPORTED   ADJUSTMENTS                     RESTATED
                                       --------   -----------                     --------
                                                                      
Cash, cash equivalents and
    marketable securities             $  205,519  $         -                  $   205,519
Working capital                          302,465       (6,225) (a)(b)(c)(d)(e)     296,240
Property and equipment, net              131,624            -                      131,624
Total assets                             558,317          635  (a)(b)(e)           558,952
Current liabilities                       34,717        6,860  (a)(b)(c)(d)(e)      41,577
Long-term debt                           209,767            -                      209,767
Shareholders' equity                     292,702       (6,225) (a)(b)(c)(d)(e)     286,477


                                                         MARCH 31, 2004
                                      ------------------------------------------------------
                                          AS
                                      PREVIOUSLY                                     AS
                                       REPORTED   ADJUSTMENTS                     RESTATED
                                       --------   -----------                     --------
                                                                      
Cash, cash equivalents and
    marketable securities             $  226,911  $         -                  $   226,911
Working capital                          306,632       (5,028) (a)(b)(c)(d)(e)     301,604
Property and equipment, net               75,777            -                       75,777
Total assets                             528,438         (759) (a)(b)(e)           527,679
Current liabilities                       51,476        4,269  (a)(b)(c)(d)(e)      55,745
Long-term debt                           210,741            -                      210,741
Shareholders' equity                     257,749       (5,028) (a)(b)(c)(d)(e)     252,721


BALANCE SHEET DATA
(unaudited in thousands)
                                                         MARCH 31, 2003
                                      ------------------------------------------------------
                                            AS
                                        PREVIOUSLY                                   AS
                                         REPORTED    ADJUSTMENTS                  RESTATED
                                         --------    -----------                  --------
                                                                      
Cash, cash equivalents and
    marketable securities               $   96,288   $         -               $    96,288
Working capital                            137,896        (1,200) (a)(c)(e)        136,696
Property and equipment, net                 51,903                                  51,903
Total assets                               352,668          (358) (a)(e)           352,310
Current liabilities                         75,620           842  (c)(e)            76,462
Long-term debt                              10,106             -                    10,106
Shareholders' equity                       260,616        (1,200) (a)(c)(e)        259,416


(a)  Adjustment for income tax impact associated with stock-based compensation
     expense pursuant to APB 25 ($1,373, $1,050 and $717 in fiscal 2005, 2004
     and 2003, respectively), partially offset by net effect of tax benefit
     realized in accrued taxes ($723 and $319 in fiscal 2005 and 2004,
     respectively) and excess tax benefit reflected in paid-in capital ($656
     and $298 in 2005 and 2004, respectively).
(b)  Adjustment for payroll taxes, interest and penalties associated with
     stock-based compensation expense pursuant to APB 25 ($984 and $439 in
     fiscal 2005 and 2004, respectively) and the related income tax impact
     ($273 and $123 in fiscal 2005 and 2004, respectively).
(c)  Adjustment for exercise deposits received by the Company for stock
     options in the two-year forfeiture period ($3,872, $3,288 and $1,321 in
     fiscal 2005, 2004 and 2003, respectively).
(d)  Adjustment for additional income tax liabilities associated with tax
     positions taken on filed tax returns, partially offset by certain
     expected tax refunds ($3,187 and $1,689 in fiscal 2005 and 2004,
     respectively).
(e)  Adjustment to record revenue and cost of sales when product is received
     by the customer instead of shipping date for certain customers as
     follows:


                                                 2005            2004           2003
                                                 ----            ----           ----
                                                                    
     Decrease in receivables                  $ 1,197         $ 2,360        $ 1,414
     Increase in inventories                      429             695            490
     Decrease in deferred tax assets              187             245            151
     Decrease in accrued liabilities              470             828            479
     Decrease in retained earnings                485           1,082            596


                                      46





INCOME STATEMENT DATA

(unaudited, in thousands, except per share data)


                                                                             YEARS ENDED MARCH 31,
                                       --------------------------------------------------------------------------------------------
                                                            2004                                           2003
                                       ---------------------------------------------  ---------------------------------------------
                                            AS                                             AS
                                        PREVIOUSLY                           AS        PREVIOUSLY                           AS
                                         REPORTED       ADJUSTMENTS       RESTATED      REPORTED       ADJUSTMENTS       RESTATED
                                         --------       -----------       --------      --------       -----------       --------
                                                                                                       
Net revenues                            $  283,941       $   (947)        $ 282,994    $  244,996        $ 2,962         $ 247,958
Cost of sales                               98,427           (205)           98,222        94,527          1,352            95,879
                                       ---------------------------------------------  ---------------------------------------------
Gross profit                               185,514           (742)          184,772       150,469          1,610           152,079
                                       ---------------------------------------------  ---------------------------------------------
Operating expenses:
    Research and development                20,651              -            20,651        19,135              -            19,135
    Selling and administrative              88,333          2,429            90,762        69,584          1,187            70,771
    Amortization of intangibles              4,459              -             4,459         2,321              -             2,321
    Litigation                              (1,700)             -            (1,700)       16,500              -            16,500
                                       ---------------------------------------------  ---------------------------------------------
Total operating expenses                   111,743          2,429           114,172       107,540          1,187           108,727
                                       ---------------------------------------------  ---------------------------------------------
Operating income                            73,771         (3,171)           70,600        42,929            423            43,352
                                       ---------------------------------------------  ---------------------------------------------
Other expense (income):
    Interest expense                         5,865              -             5,865           325              -               325
    Interest and other income               (2,092)             -            (2,092)         (977)             -              (977)
                                       ---------------------------------------------  ---------------------------------------------
Total other expense (income)                 3,773              -             3,773          (652)             -              (652)
                                       ---------------------------------------------  ---------------------------------------------
Income before income taxes                  69,998         (3,171)           66,827        43,581            423            44,004
    Provision for income taxes              24,150            977            25,127        15,471            342            15,813
                                       ---------------------------------------------  ---------------------------------------------
    Net income                          $   45,848       $ (4,148)        $  41,700    $   28,110        $    81         $  28,191
                                       =============================================  =============================================

Earnings per share:
    Basic - Class A common              $     0.98       $  (0.08)        $    0.90    $     0.59        $  0.01         $    0.60
    Basic - Class B common                    0.82          (0.07)             0.75          0.50              -              0.50
    Diluted - Class A common                  0.84          (0.06)             0.78          0.55              -              0.55
    Diluted - Class B common (a)                                               0.68                                           0.48

Shares used in per share calculation:
    Basic - Class A common                  33,046           (312) (b)       32,734        33,997           (253) (b)       33,744
    Basic - Class B common                  15,941            (96) (b)       15,845        15,803           (305) (b)       15,498
    Diluted - Class A common                58,708           (916) (b)       57,792        51,561           (406) (b)       51,155
    Diluted - Class B common (a)                                             16,175                                         16,091


(a)  In fiscal 2007, we 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,
     we 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.



                                      47




ITEM 7.  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 the financial condition and
         results of operations, which gives effect to the restatement
         discussed in Note 3 to the Consolidated Financial Statements, should
         be read in conjunction with "Selected Financial Data" and our
         Consolidated Financial Statements and the notes thereto appearing
         elsewhere in this Form 10-K.

         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"). The Committee and its
         advisors interviewed all available persons (45 in all) believed to be
         relevant to the issues being investigated, including current and
         former employees, current and former outside directors and our
         current auditors and outside legal counsel. They reviewed nearly
         300,000 electronic and hard copy documents relating to our stock
         option grant practices. During the relevant period, we awarded 2,639
         option grants covering 10.6 million shares of our Class A and Class B
         Common Stock, which were reviewed by the Committee.

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

         However, the Special Committee concluded that stock-based
         compensation expense resulting from the stock option grant practices
         followed by the Company prior to April 2, 2006 were not recorded in
         accordance with GAAP because the expense computed for most of those
         grants reflected incorrect measurement dates for financial accounting
         purposes. The "measurement date" under applicable accounting
         principles, namely 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.


                                      48




         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 as of
         March 31, 2007, 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, a
         portion of the cash bonus provided for in that agreement.

         The option plans required grants to be approved by the Compensation
         Committee of the Board of Directors. Under the option plans, options
         were to be granted with exercise prices set at no less than the fair
         market value of the underlying common stock at the date of grant. The
         1991 plan provided for the exclusive grant of Incentive Stock Options
         ("ISOs") as defined by Internal Revenue Code Section 422, while the
         2001 plan provided for the grant of both ISOs and non-qualified stock
         options ("NSOs"). Under the plans, options granted to employees other
         than the CEO or directors are subject to a ten-year ratable vesting
         period. 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 period, the option plans
         provide that the Company may elect to repurchase the shares at the
         lower of the exercise price or the fair market value of the stock on
         the date of termination. Based on management's analysis, 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 the Accounting for Stock 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 selected 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 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").


                                      49




         Employee Options. The evidence obtained through the Committee's
         ----------------
         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, written consents
         were prepared and dated 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, we have concluded 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 ISOs, 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 is payable, based on the fiscal year net income, after the end
         of the year. However, based on advice provided to us by our legal
         counsel, and our 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) 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).
         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.


                                      50




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

         OTHER MODIFICATIONS OF OPTION TERMS

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

         Based on management's analysis, we have concluded that a new
         measurement date should have been recognized in two situations: (1)
         where the employee terminated and the Company did not exercise its
         right under the option plans to buy back the shares in the two-year
         forfeiture period; and (2) where the forfeiture provision was waived
         and the employee subsequently terminated within two years of the
         exercise date. We now consider both of these situations 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


                                      51




         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, affecting
         our consolidated financial statements for each fiscal year beginning
         with our fiscal year ended March 31, 1986. The effect 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, the compensation expense associated with the
         exercisable, but unexercised options, is not 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 forfeiture.

         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 Internal Revenue
         Code Section 422, ISOs may not be granted with an exercise price less
         than the fair market value on the date of grant and, therefore, these
         grants would not likely qualify for ISO tax treatment. The
         disqualification of ISO classification exposes the Company and the
         affected employees to payroll related withholding taxes once the
         underlying shares are released from the post-exercise two-year
         forfeiture period and the substantial risk of forfeiture has lapsed
         (the "taxable event"). The Company and the affected employees may
         also be subject to interest and penalties for failing to properly
         withhold taxes and report the taxable event on their respective tax
         returns. The Company is currently reviewing the potential
         disqualification of ISO grants and the related withholding tax
         implications with the Internal Revenue Service for calendar years
         2004, 2005 and 2006 in an effort to reach agreement on the resulting
         tax liability. In the meantime, the Company has recorded expenses
         related to the withholding taxes, interest and penalties associated
         with options which would have created a taxable event in calendar
         years 2004, 2005 and 2006. The Company estimates that the payroll tax
         liability at March 31, 2006 for the disqualification 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 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

                                      52




         qualified status of the options, we have determined that
         substantially all of the options originally intended to be ISOs and
         granted prior to April 2, 2006 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 the aggregate for the
         fiscal years ended March 31, 1996 through 2006. We have restated pro
         forma net income and earnings per share under Statement of Financial
         Accounting Standards ("SFAS") No. 123 in Note 2 of the Notes to
         Consolidated Financial Statements of this Form 10-K to reflect the
         impact of these adjustments for the fiscal years ended March 31, 2006
         and 2005.

         REMEDIATION

         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.

         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 the accounting for
         stock-based compensation expense discussed above.


                                      53




         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

         We have restated our Consolidated Financial Statements for the fiscal
         years ended March 31, 2006 and 2005. In addition, because the impacts
         of the restatement adjustments extend back to the year ended March
         31, 1996, we have recognized the cumulative restatement adjustments
         through March 31, 2004 as a net decrease to beginning shareholders'
         equity as of April 1, 2004. In addition, for purposes of Part II,
         Item 6, Selected Financial Data, for the fiscal years ended March 31,
         2004 and fiscal 2003, the cumulative stock-based compensation expense
         and related income tax impact through March 31, 2002 has been
         recognized as a net decrease to beginning shareholders' equity as of
         April 1, 2002 and the 2003 and 2004 impacts associated with such
         items have been reflected in our consolidated balance sheet and
         statement of income data set forth in Part II, Item 6, Selected
         Financial Data, in this Form 10-K.

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



                                                                     YEARS ENDED MARCH 31,                     CUMULATIVE
                                                    -----------------------------------------------------     1996 THROUGH
CATEGORY OF ADJUSTMENT:                              2006 (a)      2005 (a)     2004 (b)      2003 (b)          2002 (c)
- -----------------------                             -----------   -----------  -----------  -------------  ----------------
                                                                                                   
Pretax income impact:
  Stock-based compensation expense
    related to measurement date changes (d)          $     927     $   1,080    $   1,990    $     1,187    $       10,449

  Payroll taxes, interest and penalties (d)              2,294           545          439              -                 -
  Other adjustments, net                                  (160)         (897)         742         (1,610)            2,534
                                                    -----------   -----------  -----------  -------------  ----------------
   Total pretax income reduction (increase)              3,061           728        3,171           (423)           12,983
                                                    -----------   -----------  -----------  -------------  ----------------

Income tax expense (benefit)
  Measurement date changes                                (286)         (323)        (333)          (248)             (469)
  Payroll taxes and interest                              (635)         (151)        (123)             -                 -
  Other income tax adjustments (e)                       2,171         1,498        1,689              -                 -
  Other adjustments                                         60           300         (256)           590              (918)
                                                    -----------   -----------  -----------  -------------  ----------------
   Total income tax increase (reduction)                 1,310         1,324          977            342            (1,387)
                                                    -----------   -----------  -----------  -------------  ----------------

Total net reduction (increase) in net income         $   4,371     $   2,052    $   4,148    $       (81)   $       11,596
                                                    ===========   ===========  ===========  =============  ================

         -----------------------
         (a)  See Note 3 "Restatement of Consolidated Financial Statements" of
              the Notes to Consolidated Financial Statements included in this
              Form 10-K for additional information regarding the adjustments
              made to our restated consolidated financial statements.

         (b)  The impacts on fiscal 2004 and 2003 have been reflected in Part
              II, Item 6, Selected Financial Data, in this Form 10-K.

         (c)  The cumulative effect of the restatement adjustments from fiscal
              1996 through fiscal 2002 is reflected as an adjustment to
              shareholders' equity as of April 1, 2002 in Item 6, Selected
              Financial Data. The following is a summary of the pretax and
              after-tax expense by fiscal year (in thousands):


                                      54





                               STOCK OPTION ADJUSTMENTS             OTHER ADJUSTMENTS
                          ---------------------------------  --------------------------------     NET CHARGE
YEARS ENDED MARCH 31,         PRETAX          INCOME TAX         PRETAX         INCOME TAX      TO NET INCOME
- ---------------------     ---------------   ---------------  ---------------  ---------------  ----------------
                                                                                 
1996                       $         829 (f) $           -    $           -    $           -    $          829
1997                                 657                (1)               -                -               656
1998                               2,391               (19)               -                -             2,372
1999                                 535               (27)               -                -               508
2000                               1,998               (62)               -                -             1,936
2001                               1,722              (141)               -                -             1,581
2002                               2,317              (219)           2,534             (918)            3,714
                          ---------------   ---------------  ---------------  ---------------  ----------------
Cumulative effect          $      10,449     $        (469)   $       2,534    $        (918)   $       11,596
                          ===============   ===============  ===============  ===============  ================


         (d)  Stock-based compensation expenses, including related payroll
              taxes, interest and penalties, have been recorded as adjustments
              to the selling and administrative expense line item in our
              consolidated statements of income for each period.
         (e)  This represents liabilities associated with tax positions taken
              on filed tax returns for these years, partially offset by
              certain expected tax refunds and is not related to accounting
              for stock-based compensation.
         (f)  Includes additional expense from 1986 to 1995 totaling $0.6
              million, the affect of which on the consolidated financial
              statements for 1996 and for each year 1986 to 1995 was not
              considered material.


         As a result of our failure to file our Quarterly Report on Form 10-Q
         for the quarter ended December 31, 2007, among others, on a timely
         basis, we will not be eligible to use a short-form Form S-3
         registration statement to offer or sell our securities in a public
         offering until we have timely filed all required reports under the
         Securities Exchange Act of 1934, as amended, for the 12 months prior
         to our use of the registration statement.

         BACKGROUND

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

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

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


                                      55




         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 immediate-release
         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.

         RESULTS OF OPERATIONS

         We reported net income of $58.1 million in fiscal 2007 compared to
         net income of $11.4 million in fiscal 2006. During fiscal 2006, we
         recorded expense of $30.4 million in connection with the FemmePharma
         acquisition (see Note 4 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. Excluding the $30.4 million of expense associated with
         the prior year acquisition of FemmePharma, net income for fiscal 2007
         would have increased $16.2 million, or 38.8%.

         Net revenues for fiscal 2007 increased $76.0 million, or 20.7%, as we
         experienced sales growth of $43.2 million, or 29.7%, in our branded
         products segment and $31.8 million, or 15.6%, in our specialty
         generics segment. The resulting $52.7 million increase in gross
         profit was offset in part by a $31.1 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 higher personnel
         costs, an increase in branded marketing and promotions expense, the
         incremental impact of stock-based compensation expense recorded in
         conjunction with the adoption of SFAS 123R (see Note 17 to the
         Consolidated Financial Statements), higher accrued payroll taxes,
         interest and penalties on disqualified stock options, and additional
         costs associated with the expansion of our facilities.


         FISCAL 2007 COMPARED TO FISCAL 2006

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



                                              YEARS ENDED MARCH 31,
                                         --------------------------------------------------------
                                                                                    CHANGE
                                                                             --------------------
                                                                2006
              ($ IN THOUSANDS):              2007          (AS RESTATED)         $            %
                                         --------------    -------------     ----------     -----
                                                                                
Branded products                         $     188,681     $    145,503      $   43,178     29.7%
   as % of net revenues                           42.5%            39.6%
Specialty generics/non-branded                 235,594          203,787          31,807     15.6%
   as % of net revenues                           53.1%            55.4%
Specialty materials                             17,436           16,988             448      2.6%
   as % of net revenues                            3.9%             4.6%
Other                                            1,916            1,362             554     40.7%
                                         -------------     ------------      ----------
   Total net revenues                    $     443,627     $    367,640      $   75,987     20.7%


         The increase in branded product sales was due primarily to continued
         sales growth from our prescription prenatal and hematinic product
         lines coupled with increased sales of our anti-infective brand,
         Clindesse(R). Sales from our PreCare(R) product line increased 44.1%
         to $72.5 million during fiscal 2007. This increase was primarily due
         to sales growth experienced by PrimaCare(R) ONE, the introduction of
         PreCare Premier(R) and product line price increases that occurred
         over the past 12 months. Sales of PrimaCare(R) ONE in fiscal 2007
         increased $22.3 million, or 104.2%, due primarily to market share
         gains over the past two years. Specifically, PrimaCare(R) ONE
         experienced an increase in prescription volume of 101.9% during
         fiscal 2007. Sales from our hematinic products increased 31.0% to
         $48.2 million in fiscal 2007. These increases primarily reflected
         $8.3 million of incremental sales of Repliva 21/7(TM), a new
         hematinic product introduced in the second quarter of fiscal 2006,
         coupled with increased sales from our Niferex(R) products.
         Clindesse(R), a single-dose prescription cream therapy indicated to
         treat bacterial vaginosis, experienced sales growth of 44.6% to $31.8
         million during fiscal 2007 as our share of the


                                      56




         prescription intravaginal bacterial vaginosis market increased to
         26.4% at the end of fiscal 2007. Sales of Clindesse(R) in fiscal 2007
         also reflected the impact of a price increase in September 2006.

         The growth in specialty generic/non-branded sales resulted primarily
         from increases experienced by our cardiovascular, cough/cold and pain
         management product lines. The cardiovascular product line contributed
         sales growth of $16.0 million, or 18.7%, in fiscal 2007 due to $11.5
         million of incremental sales volume from new products with the
         remaining increase attributable to higher prices. The reported new
         products consisted of six strengths of diltiazem HCI ER Capsules (AB
         rated to Tiazac(R)) that were approved by the FDA in September 2006.
         In fiscal 2007, our cough/cold product line reported sales growth of
         $8.1 million, or 23.5%, as sales volume grew $5.0 million and price
         increases generated increased sales of $3.1 million. Sales from the
         pain management product line in fiscal 2007 increased $9.1 million,
         or 24.2%, due to incremental sales from three product approvals
         received late in fiscal 2006 and increased prices on the other pain
         management products.

         The increase in specialty material product sales was primarily due to
         the impact of price increases on certain products.

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



                                             YEARS ENDED MARCH 31,
                                         -------------------------------------------------------
                                                                                  CHANGE
                                                                           ---------------------
                                                            2006
              ($ IN THOUSANDS):              2007       (AS RESTATED)          $            %
                                         ------------   -------------      ----------   --------
                                                                               
Branded products                         $    167,864   $     128,572      $   39,292      30.6%
   as % of net revenues                          89.0%           88.4%
Specialty generics/non-branded                138,272         111,907          26,365      23.6%
   as % of net revenues                          58.7%           54.9%
Specialty materials                             6,005           4,732           1,273      26.9%
   as % of net revenues                          34.4%           27.9%
Other                                        (15,777)         (1,506)        (14,271)   (947.6)%
                                         ------------   -------------      ----------
   Total gross profit                    $    296,364   $     243,705      $   52,659      21.6%
   as % of total net revenues                    66.8%           66.3%


         The increase in gross profit was principally due to the sales growth
         experienced by our branded products and specialty generic/non-branded
         segments. The higher specialty generic gross profit percentage in
         fiscal 2007 was primarily attributable to sales of new cardiovascular
         products coupled with the impact of price increases on certain
         cardiovascular, cough/cold and pain management products. Impacting
         the Other category are contract manufacturing revenues, pricing and
         production variances, and changes to inventory reserves associated
         with production. Any inventory reserve changes associated with
         finished goods are reflected in the applicable segment. The
         fluctuation in the Other category was primarily due to the impact of
         higher production costs during the first six months of the fiscal
         year that resulted from lower-than-expected production volume,
         coupled with an increase in provisions for obsolete inventory on
         certain existing products in various stages of production. Also,
         during the last three quarters of fiscal 2007, we recorded provisions
         associated with certain new products where production occurred prior
         to receiving FDA approval and the upcoming expiration dates made them
         unsalable. The provision for obsolete inventory for fiscal 2007 and
         2006 was $12.0 million and $4.2 million, respectively.


                                      57




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



                                                  YEARS ENDED MARCH 31,
                                                ---------------------------------------------------------
                                                                                            CHANGE
                                                                                    ---------------------
              ($ IN THOUSANDS):                    2007         2006                     $            %
                                                -----------  -----------            -----------      ----
                                                                                         
Research and development                        $    31,462  $    28,886            $     2,576      8.9%
   as % of net revenues                                 7.1%         7.9%


         The increase in research and development expense was due to increased
         spending on clinical efficacy and bioequivalence studies as we
         continued active development of various brand and non-brand/generic
         products in our internal and external pipelines, coupled with an
         increase in research and development personnel.

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



                                                  YEARS ENDED MARCH 31,
                                                -----------------------------------------------------
                                                                                         CHANGE
                                                                                    -----------------
              ($ IN THOUSANDS):                   2007          2006                     $         %
                                                -------      -----------            ----------     --
                                                                           
Purchased in-process research
         and development                        $     -      $    30,441            $  (30,441)    NM


         During fiscal 2006, we recorded expense of $30.4 million in
         connection with the FemmePharma acquisition (see Note 4 to the
         Consolidated Financial Statements) "Acquisitions and License
         Agreement" 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 represents the estimated fair value of the worldwide
         marketing rights to an endometriosis product we acquired as part of
         the FemmePharma 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
         --------------------------



                                                     YEARS ENDED MARCH 31,
                                                 ------------------------------------------------------
                                                                      2006                   CHANGE
                                                  2007           (AS RESTATED)           --------------
            ($ IN THOUSANDS):                    -----           -------------               $       %
                                                                                         ---------  ----
                                                                                        
Selling and administrative                       $ 174,344       $     143,437           $  30,907  21.6%
  as % of net revenues                                39.3%               39.0%



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

         *  $14.8 million increase in personnel costs due to increases in
            management and other personnel;
         *  $3.4 million increase in branded marketing and promotions expense;
         *  $2.5 million increase in legal and professional expense
            commensurate with an increase in litigation activity and
            evaluation of potential acquisition opportunities; and
         *  $2.2 million increase in expense resulting from facility
            expansion.

         The increase in personnel costs included $3.1 million of incremental
         stock-based compensation expense resulting from the adoption of SFAS
         123R, "Share-Based Payment," and an increase in accrued payroll
         taxes, interest and penalties associated with the disqualification of
         certain stock options. We adopted SFAS 123R using the


                                      58




         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" in Part II,
         Item 7, and Note 3 "Restatement of Consolidated Financial Statements"
         in the Notes to Consolidated Financial Statements in this Form 10-K).

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




                                                    YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                                              CHANGE
                                                                                          ---------------
              ($ IN THOUSANDS):                      2007       2006                        $         %
                                                    -------  -----------                  -----      ----
                                                                                         
Amortization of intangible assets                   $ 4,810     $  4,784                  $  26      0.5%
    as % of net revenues                                1.1%         1.3%


         The increase in amortization of intangible assets was due primarily
         to an increase in amortization of patent and trademark costs.

         LITIGATION
         ----------




                                                   YEARS ENDED MARCH 31,
                                                   --------------------------------------------------
                                                                                         CHANGE
                                                                                    -----------------
              ($ IN THOUSANDS):                      2007     2006                      $          %
                                                   -------   ------                 ----------     --
                                                                                      
Litigation                                         $(2,408)  $     -                  $(2,408)     NM


         The $2.4 million of income reflected in "Litigation" consisted of a
         net payment received by us in accordance with a settlement agreement
         entered into with an insurance company for insurance coverage related
         to the Healthpoint litigation.

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



                                                       YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                          2006
                                                       2007           (AS RESTATED)          CHANGE
                                                                                        -----------------
             ($ IN THOUSANDS):                                                              $        %
                                                     --------           --------        ---------  ------

                                                                                       
Operating income                                     $ 88,156           $ 36,157        $  51,999  143.8%



         The improvement in operating income was partially due to the $30.4
         million of expense we recorded during fiscal 2006 in connection with
         the FemmePharma acquisition. Excluding the effect of this $30.4
         million of expense, operating income for fiscal 2007 would have
         increased $21.6 million, or 32.4%.


                                      59




         INTEREST EXPENSE
         ----------------



                                                    YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                                             CHANGE
                                                                                        -----------------
              ($ IN THOUSANDS):                       2007         2006                    $          %
                                                    -------      -------                -------     -----
                                                                                        
Interest expense                                    $ 8,985      $ 6,045                $ 2,940     48.6%


         The increase in interest expense resulted from interest incurred on
         the $43.0 million mortgage loan we entered into in March 2006 coupled
         with the completion of a number of sizable capital projects during
         fiscal 2006 and the related reduced level of capitalized interest
         recorded on those projects.

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


                                                   YEARS ENDED MARCH 31,
                                                   -----------------------------------------------------
                                                                                            CHANGE
                                                                                       -----------------
              ($ IN THOUSANDS):                      2007         2006                    $          %
                                                   -------      -------                -------     -----
                                                                                       
Interest and other income                          $ 9,901      $ 5,737                $ 4,164     72.6%


         The increase in interest and other income resulted primarily from an
         increase in the average balance of invested cash coupled with an
         increase in the weighted average interest rate earned on short-term
         investments. The increase in the weighted average interest rate was
         due to higher short-term market interest rates.

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



                                                         YEARS ENDED MARCH 31,
                                                     ----------------------------------------------------
                                                                                              CHANGE
                                                       2007                2006            --------------
                                                                       (AS RESTATED)
            ($ IN THOUSANDS):                                                                 $       %
                                                     --------             -------          -------  -----
                                                                                        
Provision for income taxes                           $ 32,958             $24,433          $ 8,525  34.9%
  effective tax rate                                     37.0%               68.2%


         The higher effective tax rate for fiscal 2006 was attributable to the
         determination that $30.4 million of expense we recorded for the
         FemmePharma acquisition was not deductible for tax purposes. The
         effective tax rate would have been 36.9% for that year when applied
         to a pre-tax income amount that excluded the FemmePharma acquisition
         expense of $30.4 million. The effective tax rates in both fiscal 2007
         and 2006 were adversely affected by the recording of additional
         liabilities associated with tax positions claimed on filed tax
         returns for those years.


                                      60




         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------




                                                        YEARS ENDED MARCH 31,
                                                     ----------------------------------------------------
                                                                                            CHANGE
                                                                          2006        -------------------
                                                       2007           (AS RESTATED)
            ($ IN THOUSANDS):                                                             $          %
                                                     --------           --------      ---------    ------
                                                                                       
Net income                                           $ 58,090           $ 11,416      $  46,674    408.9%
    Diluted earnings per Class A share                   1.05               0.23           0.82    356.5%
    Diluted earnings per Class B share                   0.91               0.20           0.71    355.0%


         The improvement in net income per share was partially due to the
         $30.4 million of expense we recorded during fiscal 2006 in connection
         with the FemmePharma acquisition. Net income was also favorably
         impacted by a $52.7 million increase in gross profit, offset in part
         by a $31.1 million increase in operating expenses before taking into
         account the $30.4 million of expense associated with the prior year
         acquisition of FemmePharma.


         FISCAL 2006 COMPARED TO FISCAL 2005

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


                                                    YEARS ENDED MARCH 31,
                                               ----------------------------------------------------
                                                                                       CHANGE
                                                                                 ------------------
                                                    2006            2005
              ($ IN THOUSANDS):                (AS RESTATED)   (AS RESTATED)         $         %
                                               -------------    ------------     ---------  -------
                                                                                
Branded products                               $    145,503     $    90,628      $  54,875    60.6%
   as % of net revenues                                39.6%           29.7%
Specialty generics/non-branded                      203,787         194,022          9,765     5.0%
   as % of net revenues                                55.4%           63.7%
Specialty materials                                  16,988          18,345        (1,357)   (7.4)%
   as % of net revenues                                 4.6%            6.0%
Other                                                 1,362           1,661          (299)  (18.0)%
                                               ------------     -----------      ---------
   Total net revenues                          $    367,640     $   304,656      $  62,984    20.7%


         The growth in branded product sales was due primarily to increased
         sales of our two anti-infective brands, Clindesse(R) and
         Gynazole-1(R), and continued sales growth from our hematinic and
         prescription prenatal product lines. Clindesse(R), a single-dose
         prescription cream therapy indicated to treat bacterial vaginosis,
         contributed $22.0 million of sales during fiscal 2006. Since its
         launch in January 2005, Clindesse(R) has gained 19.7% of the
         intravaginal bacterial vaginosis market. Sales of Gynazole-1(R), our
         vaginal antifungal cream product, increased $3.9 million, or 18.3%,
         to $25.2 million during fiscal 2006. This increase was due to pricing
         increases as our prescription volume declined 3.6% in fiscal 2006.
         Sales of our hematinic products in fiscal 2006 increased $11.4
         million, or 44.8%, to $36.8 million. The growth in hematinic sales
         resulted from a 13.8% increase in prescription volume during fiscal
         2006, pricing increases and $3.3 million of incremental sales
         associated with the introduction of two new products, Niferex Gold(R)
         and Repliva 21/7(TM). Also included in branded product sales was our
         PreCare(R) product line which continued as the leading branded line
         of prescription prenatal nutritional supplements in the U.S. Sales
         from our PreCare(R) product line increased $18.1 million, or 56.0%,
         to $50.4 million in fiscal 2006. This increase was primarily due to
         sales growth experienced by PrimaCare(R) ONE, our proprietary line
         extension to PrimaCare(R), as its share of the branded prenatal
         nutritional supplement market increased to 17.5% at the end of fiscal
         2006. The increase in PreCare(R) product sales was also impacted by a
         temporary fourth quarter supply disruption of PrimaCare(R) ONE in the
         prior year. The increase in branded product sales was further
         supplemented by the introduction of Encora(R), a new prescription
         nutritional supplement

                                      61




         with essential fatty acids, which contributed $1.8 million of
         incremental revenue during fiscal 2006 and a $1.8 million increase in
         sales of our Micro-K(R) product line.

         The increase in specialty generic/non-branded sales resulted from
         $15.3 million of increased sales volume from existing products in our
         cough/cold, pain management and digestive enzyme product lines
         coupled with $1.5 million of incremental sales volume from new
         product introductions primarily in our pain management product line.
         These increases were offset in part by product price erosion of $7.1
         million that resulted from pricing pressures on certain products.
         Although specialty generic sales resulting from new product
         introductions were limited during fiscal 2006, we did receive late in
         fiscal 2006 ANDA approval for five strengths of oxycodone
         hydrochloride tablets and three strengths of hydromorphone
         hydrochloride tablets.

         The decrease in specialty material product sales was primarily due to
         reduced sales on a product that is used by a customer in a chewable
         vitamin that the customer was in the process of reformulating,
         coupled with increased competition on our calcium carbonate products.

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



                                                     YEARS ENDED MARCH 31,
                                               -----------------------------------------------------------
                                                                                           CHANGE
                                                                                   -----------------------
                                                    2006              2005
              ($ IN THOUSANDS):                (AS RESTATED)     (AS RESTATED)          $             %
                                               -------------     -------------     -----------     -------
                                                                                         
Branded products                               $     128,572     $      79,317     $    49,255       62.1%
   as % of net revenues                                 88.4%             87.5%
Specialty generics/non-branded                       111,907           115,040         (3,133)      (2.7)%
   as % of net revenues                                 54.9%             59.3%
Specialty materials                                    4,732             6,394         (1,662)     (26.0)%
   as % of net revenues                                 27.9%             34.9%
Other                                                (1,506)           (4,043)           2,537       62.8%
                                               -------------     -------------     -----------
   Total gross profit                          $     243,705     $     196,708     $    46,997       23.9%
     as % of total net revenues                         66.3%             64.6%


         The increase in gross profit was primarily due to the significant
         sales growth experienced by our branded products segment. The higher
         gross profit percentage on a consolidated basis reflected the impact
         of our higher margin branded products comprising a larger percentage
         of net revenues. This effect was offset in part by lower margins in
         the specialty generic/non-branded segment due primarily to the impact
         of price erosion on certain products in the cardiovascular and pain
         management product lines coupled with a shift in the mix of sales
         toward lower margin products, particularly in the cough/cold
         category. The gross profit percentage decrease experienced by
         specialty materials primarily resulted from higher production costs
         associated with lower volume and an unfavorable change in mix of
         products sold.

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



                                                   YEARS ENDED MARCH 31,
                                                   ----------------------------------------------------
                                                                                            CHANGE
                                                                                       ----------------
              ($ IN THOUSANDS):                      2006         2005                    $         %
                                                   -------      --------               -------    -----
                                                                                      
Research and development                           $28,886      $ 23,538               $ 5,348    22.7%
   as % of net revenues                                7.9%          7.7%



                                      62




         The increase in research and development expense was due to increased
         spending on bioequivalency studies as we continued active development
         of various branded and generic/non-brand products in our internal and
         external pipelines and increased personnel expenses related to the
         growth of our research and development staff.

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




                                                    YEARS ENDED MARCH 31,
                                                    ---------------------------------------------------
                                                                                           CHANGE
                                                                                      -----------------
              ($ IN THOUSANDS):                       2006       2005                     $          %
                                                    -------    -------                -----------    --
                                                                                        
Purchased in-process research
         and development                            $30,441    $     -                $    30,441    NM


         During fiscal 2006, we recorded expense of $30.4 million in
         connection with the FemmePharma acquisition 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 represents the
         estimated fair value of the worldwide marketing rights to an
         endometriosis product we acquired as part of the FemmePharma
         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
         --------------------------



                                                         YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                                              CHANGE
                                                      2006                  2005         ----------------
                                                  (AS RESTATED)         (AS RESTATED)
             ($ IN THOUSANDS):                                                                $       %
                                                    ---------             --------       ---------  -----
                                                                                        
Selling and administrative                          $ 143,437             $118,263       $  25,174  21.3%
  as % of net revenues                                   39.0%                38.8%


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

               *  $11.2 million increase in personnel costs associated with
                  expansion of the branded sales force in fiscal 2005 and
                  2006, increases in management and other personnel to support
                  the overall growth of the business, and an increase in
                  accrued payroll taxes, interest and penalties associated
                  with the disqualification of certain stock options (see the
                  Explanatory Note beginning on page 2 of this Form 10-K and
                  Note 3 "Restatement of Consolidated Financial Statements" of
                  the Notes to Consolidated Financial Statements included in
                  this Form 10-K);
               *  $7.3 million increase in branded marketing and promotions
                  expense for promotion of our existing brands, to further
                  promote the launch of Clindesse(R) and to support the
                  introduction in fiscal 2006 of a new prescription
                  nutritional supplement product and two new hematinic
                  products; and
               *  $6.4 million increase in legal and professional expense
                  commensurate with an increase in litigation activity and
                  evaluation of potential acquisition opportunities. The
                  increase in litigation activity included ongoing costs
                  associated with certain patent infringement actions brought
                  against us on products we market or propose to market.

                                      63




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



                                                    YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                                           CHANGE
                                                                                    ---------------------
              ($ IN THOUSANDS):                       2006         2005                $              %
                                                    -------      -------            -------          ----
                                                                                         
Amortization of intangible assets                   $ 4,784      $ 4,653            $  131           2.8%
    as % of net revenues                                1.3%         1.5%


         The increase in amortization of intangible assets was due primarily
         to a full year's amortization in fiscal 2006 of license costs
         incurred for a product launch in fiscal 2005 under a co-development
         arrangement completed in fiscal 2005, an increase in amortization of
         patent and trademark costs, and amortization of the purchase price
         allocated to the non-compete agreement obtained in the FemmePharma
         acquisition.

         LITIGATION
         ----------




                                                  YEARS ENDED MARCH 31,
                                                  ----------------------------------------------------
                                                                                           CHANGE
                                                                                       ---------------
              ($ IN THOUSANDS):                    2006          2005                      $         %
                                                  -----       ---------                ---------    --
                                                                                       
Litigation                                        $   -       $  (1,430)               $   1,430    NM


         The $1.4 million of income reflected in "Litigation" for fiscal 2005
         consisted of a $0.6 million net payment received by us in accordance
         with a favorable legal settlement of vitamin antitrust litigation and
         $0.8 million associated with the reversal of excess reserves that
         resulted from settlement of the Healthpoint litigation in fiscal
         2005.

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



                                                    YEARS ENDED MARCH 31,
                                                 ----------------------------------------------------------
                                                                                             CHANGE
                                                   2006              2005             ---------------------
                                              (AS RESTATED)      (AS RESTATED)
            ($ IN THOUSANDS):                                                             $            %
                                                 --------           --------          ----------    -------
                                                                                        
Operating income                                 $ 36,157           $ 51,684          $  (15,527)   (30.0)%


         The decrease in operating income resulted from the $30.4 million
         in-process research and development charge recorded in connection
         with the FemmePharma acquisition.


                                      64




         INTEREST EXPENSE
         ----------------



                                                   YEARS ENDED MARCH 31,
                                                  -------------------------------------------------------
                                                                                              CHANGE
                                                                                          ---------------
              ($ IN THOUSANDS):                      2006         2005                      $         %
                                                  ---------    ---------                  -----     -----
                                                                                        
Interest expense                                  $   6,045    $   5,432                  $ 613     11.3%


         The increase in interest expense was primarily due to the completion
         of a number of capital projects during fiscal 2006 and the related
         reduced level of capitalized interest on those projects.

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



                                                   YEARS ENDED MARCH 31,
                                                  -------------------------------------------------------
                                                                                             CHANGE
                                                                                       ------------------
              ($ IN THOUSANDS):                      2006         2005                    $           %
                                                  ---------    ---------               --------     -----
                                                                                        
Interest and other income                         $   5,737    $   3,048               $  2,689     88.2%


         The increase in interest and other income was primarily due to an
         increase in interest income on short-term investments and dividends
         earned on redeemable preferred stock. The increase in interest income
         resulted from a full year's effect of investing excess cash in
         short-term investments with higher yielding interest rates. The
         higher weighted average interest rate earned on short-term
         investments was offset in part by a decline in the average balance of
         invested cash.

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



                                                         YEARS ENDED MARCH 31,
                                                   -------------------------------------------------------
                                                                                                CHANGE
                                                       2006                2005             --------------
                                                 (AS RESTATED)        (AS RESTATED)
            ($ IN THOUSANDS):                                                                  $       %
                                                   ----------           ----------          -------  -----
                                                                                         
Provision for income taxes                         $   24,433           $   18,083          $ 6,350  35.1%
  effective tax rate                                     68.2%                36.7%


         The increase in the effective tax rate was attributable to the
         non-deductibility for tax purposes of the $30.4 million of expense we
         recorded for the FemmePharma acquisition. For fiscal 2006, the
         effective tax rate would have been 36.9% when applied to a pre-tax
         income amount that excluded the FemmePharma acquisition expense of
         $30.4 million. The effective tax rates in both fiscal 2006 and 2005
         were adversely affected by the recording of additional liabilities
         associated with tax positions claimed on tax returns filed for those
         fiscal years, partially offset by certain expected tax refunds.


                                      65




         NET INCOME AND DILUTED EARNINGS PER SHARE
         -----------------------------------------



                                                       YEARS ENDED MARCH 31,
                                                    -----------------------------------------------------
                                                                                            CHANGE
                                                       2006              2005         -------------------
                                                  (AS RESTATED)     (AS RESTATED)
            ($ IN THOUSANDS):                                                             $          %
                                                    ---------         ---------       ---------   -------
                                                                                      
Net income                                          $  11,416         $  31,217       $ (19,801)  (63.4)%
    Diluted earnings per Class A share                   0.23              0.60           (0.37)  (61.7)%
    Diluted earnings per Class B share                   0.20              0.52           (0.32)  (61.5)%


         The decrease in net income per share resulted from the $30.4 million
         in-process research and development charge we recorded in connection
         with the FemmePharma acquisition.

         LIQUIDITY AND CAPITAL RESOURCES
         -------------------------------

         Cash and cash equivalents and working capital were $82.6 million and
         $372.3 million, respectively, at March 31, 2007, compared to $100.7
         million and $305.0 million, respectively, at March 31, 2006. The
         increase in working capital resulted primarily from a $25.1 million
         increase in receivables, a $20.3 million increase in inventories and
         an increase in net income adjusted for non-cash items. The increase
         in receivables was primarily due to higher sales and the increase in
         inventories related primarily to the new products we have recently
         introduced or expect to launch in the few months following fiscal
         year-end.

         In addition, we had $119.2 million invested in auction rate
         securities ("ARS") at March 31, 2007. The ARS held by the Company are
         AAA rated securities with long-term nominal maturities secured by
         student loans which are guaranteed by the U.S. Government. The
         interest rates on these securities are reset through an auction
         process that resets the applicable interest rate at pre-determined
         intervals, up to 35 days. Subsequent to March 31, 2007, 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 24 to the Notes to Consolidated
         Financial Statements).

         The primary source of operating cash flow used in the funding of our
         businesses continues to be internally generated funds from product
         sales. Net cash flow from operating activities of $57.1 million was
         favorably impacted by net income adjusted for non-cash items, offset
         in part by the increases in receivables and inventories.

         Net cash flow used in investing activities included capital
         expenditures of $25.1 million in fiscal 2007 compared to $58.3
         million for the prior year. 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 with cash on hand. The
         remaining capital expenditures during fiscal 2007 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 in
         fiscal 2007 consisted of $50.9 million in purchases of


                                      66




         short-term marketable securities that were classified as available
         for sale and a $0.4 million dividend payment for preferred stock. For
         the prior year, 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 4 to
         the Consolidated Financial Statements).

         Our debt balance, including current maturities, was $241.3 million at
         March 31, 2007 compared to $243.0 million at March 31, 2006. In March
         2006, we entered into a $43.0 million mortgage loan agreement with
         one of our primary lenders, in part, to refinance $9.9 million of
         existing mortgages. The $32.8 million of net proceeds we received
         from the 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 due 2033 ("the 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 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. As of May 16, 2007, the
         average trading price over this period did not equal or exceed
         $1,200. We may redeem some or all of the Notes at any time on or
         after May 21, 2006, at a redemption price, payable in cash, of 100%
         of the principal amount of the Notes, plus accrued and unpaid
         interest (including contingent interest, if any) to the date of
         redemption. Holders may require us to repurchase all or a portion of
         their Notes on May 16, 2008, 2013, 2018, 2023 and 2028, or upon a
         change in control, as defined in the indenture governing the Notes,
         at 100% of the principal amount of the Notes, plus accrued and unpaid
         interest (including contingent interest, if any) to the date of
         repurchase, payable in cash. We classified the Notes as a current
         liability as of June 30, 2007 and thereafter through March 31, 2008,
         due to the right the holders have to require us to repurchase the
         Notes on May 16, 2008. The Notes are subordinate to all of our
         existing and future senior obligations.

         In June 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 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. This agreement contains financial covenants that
         impose limits on dividend payments, require minimum equity, a maximum
         senior leverage ratio and minimum fixed charge coverage ratio. As of
         March 31, 2007, we were in compliance with all of our financial
         covenants. 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 fiscal 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.

         The new credit facility has a five-year term expiring in June 2011.
         As of March 31, 2007, there were no borrowings outstanding under the
         facility, but there were letters of credit of $0.9 million issued
         under the agreement.

         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 12 to 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


                                      67




         to the property being placed in service. Industrial revenue bonds
         totaling $109.4 million were outstanding at March 31, 2007. The
         industrial revenue bonds are issued by St. Louis County to us upon
         our payment of qualifying costs of capital improvements, which are
         then leased by us for a period ending December 1, 2019, unless
         earlier terminated. We have the option at any time to discontinue the
         arrangement and regain full title to the abated property. The
         industrial revenue bonds bear interest at 4.25% per annum and are
         payable as to principal and interest concurrently with payments due
         under the terms of the lease. We have classified the leased assets as
         property and equipment and have established a capital lease
         obligation equal to the outstanding principal balance of the
         industrial revenue bonds. Lease payments may be made by tendering an
         equivalent portion of the industrial revenue bonds. As the capital
         lease payments to St. Louis County may be satisfied by tendering
         industrial revenue bonds (which is our intention), the capital lease
         obligation, industrial revenue bonds and related interest expense and
         interest income, respectively, have been offset for presentation
         purposes in the Consolidated Financial Statements.

         The following table summarizes our contractual obligations (in
         thousands):



                                                                        LESS THAN                                MORE THAN
                                                             TOTAL        1 YEAR       1-3 YEARS   3-5 YEARS      5 YEARS
                                                             -----        ------       ---------   ---------      -------
                                                                                                  
        OBLIGATIONS AT MARCH 31, 2007
        -----------------------------
        Long-term debt obligations(1)                      $ 241,348    $   1,897     $  204,164   $  4,687      $  30,600
        Operating lease obligations                            7,722        3,668          1,662      1,281          1,111
        Other long-term obligations(2)                         6,319            -              -          -          6,319
                                                         ------------------------------------------------------------------
         Total contractual cash obligations(3)             $ 255,389    $   5,565     $  205,826   $  5,968      $  38,030
                                                         ------------------------------------------------------------------


         (1)   Holders of the $200.0 million aggregate principal amount of
               Convertible Subordinated Notes may require the Company to
               repurchase them for an amount equal to the unpaid principal
               amount in May 2008. If the market price of our Class A Common
               Stock exceeds $23.01, we do not expect the Note holders will
               exercise their repurchase rights.
         (2)   Represents the accrual of retirement compensation the Company
               is obligated to pay its CEO beginning at retirement for the
               longer of ten years or the life of the CEO.
         (3)   The Company has licensed the exclusive rights to co-develop and
               market various generic equivalent products with other drug
               delivery companies. These collaboration agreements require the
               Company to make up-front and ongoing payments as development
               milestones are attained. If all milestones remaining under
               these agreements were reached, payments by the Company could
               total up to $35.8 million as of March 31, 2007.


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

         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,


                                      68




         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 fiscal years.

         CRITICAL ACCOUNTING ESTIMATES

         Our Consolidated Financial Statements are presented on the basis of
         GAAP. Our significant accounting policies are described in Note 2 to
         the Notes to Consolidated Financial Statements. Certain of our
         accounting policies are particularly important to the presentation of
         our financial position and results of operations and require the
         application of significant judgment by our management. As a result,
         amounts determined under these policies are subject to an inherent
         degree of uncertainty. In applying these policies, we make estimates
         and judgments that affect the reported amounts of assets,
         liabilities, revenues and expenses and related disclosures. We base
         our estimates and judgments on historical experience, the terms of
         existing contracts, observance of trends in the industry, information
         that is obtained from customers and outside sources, and on various
         other assumptions that we believe to be reasonable and appropriate
         under the circumstances, the results of which form the basis for
         making judgments about the carrying values of assets and liabilities
         that are not readily apparent from other sources. Although we believe
         that our estimates and assumptions are reasonable, actual results may
         differ significantly from our estimates. Changes in estimates and
         assumptions based upon actual results may have a material impact on
         our results of operations and/or financial condition. Our critical
         accounting estimates are described below.

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

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

         From time to time, we provide incentives to our wholesale customers,
         such as trade show allowances or stocking allowances that they in
         turn use to accelerate distribution to their end customers. We
         believe that these incentives are normal and customary in the
         industry. Sales allowances are accrued and revenue is recognized as
         sales are made in accordance with the terms of the allowances offered
         to the customer. Due to the nature of these allowances, we are able
         to accurately calculate the required provisions for the allowances
         based on the specific terms in each agreement. Additionally,
         customers will normally purchase additional product ahead of regular
         demand to take advantage of the temporarily lower cost resulting from
         the sales allowances. This practice has been customary in the
         industry and we believe would be part of a customer's ordinary course
         of business inventory level. We reserve the right, with our major
         wholesale customers, to limit the amount of these forward buys. Sales
         made as a result of allowances offered on our specialty
         non-branded/generics product line in conjunction with trade shows
         sponsored by our major wholesale customers and for other promotional
         programs accounted for 11.6% and 13.9% of total gross revenues for
         fiscal 2007 and fiscal 2006, respectively.

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

         We evaluate inventory levels at our wholesale customers, which
         accounted for approximately 60% of our unit sales in fiscal 2007,
         through an internal analysis that considers, among other things,
         wholesaler purchases,


                                      69




         wholesaler contract sales, available end consumer prescription
         information and inventory data received from our three largest
         wholesale customers. We believe that our evaluation of wholesaler
         inventory levels allows us to make reasonable estimates of our
         reserve balances. Further, our products are typically sold with
         adequate shelf life to permit sufficient time for our wholesaler
         customers to sell our products in their inventory through to the end
         consumer.

         The following table reflects the fiscal 2007 activity for each
         accounts receivable reserve:


                                                            Current Provision   Current Provision   Actual Returns
                                                             Related to Sales    Related to Sales     or Credits
              (in thousands)                  Beginning        Made in the           Made in            in the       Ending
                                               Balance        Current Period      Prior Periods     Current Period   Balance
                                            -------------- ------------------- ------------------- ---------------- ---------
                                            (as restated)
                                                                                                      
YEAR ENDED MARCH 31, 2007
  Accounts Receivable Reserves:
    Chargebacks                              $     14,312   $          94,716   $               -   $      (96,023)  $ 13,005
    Sales rebates                                   2,214              17,155                   -          (13,983)     5,386
    Sales returns                                   2,127              12,591                   -          (11,845)     2,873
    Cash discounts and other allowances             4,226              17,541                   -          (18,256)     3,511
    Medicaid rebates                                5,818               6,819                   -           (6,131)     6,506
                                            -------------- ------------------- ------------------- ---------------- ----------
      Total                                  $     28,697   $       $ 148,822   $               -   $     (146,238)  $ 31,281
                                            ============== =================== =================== ================ ==========


         The decrease in the reserve for chargebacks at March 31, 2007 was
         primarily due to a decline in customer inventory levels of our
         specialty generic/non-branded products at the end of the year. The
         higher reserve for sales rebates at March 31, 2007 resulted from
         increased reserves on rebates associated with branded product sales
         to managed care organizations that began late in the fiscal 2006 year
         and ongoing sales promotions on new specialty generic/non-branded
         products introduced in fiscal 2007. The increase in the reserve for
         sales returns at March 31, 2007 was primarily due to an increase in
         branded product sales coupled with reserves established on certain
         new specialty generic/non-branded products where inventory with short
         shelf lives was sold.

         The following table reflects the fiscal 2006 activity for each
         accounts receivable reserve:



                                                          Current Provision Current Provision  Actual Returns
                                                          Related to Sales  Related to Sales     or Credits
              (in thousands)                 Beginning      Made in the          Made in           in the         Ending
                                              Balance      Current Period     Prior Periods    Current Period     Balance
                                            ------------- ----------------- ------------------ ---------------- ------------
YEAR ENDED MARCH 31, 2006                   (as restated)   (as restated)     (as restated)     (as restated)   (as restated)
                                                                                                  
  Accounts Receivable Reserves:
    Chargebacks                              $     9,000   $        97,791   $              -   $      (92,479)  $   14,312
    Sales rebates                                  1,192            14,185                  -          (13,163)       2,214
    Sales returns                                  2,187            14,239                  -          (14,299)       2,127
    Cash discounts and other allowances            3,712            17,395                  -          (16,881)       4,226
    Medicaid rebates                               4,051            11,052                  -           (9,285)       5,818
                                            ------------- ----------------- ------------------ ---------------- ------------
      Total                                  $    20,142   $       154,662   $              -   $     (146,107)  $   28,697
                                            ============= ================= ================== ================ ============


         The increase in the reserve for chargebacks at March 31, 2006 was
         primarily due to our specialty generics segment experiencing price
         erosion during fiscal 2006 coupled with higher customer inventory
         levels of our specialty generic/non-branded products at the end of
         the year. The reserve for sales returns at March 31, 2006 was
         relatively consistent with the prior year-end balance as improvement
         in the rate of product returns at our


                                      70




         specialty generic/non-branded segment was offset by an increase in
         the product return rate in our branded business. 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 March 31, 2006. The increase in reserves for
         sales rebates and cash discounts and other allowances at March 31,
         2006 was primarily due to greater fourth quarter sales in fiscal 2006
         compared to the prior year's fourth quarter.

         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 fiscal 2007 and 2006, the
         chargeback provision reduced the gross sales of our specialty
         generics segment by $93.9 million and $97.0 million, respectively.
         These amounts accounted for 99.2% and 99.4% of the total chargeback
         provisions recorded in fiscal 2007 and 2006, respectively.

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

         *  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 wholesaler customers based on historical buying
            patterns. During fiscal 2007, unit sales to our three major
            wholesale customers accounted for 83% of our total unit sales to
            all wholesalers, and the aggregate inventory position of the three
            major wholesalers at March 31, 2007 was approximately equivalent
            to our last eight 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 wholesale customers for
            which we do not receive actual inventory data, as our experience
            and customer buying patterns indicate that our smaller wholesale
            customers carry less inventory than our large wholesale customers.
            As of March 31, 2007, each week of inventory for those remaining
            wholesalers represented approximately $0.2 million, or 1.4%, of
            the reported reserve for chargebacks.

         *  The percentage of sales to our wholesale customers that will
            result in chargebacks. Using our automated chargeback system we
            track, at the product level, the percentage of sales units shipped
            to our wholesale customers that eventually result in chargebacks
            to us. The percentage for each product, which is based on actual
            historical experience, is applied to the respective inventory
            units in the wholesale distribution channel. As of March 31, 2007,
            the aggregate weighted average percentage of sales to wholesalers
            assumed to result in chargebacks was approximately 97%, with each
            1% representing approximately $0.1 million, or 1.1%, of the
            reported reserve for chargebacks.

         *  Contract pricing and the resulting chargeback per unit. The
            chargeback provision is based on the difference between our
            invoice price to the wholesaler (referred to as wholesale
            acquisition cost, or "WAC") and the


                                      71




            contract price negotiated with either our indirect customer or
            with the wholesaler for sales by the wholesaler to the indirect
            customers. We calculate the price difference, or chargeback per
            unit, for each product and for each major wholesale customer using
            historical weighted average pricing, based on actual chargeback
            experience. Use of weighted average pricing over time compensates
            for changes in the mix of indirect customers and products from
            period to period. As of March 31, 2007, a 5% shift in the
            calculated chargeback per unit in the same direction across all
            products and customers would result in a $0.7 million, or 5.1%,
            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. As a result of WAC
         decreases to certain specialty non-branded/generic products, we paid
         shelf-stock adjustments of $8.7 million to our wholesale customers
         during fiscal 2007.

         Sales Returns - Consistent with industry practice, we maintain a
         -------------
         returns policy that allows our direct and indirect customers to
         return product six months prior to expiration and within one year
         after expiration. This policy is applicable to both our branded and
         specialty generics business segments. Upon recognition of revenue
         from product sales to customers, we provide for an estimate of
         product to be returned. This estimate is determined by applying a
         historical relationship of customer returns to gross sales. We
         evaluate the reserve for sales returns by calculating historical
         return rates using data from the last 12 months on a product-specific
         basis and by class of trade (wholesale versus retail chain). The
         calculated percentages are applied against estimates of inventory in
         the distribution channel on a product specific basis. To determine
         the inventory levels in the wholesale distribution channel, we
         utilize actual inventory information from our major wholesale
         customers and estimate the inventory positions of the remaining
         wholesalers based on historical buying patterns. For inventory held
         by our non-wholesale customers, we use the last two months of sales
         to the direct buying chains and the indirect buying retailers as an
         estimate. A 10% change in the product specific historical return
         rates used in the reserve analysis would have changed the reserve
         balance at March 31, 2007 by approximately $0.2 million, or 7.2%, 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 March 31, 2007 by approximately $0.3 million,
         or 9.6%, 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 non-branded/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, 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 March 31, 2007 by
         $0.5


                                      72




         million, or 7.0% of the reported reserve for Medicaid rebates.
         Similarly, a 10% change in estimated patient usage would have changed
         the reserve by $0.5 million, or 7.0% 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,
         which range from nine to 20 years. We determine amortization periods
         for intangible assets that are acquired based on our assessment of
         various factors impacting estimated useful lives and cash flows of
         the acquired products. Such factors include the product's position in
         its life cycle, the existence or absence of like products in the
         market, various other competitive and regulatory issues, and
         contractual terms. Significant changes to any of these factors may
         result in a reduction in the intangible asset's useful life and an
         acceleration of related amortization expense.

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

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

         STOCK-BASED COMPENSATION As discussed in Note 2 to the Consolidated
         ------------------------
         Financial Statements, effective April 1, 2006, we adopted SFAS 123R,
         which requires the measurement and recognition of compensation
         expense, based on estimated fair values, for all share-based
         compensation awards made to employees and directors over the vesting
         period of the awards. The Company adopted SFAS 123R using the
         modified prospective method and, as a result, did not retroactively
         adjust results from prior periods due to the adoption. 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 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 the 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 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


                                      73




         assumptions based primarily on historical data. If actual results
         differ significantly from these estimates, stock-based compensation
         expense and our results of operations could be materially impacted.

         INCOME TAXES Our deferred tax assets and liabilities are determined
         ------------
         based on temporary differences between financial reporting and tax
         bases of assets and liabilities, applying enacted tax rates expected
         to be in effect for the year in which the differences are expected to
         reverse. Deferred tax assets and liabilities are measured using the
         currently enacted tax rates that apply to taxable income in effect
         for the years in which those tax assets are expected to be realized
         or settled. We record a valuation allowance to reduce deferred tax
         assets to the amount that is believed more likely than not to be
         realized. Management believes it is more likely than not that
         forecasted income, including income that may be generated as a result
         of certain tax planning strategies, together with the tax effects of
         the deferred tax liabilities, will be sufficient to fully recover the
         remaining deferred tax assets. In the event that 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 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 laws and regulations are subject to interpretation and tax
         litigation is inherently uncertain, these evaluations can involve a
         series of complex judgments about future events and may rely heavily
         on estimates and assumptions. The recorded tax liabilities are based
         on estimates and assumptions that have been deemed reasonable by
         management. However, if our estimates are not representative of
         actual outcomes, recorded tax liabilities could be materially
         impacted.

         CONTINGENCIES We are involved in various legal proceedings, some of
         -------------
         which involve claims for substantial amounts. An estimate is made to
         accrue for a loss contingency relating to any of these legal
         proceedings if we determine 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 future outcome of litigation and because of
         the potential that an adverse outcome in legal proceedings could have
         a material impact on our financial position or results of operations,
         such estimates are considered to be critical accounting estimates.
         After review, it was determined at March 31, 2007 that for each of
         the various legal proceedings in which we are involved, the
         conditions mentioned above were not met. We will continue to evaluate
         all legal matters as additional information becomes available.

         RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2006, the FASB issued 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, we may recognize the tax benefit
         from an uncertain tax position only if it is more likely than not
         that the tax position will be sustained on examination by the taxing
         authorities, based on the technical merits of the position. The tax
         benefits recognized in the financial statements from such a position
         should be measured based on the largest benefit that has a greater
         than 50% likelihood of being realized upon ultimate settlement. FIN
         48 also provides guidance on derecognizing 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. We adopted FIN 48 on April 1, 2007 and do not
         believe it will have a material effect on our Consolidated Financial
         Statements.

         In May 2007, the FASB issued FASB Staff Position No. FIN 48-1,
         "Definition of "Settlement" in FASB Interpretation No. 48" ("FSP FIN
         48-1"), which provides guidance on how a company should determine
         whether


                                      74




         a tax position is effectively settled for the purpose of recognizing
         previously unrecognized tax benefits. FSP FIN 48-1 should be applied
         upon initial adoption of FIN 48, which we adopted on April 1, 2007,
         as indicated above. We do not believe the adoption of FSP FIN 48-1
         will have a material effect on our Consolidated Financial Statements.

         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 disclosure
         requirements about fair value measurements. SFAS 157 is effective for
         financial statements issued in fiscal years beginning after November
         15, 2007, and interim periods within those fiscal years. The Company
         plans to adopt SFAS 157 at the beginning of fiscal 2009 and is
         evaluating the impact, if any, the adoption of SFAS 157 will have on
         its financial condition and results of operations.

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

         In March 2007, the FASB ratified the consensus reached by the
         Emerging Issues Task Force ("EITF") in Issue No. 06-10, "Accounting
         for Collateral Assignment Split-Dollar Life Insurance Arrangements,"
         ("Issue 06-10"). Issue 06-10 requires companies with collateral
         assignment split-dollar life insurance policies that provide a
         benefit 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 September 2007, the EITF reached a consensus on Issue No. 07-1
         ("Issue 07-1"), "Accounting for Collaborative Arrangements." The
         scope of Issue 07-1 is limited to collaborative arrangements where no
         separate legal entity exists and in which the parties are active
         participants and are exposed to significant risks and rewards that
         depend on the success of the activity. The EITF concluded that
         revenue transactions with third parties and associated costs incurred
         should be reported in the appropriate line item in each company's
         financial statements pursuant to the guidance in Issue 99-19,
         "Reporting Revenue Gross as a Principal versus Net as an Agent." The
         EITF also concluded that the equity method of accounting under
         Accounting Principles Board Opinion 18, "The Equity Method of
         Accounting for Investments in Common Stock," should not be applied to
         arrangements that are not conducted through a separate legal entity.
         The EITF also concluded that the income statement classification of
         payments made between the parties in an arrangement should be based
         on a consideration of the following factors: the nature and terms of
         the arrangement; the nature of the entities' operations; and whether
         the partners' payments are within the scope of existing GAAP. To the
         extent such costs are not within the scope of other authoritative
         accounting literature, the income statement characterization for the
         payments should be based on an analogy to authoritative accounting
         literature or a reasonable, rational, and consistently applied
         accounting policy election. The provisions of Issue 07-1 are
         effective for fiscal years beginning on or after December 15, 2008,
         and


                                      75




         companies will be required to apply the provisions through
         retrospective application. The Company plans to adopt Issue 07-1 at
         the beginning of fiscal 2010 and is evaluating the impact of the
         adoption of Issue 07-1 on its financial condition and results of
         operations.

         In 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 December 2007, the FASB issued SFAS No. 141 (revised 2007),
         "Business Combinations," ("SFAS 141 (R)") which replaces SFAS 141 but
         retains the fundamental concept of purchase method of accounting in a
         business combination and improves reporting by creating greater
         consistency in the accounting and financial reporting of business
         combinations, resulting in more complete, comparable, and relevant
         information for investors and other users of financial statements. To
         achieve this goal, the new standard requires the acquiring entity in
         a business combination to recognize all the assets acquired and
         liabilities assumed in the transaction and any non-controlling
         interest at the acquisition date 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 No. 160, "Non-controlling
         Interests in Consolidated Financial Statements" ("SFAS 160") an
         amendment of ARB No. 51, which will affect only those entities that
         have an outstanding non-controlling interest in one or more
         subsidiaries or that deconsolidate a subsidiary by requiring all
         entities to report non-controlling (minority) interests in
         subsidiaries in the same way as equity in the consolidated financial
         statements. In addition, SFAS 160 eliminates the diversity that
         currently exists in accounting for transactions between an entity and
         non-controlling interests by requiring they be treated as equity
         transactions. SFAS 160 is effective for fiscal years beginning after
         December 15, 2008. The Company plans to adopt SFAS 160 at the
         beginning of fiscal 2010 and is evaluating the impact of SFAS 160 on
         its financial condition and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

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

         The majority of our investments in marketable securities are taxable
         auction rate securities. The rates on these securities reset at
         pre-determined interval up to 35 days. As of March 31, 2007, we had
         invested $119.2 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 March 31, 2007 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 24 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


                                      76




         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.

         The annual favorable impact on our net income as a result of a 25, 50
         or 100 basis point (where 100 basis points equals 1%) increase in
         short-term interest rates would be approximately $0.6 million, $1.1
         million or $2.2 million, respectively, based on our average cash, cash
         equivalents and short-term marketable investment balances during the
         fiscal year ended March 31, 2007.

         Advances to us under our credit facility bear interest at a rate that
         varies consistent with increases or decreases in the publicly
         announced prime rate and/or the LIBOR rate with respect to
         LIBOR-related loans, if any. A material increase in such rates could
         significantly increase borrowing expenses. We did not have any cash
         borrowings under our credit facility at March 31, 2007.

         In May 2003, we issued Notes with a principal amount of $200.0
         million. The interest rate on the Notes is fixed at 2.50% and
         therefore not subject to interest rate changes. Beginning May 16,
         2006, we became obligated to pay contingent interest at a rate equal
         to 0.5% per annum during any six-month period, if the average trading
         price of the Notes per $1,000 principal amount for the five-trading
         day period ending on the third trading day immediately preceding the
         first day of the applicable six-month period equals $1,200 or more.
         Holders may require us to repurchase all or a portion of their Notes
         on May 16, 2008, 2013, 2018, 2023 and 2028, or upon a change in
         control, as defined in the indenture governing the Notes, at 100% of
         the principal amount of the Notes, plus accrued and unpaid interest
         (including contingent interest, if any) to the date of repurchase,
         payable in cash. As a result, we have classified the Notes as a
         current liability as of June 30, 2007 due to the right the holders
         have to require us to repurchase the Notes on May 16, 2008.

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


                                      77




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         -------------------------------------------

           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           -------------------------------------------------------


The Board of Directors and Shareholders
K-V Pharmaceutical Company:

We have audited the accompanying consolidated balance sheets of K-V
Pharmaceutical Company and subsidiaries (the Company) as of March 31, 2007 and
2006, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 2007. In connection with our audits of the consolidated
financial statements, we have also audited the accompanying financial
statement schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of K-V
Pharmaceutical Company and subsidiaries as of March 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2007 in conformity with U.S. generally
accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004), "Share-Based Payment", effective April 1, 2006.

As discussed in Note 3 to the consolidated financial statements, the Company's
consolidated balance sheet as of March 31, 2006, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash
flows for the years ended March 31, 2006 and 2005, have been restated.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of internal
control over financial reporting of K-V Pharmaceutical Company as of March 31,
2007 based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 25, 2008 expressed an unqualified opinion
on management's assessment of, and an adverse opinion on the effective
operation of, internal control over financial reporting.


/s/ KPMG LLP
St. Louis, Missouri
March 25, 2008


                                      78





                                     K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                             CONSOLIDATED BALANCE SHEETS
                                                    (In thousands)



                                                                                                    MARCH 31,
                                                                                               ------------------
                                                                                               2007          2006
                                                                                               ----          ----
                                            ASSETS                                                      (AS RESTATED)
                                            ------                                                      -------------

                                                                                                   
CURRENT ASSETS:
Cash and cash equivalents............................................................    $    82,574     $   100,706
Marketable securities................................................................        157,812         106,763
Receivables, less allowance for doubtful accounts of $716 and $397
   in 2007 and 2006, respectively....................................................         78,634          53,571
Inventories, net.....................................................................         91,515          71,166
Prepaid and other assets.............................................................          6,571           7,012
Deferred tax asset...................................................................         14,364          10,072
                                                                                         -----------     -----------
   Total Current Assets..............................................................        431,470         349,290
Property and equipment, less accumulated depreciation................................        186,900         178,042
Intangible assets and goodwill, net..................................................         69,010          72,955
Other assets.........................................................................         20,403          19,026
                                                                                         -----------     -----------
TOTAL ASSETS.........................................................................    $   707,783     $   619,313
                                                                                         ===========     ===========

                                         LIABILITIES
                                         -----------
CURRENT LIABILITIES:
Accounts payable.....................................................................    $    18,506     $    17,975
Accrued liabilities..................................................................         38,776          24,676
Current maturities of long-term debt.................................................          1,897           1,681
                                                                                         -----------     -----------
   Total Current Liabilities.........................................................         59,179          44,332
Long-term debt.......................................................................        239,451         241,319
Other long-term liabilities..........................................................          6,319           5,442
Deferred tax liability...............................................................         38,007          25,221
                                                                                         -----------     -----------
TOTAL LIABILITIES....................................................................        342,956         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 both March 31, 2007 and 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 40,316,426 and 39,660,637 at March 31, 2007
       and 2006, respectively........................................................            403             397
     Class B - issued 12,393,982 and 12,679,986 at March 31, 2007 and
       2006, respectively (convertible into Class A shares on a one-for-one basis)...            124             127
Additional paid-in capital...........................................................        150,818         145,180
Retained earnings....................................................................        269,430         211,410
Accumulated other comprehensive income (loss)........................................             33            (211)
Less: Treasury stock, 3,237,023 shares of Class A and 92,902 shares of Class B Common
   Stock at March 31, 2007, and 3,123,975 shares of Class A and 92,902 shares
   of Class B Common Stock at March 31, 2006, at cost................................        (55,981)        (53,904)
                                                                                         -----------     -----------
TOTAL SHAREHOLDERS' EQUITY...........................................................        364,827         302,999
                                                                                         -----------     -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...........................................    $   707,783     $   619,313
                                                                                         ===========     ===========

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      79






                                            K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENTS OF INCOME
                                               (In thousands, except per share data)


                                                                                         YEARS ENDED MARCH 31,
                                                                   ----------------------------------------------------------------
                                                                          2007                  2006                  2005
                                                                   --------------------  --------------------  --------------------
                                                                                            (AS RESTATED)         (AS RESTATED)
                                                                                                       
Net revenues....................................................    $          443,627    $          367,640    $          304,656
Cost of sales...................................................               147,263               123,935               107,948
                                                                   --------------------  --------------------  --------------------
Gross profit....................................................               296,364               243,705               196,708
                                                                   --------------------  --------------------  --------------------
Operating expenses:
    Research and development....................................                31,462                28,886                23,538
    Purchased in-process research and
        development and transaction costs.......................                    --                30,441                    --
    Selling and administrative..................................               174,344               143,437               118,263
    Amortization of intangibles.................................                 4,810                 4,784                 4,653
    Litigation..................................................                (2,408)                   --                (1,430)
                                                                   --------------------  --------------------  --------------------
Total operating expenses........................................               208,208               207,548               145,024
                                                                   --------------------  --------------------  --------------------

Operating income................................................                88,156                36,157                51,684
                                                                   --------------------  --------------------  --------------------

Other expense (income):
    Interest expense............................................                 8,985                 6,045                 5,432
    Interest and other income...................................                (9,901)               (5,737)               (3,048)
                                                                   --------------------  --------------------  --------------------
Total other expense (income), net...............................                  (916)                  308                 2,384
                                                                   --------------------  --------------------  --------------------
Income before income taxes and cumulative effect
    of change in accounting principle...........................                89,072                35,849                49,300
Provision for income taxes......................................                32,958                24,433                18,083
                                                                   --------------------  --------------------  --------------------
Income before cumulative effect of change
    in accounting principle.....................................                56,114                11,416                31,217
Cumulative effect of change in accounting
    principle (net of $670 in taxes)............................                 1,976                    --                    --
                                                                   --------------------  --------------------  --------------------
Net income......................................................    $           58,090    $           11,416    $           31,217
                                                                   ====================  ====================  ====================
(CONTINUED)



                                      80





                                            K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF INCOME - (CONTINUED)
                                               (In thousands, except per share data)


                                                                                          YEARS ENDED MARCH 31,
                                                                   ----------------------------------------------------------------
                                                                          2007                  2006                  2005
                                                                   --------------------  --------------------  --------------------
                                                                                            (AS RESTATED)         (AS RESTATED)
                                                                                                        
Earnings per share before cumulative effect of change in
  accounting principle:
       Basic - Class A common....................................    $         $ 1.19      $           0.24      $           0.68
       Basic - Class B common....................................                0.99                  0.20                  0.56
       Diluted - Class A common..................................                1.02                  0.23                  0.60
       Diluted - Class B common..................................                0.88                  0.20                  0.52

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

Earnings per share:
       Basic - Class A common....................................    $           1.23      $           0.24      $           0.68
       Basic - Class B common....................................                1.03                  0.20                  0.56
       Diluted - Class A common..................................                1.05                  0.23                  0.60
       Diluted - Class B common..................................                0.91                  0.20                  0.52

Shares used in per share calculation:
       Basic - Class A common....................................              36,813                35,842                33,734
       Basic - Class B common....................................              12,390                12,918                14,833
       Diluted - Class A common..................................              58,953                49,997                58,633
       Diluted - Class B common..................................              12,489                13,113                15,072




SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      81





                                            K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                                           (In thousands)

                                                                                                YEARS ENDED MARCH 31,
                                                                                  ----------------------------------------------
                                                                                      2007             2006              2005
                                                                                  -----------      -----------       -----------
                                                                                                  (AS RESTATED)     (AS RESTATED)
                                                                                                            
Net income.............................................................           $    58,090      $    11,416       $    31,217
Unrealized gain (loss) on available for sale securities:
   Unrealized holding gain (loss) during the period....................                   100             (118)             (201)
   Reclassification of losses included in net income...................                   270               --                --
   Tax impact related to other comprehensive income (loss).............                  (126)              40                68
                                                                                  -----------      -----------       -----------
      Total other comprehensive income (loss)..........................                   244              (78)             (133)
                                                                                  -----------      -----------       -----------

Total comprehensive income.............................................           $    58,334      $    11,338       $    31,084
                                                                                  ===========      ===========       ===========




SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      82





                                            K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                                                        YEARS ENDED MARCH 31, 2007, 2006 AND 2005
                                                   --------------------------------------------------------------------------------
                                                                                                                 ACCU-
                                                                                                                 MULATED
                                                                                                                 OTHER
                                                                                                                 COMPRE-    TOTAL
                                                             CLASS A CLASS B  ADDITIONAL                         HENSIVE    SHARE-
                                                   PREFERRED COMMON  COMMON     PAID-IN    TREASURY    RETAINED  INCOME    HOLDERS'
                                                     STOCK    STOCK   STOCK     CAPITAL     STOCK      EARNINGS  (LOSS)     EQUITY
                                                     -----    -----   -----     -------     -----      --------  ------     ------
                                                                              (Dollars in thousands)

                                                                                                 
BALANCE AT MARCH 31, 2004, AS PREVIOUSLY REPORTED..  $  --    $ 362   $ 162   $ 123,828    $ (51,183) $ 184,580  $   --  $ 257,749
Cumulative effect of restatement...................     --       (5)     (1)     10,641(a)        --    (15,663)     --     (5,028)
                                                    -------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004, AS RESTATED.............     --      357     161     134,469      (51,183)   168,917      --    252,721
Net income, as restated............................     --       --      --          --           --     31,217      --     31,217
Dividends paid on preferred stock..................     --       --      --          --           --        (70)     --        (70)
Conversion of 2,783,537 Class B shares to
  Class A shares...................................     --       28     (28)         --           --         --      --         --
Issuance of 14,679 Class A shares
   under product development agreement.............     --       --      --         237           --         --      --        237
Stock-based compensation, as restated..............     --       --      --       1,080           --         --      --      1,080
Purchase of common stock for treasury..............     --       --      --          --       (2,468)        --      --     (2,468)
Stock options exercised - 76,310 shares of Class
   A and 12,101 shares of Class B, as restated.....     --        1      --       3,533           --         --      --      3,534
Excess income tax benefits from stock option
   exercises, as restated..........................     --       --      --         359           --         --      --        359
Other comprehensive loss...........................     --       --      --          --           --         --    (133)      (133)
                                                    -------------------------------------------------------------------------------

BALANCE AT MARCH 31, 2005, AS RESTATED.............     --      386     133     139,678      (53,651)   200,064    (133)   286,477
Net income, as restated............................     --       --      --          --           --     11,416      --     11,416
Dividends paid on preferred stock..................     --       --      --          --           --        (70)     --        (70)
Conversion of 736,778 Class B shares to
  Class A shares...................................     --        7      (7)         --           --         --      --         --
Stock-based compensation, as restated..............     --       --      --         927           --         --      --        927
Purchase of common stock for treasury..............     --       --      --          --         (253)        --      --       (253)
Stock options exercised - 353,355 shares of Class
   A and 127,519 shares of Class B, as restated....     --        4       1       3,138           --         --      --      3,143
Excess income tax benefits from stock option
   exercises, as restated..........................     --       --      --       1,437           --         --      --      1,437
Other comprehensive loss...........................     --       --      --          --           --         --     (78)       (78)
                                                    -------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2006, AS RESTATED.............     --      397     127     145,180      (53,904)   211,410    (211)   302,999
Net income.........................................     --       --      --          --           --     58,090      --     58,090
Dividends paid on preferred stock..................     --       --      --          --           --        (70)     --        (70)
Conversion of 441,341 Class B shares to
  Class A shares...................................     --        4      (4)         --           --         --      --         --
Stock-based compensation...........................     --       --      --       3,984           --         --      --      3,984
Purchase of common stock for treasury..............     --       --      --          --       (2,077)        --      --     (2,077)
Stock options exercised - 166,169 shares of Class A
   and 193,899 shares of Class B...................     --        2       1       3,617           --         --      --      3,620
Excess income tax benefits from stock option
  exercises........................................     --       --      --         683           --         --      --        683
Cumulative effect of change in accounting
  principle........................................     --       --      --      (2,646)          --         --      --     (2,646)
Other comprehensive income ........................     --       --      --          --           --         --     244        244
                                                    -------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2007..........................  $  --    $ 403   $ 124   $ 150,818    $ (55,981) $ 269,430  $   33  $ 364,827
                                                    ===============================================================================


(a)  Adjustment for stock-based compensation expense pursuant to APB 25
     ($13,626) and excess tax benefit associated with income tax impact of
     stock-based compensation expense pursuant to APB 25 ($298), partially
     offset by exercise deposits received by the Company for stock options in
     the two-year forfeiture period ($3,283) - see Note 3.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      83




                                           K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                          (In thousands)

                                                                                               YEARS ENDED MARCH 31,
                                                                                 ------------------------------------------------
                                                                                      2007              2006              2005
                                                                                 -------------      ------------      -----------
                                                                                                    (AS RESTATED)    (AS RESTATED)
                                                                                                             
Operating Activities:
Net income.............................................................          $      58,090      $     11,416      $    31,217
Adjustments to reconcile net income 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 .....................................                 22,388            18,002           13,904
   Deferred income tax provision.......................................                  7,698             6,062           13,095
   Deferred compensation...............................................                    877               965            1,355
   Stock-based compensation............................................                  3,984               927            1,080
   Litigation..........................................................                     --                --             (843)
   Excess tax benefits associated with stock options...................                   (683)               --               --
   Other...............................................................                    270                --               --
Changes in operating assets and liabilities:
   Decrease (increase) in receivables, net.............................                (25,063)            7,593            2,348
   Increase in inventories.............................................                (20,349)          (16,792)          (2,982)
   (Increase) decrease in prepaid and other assets.....................                 (2,771)            1,333           (3,530)
   Increase (decrease) in accounts payable and accrued
      liabilities......................................................                 14,670             5,533           (6,614)
                                                                                 -------------      ------------      -----------
Net cash provided by operating activities..............................                 57,135            64,609           49,030
                                                                                 -------------      ------------      -----------
Investing Activities:
   Purchase of property and equipment..................................                (25,066)          (58,334)         (63,622)
   Purchase of marketable securities...................................                (50,949)          (61,187)         (10,565)
   Purchase of preferred stock.........................................                   (400)          (11,300)              --
   Product acquisition.................................................                     --           (25,643)              --
                                                                                 -------------      ------------      -----------
Net cash used in investing activities..................................                (76,415)         (156,464)         (74,187)
                                                                                 -------------      ------------      -----------
Financing Activities:
   Principal payments on long-term debt................................                 (1,652)             (892)          (8,179)
   Proceeds from borrowing of long-term debt...........................                     --            32,764               --
   Dividends paid on preferred stock...................................                    (70)              (70)             (70)
   Purchase of common stock for treasury...............................                 (2,077)             (253)          (2,468)
   Excess tax benefits associated with stock options...................                    683                --               --
   Cash deposits received for stock options............................                  4,264             1,187            4,118
                                                                                 -------------      ------------      -----------
Net cash provided by (used in) financing activities...................                   1,148            32,736           (6,599)
                                                                                 -------------      ------------      -----------
Decrease in cash and cash equivalents.................................                 (18,132)          (59,119)         (31,756)
Cash and cash equivalents:
   Beginning of year...................................................                100,706           159,825          191,581
                                                                                 -------------      ------------      -----------
   End of year.........................................................          $      82,574      $    100,706      $   159,825
                                                                                 =============      ============      ===========


Non-cash investing and financing activities:
   Term loans refinanced...............................................          $          --      $      9,859      $        --

   Issuance of common stock under product development
      agreement........................................................                     --                --              237

   Stock options exercised (at expiration of two-year forfeiture period)                 3,620             3,143            3,534

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      84



              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollars in thousands, except per share data)

1.   DESCRIPTION OF BUSINESS
     -----------------------

     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.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

          BASIS OF PRESENTATION
          ---------------------

          The Company's consolidated financial statements are prepared
          in accordance with U.S. generally accepted accounting
          principles ("GAAP").  The consolidated financial statements
          include the accounts of KV and its wholly-owned subsidiaries.
          All material inter-company accounts and transactions have been
          eliminated in consolidation.

          USE OF ESTIMATES
          ----------------

          The preparation of financial statements in conformity with
          GAAP requires management to make estimates and assumptions
          that affect the reported amounts of assets and liabilities,
          the disclosure of contingent liabilities at the date of the
          financial statements, and the reported amounts of revenues and
          expenses during the reporting period.  Actual results in
          subsequent periods may differ from the estimates and
          assumptions used in the preparation of the accompanying
          consolidated financial statements.

          The most significant estimates made by management include
          revenue recognition and reductions to gross revenues,
          inventory valuation, intangible assets, stock-based
          compensation, income taxes, and loss contingencies related to
          legal proceedings. Management periodically evaluates
          estimates used in the preparation of the consolidated
          financial statements and makes changes on a prospective basis
          when adjustments are necessary.

          CASH EQUIVALENTS
          ----------------

          Cash equivalents consist of interest-bearing deposits that can
          be redeemed on demand and investments that have original
          maturities of three months or less.

          MARKETABLE SECURITIES
          ---------------------

          The Company's marketable securities consist of mutual funds
          comprised of U.S. government investments and auction rate
          securities. The Company classifies its marketable securities
          as available-for-sale with net unrealized gains or losses
          recorded as a separate component of shareholders' equity, net
          of any related tax effect. Auction rate securities generally
          have long-term stated maturities of 20 to 30 years. However,
          these securities have certain economic characteristics of
          short-term investments due to a rate-setting mechanism and

                              85





          the ability to liquidate them through a dutch auction process
          that occurs on pre-determined intervals of less than 90 days.

          INVENTORIES
          -----------

          Inventories consist of finished goods held for distribution,
          raw materials and work in process.  Inventories are stated at
          the lower of cost or market, with the cost determined on the
          first-in, first-out (FIFO) basis.  Reserves for obsolete,
          excess or slow-moving inventory are established by management
          based on evaluation of inventory levels, forecasted demand and
          market conditions.

          PROPERTY AND EQUIPMENT
          ----------------------

          Property and equipment are stated at cost, less accumulated
          depreciation. Major renewals and improvements are capitalized,
          while routine maintenance and repairs are expensed as
          incurred. At the time properties are retired from service, the
          cost and accumulated depreciation are removed from the
          respective accounts and the related gains or losses are
          reflected in earnings. The Company capitalizes interest on
          qualified construction projects.

          Depreciation expense is computed over the estimated useful
          lives of the related assets using the straight-line
          method. The estimated useful lives are principally 10 years
          for land improvements, 10 to 40 years for buildings and
          improvements, 3 to 15 years for machinery and equipment, and 3
          to 10 years for office furniture and equipment.  Leasehold
          improvements are amortized on a straight-line basis over the
          shorter of the respective lease terms or the estimated useful
          life of the assets.

          The Company assesses property and equipment for impairment
          whenever events or changes in circumstances indicate that an
          asset's carrying amount may not be recoverable.

          INTANGIBLE ASSETS AND GOODWILL
          ------------------------------

          Intangible assets 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 estimated
          useful lives of 20 years.  Costs associated with the
          development of patents and trademarks are amortized on a
          straight-line basis over estimated useful lives ranging from 5
          to 17 years.  The Company evaluates its intangible assets for
          impairment at least annually or whenever events or changes in
          circumstances indicate that an intangible asset's carrying
          amount may not be recoverable.  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.

          In accordance with Statement of Financial Accounting Standards
          ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
          goodwill is subject to at least an annual assessment of
          impairment on a fair value basis.  If the Company determines
          through the assessment process that goodwill has been
          impaired, the Company will record the impairment charge in its
          results of operations.  The Company's test for goodwill
          impairment in fiscal 2007 determined there was no goodwill
          impairment.

          OTHER ASSETS
          ------------

          Non-marketable equity investments for which the Company does
          not have the ability to exercise significant influence over
          operating and financial policies (generally less than 20%
          ownership) are accounted for using

                                  86





          the cost method.  Such investments are included in "Other
          assets" in the accompanying consolidated balance sheets and
          relate to the Company's $11,406 investment in the preferred
          stock of Strides Arcolab Limited (see Note 4).

          This investment is periodically reviewed for other-than-
          temporary declines in fair value.  An other than temporary
          decline in fair value is identified by evaluating market
          conditions, the entity's ability to achieve forecast and
          regulatory submission guidelines, as well as the entity's
          overall financial condition.

          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 products it has developed to
          pharmaceutical marketers.  Royalties under these arrangements
          are earned based on the sale of products.

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

             *    Payment discounts are reductions to invoiced amounts
                  offered to customers for payment within a specified
                  period and are estimated utilizing historical customer
                  payment experience.
             *    Sales rebates are offered to certain customers to
                  promote customer loyalty and encourage greater product
                  sales.  These rebate programs provide that, upon the
                  attainment of pre-established volumes or the
                  attainment of revenue milestones for a specified
                  period, the customer receives credit against
                  purchases.  Other promotional programs are incentive
                  programs periodically offered to customers.  Due to
                  the nature of these programs, the Company is able to
                  estimate provisions for rebates and other promotional
                  programs based on the specific terms in each
                  agreement.
             *    Consistent with common industry practices, the Company
                  has agreed to terms with its customers to allow them
                  to return product that is within a certain period of
                  the expiration date.  Upon recognition of revenue from
                  product sales to customers, the Company provides for
                  an estimate of product to be returned.  This estimate
                  is determined by applying a historical relationship of
                  customer returns to amounts invoiced.
             *    The Company markets and sells products directly to
                  wholesalers, distributors, warehousing pharmacy
                  chains, mail order pharmacies and other direct
                  purchasing groups.  The Company also markets products
                  indirectly to independent pharmacies, non-warehousing
                  chains, managed care organizations, and group
                  purchasing organizations, collectively referred to as
                  "indirect customers."   The Company enters 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, the Company may pre-authorize
                  wholesalers to offer specified contract pricing to
                  other indirect customers.  Under either arrangement,
                  the Company provides 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.

                                 87





                  Provisions for estimated chargebacks are calculated
                  primarily using historical chargeback experience,
                  actual contract pricing and estimated and actual
                  wholesaler inventory levels.
             *    Generally, the Company provides credits to wholesale
                  customers for decreases that are made to selling
                  prices for the value of inventory that is owned by
                  these customers at the date of the price reduction.
                  These credits are customary in the industry and are
                  intended to reduce a wholesale customer's inventory
                  cost to better reflect current market prices.  Since a
                  reduction in the wholesaler's invoice price reduces
                  the chargeback per unit, price reduction credits are
                  typically included as part of the reserve for
                  chargebacks because they act essentially as
                  accelerated chargebacks.  Although the Company
                  contractually agreed to provide price adjustment
                  credits to its 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.
             *    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. The provision
                  for Medicaid rebates is based upon historical
                  experience of claims submitted by the various states.
                  The Company also monitors Medicaid legislative changes
                  to determine what impact such legislation may have on
                  the provision for Medicaid rebates.


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

          Accruals for sales provisions are presented in the
          Consolidated Financial Statements as reductions to net
          revenues and accounts receivable.  Sales provisions totaled
          $148,822, $154,662 (as restated) and $133,751 (as restated)
          for the years ended March 31, 2007, 2006 and 2005,
          respectively.  The reserve balances related to the sales
          provisions totaled $31,281 and $28,697 (as restated) at
          March 31, 2007 and 2006, respectively, and are included in
          "Receivables, less allowance for doubtful accounts" in the
          accompanying Consolidated Balance Sheets.

          CONCENTRATION OF CREDIT RISK
          ----------------------------

          The Company extends credit on an uncollateralized basis
          primarily to wholesale drug distributors and retail pharmacy
          chains throughout the United States. As a result, the Company is
          required to estimate the level of receivables which ultimately
          will not be paid. The Company calculates this estimate based
          on prior experience supplemented by a customer specific review
          when it is deemed necessary. On a periodic basis, the Company
          performs evaluations of the financial condition of all
          customers to further limit its credit risk exposure.  Actual
          losses from uncollectible accounts have historically been
          insignificant.

          The Company's three largest customers accounted for
          approximately 34%, 20% and 15%, and 32% (as restated), 20% (as
          restated) and 14% of gross receivables at March 31, 2007 and
          2006, respectively.

          For the year ended March 31, 2007, KV's three largest
          customers accounted for 26%, 21% and 14% of gross revenues.
          For the years ended March 31, 2006 and 2005, the Company's
          three largest customers accounted for gross revenues of 27%,
          16% and 13% and 27%, 17% (as restated) and 12%, respectively.

          The Company maintains cash balances at certain financial
          institutions that are greater than the FDIC insurable limit.



                                    88





          SHIPPING AND HANDLING COSTS
          ---------------------------

          The Company classifies shipping and handling costs in cost of
          sales.  The Company does not derive revenue from shipping.

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

          Research and development costs, including licensing fees for
          early stage development products, are expensed in the period
          incurred.

          The Company has licensed the exclusive rights to co-develop
          and market various products with other drug delivery
          companies.  These collaborative agreements usually require the
          Company to pay up-front fees and ongoing milestone payments.
          When the Company makes an up-front or milestone payment,
          management evaluates the stage of the related product to
          determine the appropriate accounting treatment.  If the
          product is considered to be beyond the early development stage
          but has not yet been approved by regulatory authorities, the
          Company will evaluate the facts and circumstances of each case
          to determine if a portion or all of the payment has future
          economic benefit and should be capitalized.  Payments made to
          third parties subsequent to regulatory approval are
          capitalized with that cost generally amortized over the
          shorter of the life of the product or the term of the
          licensing agreement.

          The Company accrues estimated costs associated with clinical
          studies performed by contract research organizations based on
          the total of costs incurred through the balance sheet date.
          The Company monitors the progress of the trials and their
          related activities to the extent possible, and adjusts the
          accruals accordingly.  These accrued costs are recorded as a
          component of research and development expense.

          ADVERTISING
          -----------

          Costs associated with advertising are expensed in the period
          in which the advertising is used and these costs are included
          in selling and administrative expense.  Advertising expenses
          totaled $21,932, $18,366 and $10,885 for the years ended March
          31, 2007, 2006 and 2005, respectively.  Advertising expense
          includes the cost of product samples given to physicians for
          marketing to their patients.

          LITIGATION
          ----------

          The Company is subject to litigation in the ordinary course of
          business and to certain other contingencies (see Note 13).
          Legal fees and other expenses related to litigation and
          contingencies are recorded as incurred.  The Company, in
          consultation with its legal counsel, also assesses the need to
          record a liability for litigation and contingencies
          on a case-by-case basis.  Accruals are recorded when the
          Company determines that a loss related to a matter is both
          probable and reasonably estimatable.

          DEFERRED FINANCING COSTS
          ------------------------

          Deferred financing costs of $5,835 were incurred in connection
          with the issuance of convertible debt (see Note 11). These
          costs are being amortized into interest expense on a
          straight-line basis over the five-year period that ends on the
          first date the debt can be put by the holders to the Company.
          Accumulated amortization totaled $4,471 and $3,307 at March
          31, 2007 and 2006, respectively.  Deferred financing costs,
          net of accumulated amortization, are included in "Other
          Assets" in the accompanying consolidated balance sheets.

                                   89




          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 debt.  The dilutive effects of
          outstanding stock options and unvested common shares subject
          to repurchase are reflected in diluted earnings per share by
          application of the treasury stock method.  Convertible
          preferred stock and the convertible debt are reflected on an
          if-converted basis.  The computation of diluted earnings per
          share for Class A Common Stock assumes the conversion of the
          Class B Common Stock, while the diluted earnings per share for
          Class B Common Stock does not assume the conversion of those
          shares.

          In December 2004, the Company adopted the guidance in EITF No.
          04-08, "The Effect of Contingently Convertible Debt on Diluted
          Earnings per Share." The EITF consensus required that the
          impact of contingently convertible debt instruments be
          included in diluted earnings per share computations (if
          dilutive) regardless of whether the market price trigger (or
          other contingent feature) had been met.

          INCOME TAXES
          ------------

          Income taxes are accounted for under the asset and liability
          method where deferred tax assets and liabilities are
          recognized for the future tax consequences attributable to
          differences between the financial statement carrying amounts
          of existing assets and liabilities and their respective tax
          bases.  Deferred tax assets and liabilities are measured using
          enacted tax rates expected to apply to taxable income in the
          years in which those temporary differences are expected to be
          recovered or settled.  The effect on deferred tax assets and
          liabilities of a change in tax rates is recognized in income
          in the period that includes the enactment date.  A valuation
          allowance is established when it is more likely than not that
          some portion or all of the deferred tax assets will not be
          realized.  The Company records liabilities for tax positions
          claimed on filed tax returns when the liabilities are probable
          and can be reasonably estimated. Accrued interest and
          penalties relating to unrecognized tax benefits are recorded
          as part of the income tax provision.

                                  90




          STOCK-BASED COMPENSATION
          ------------------------

          Effective April 1, 2006, the Company adopted SFAS 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 expense 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.

          The following table illustrates the effect of the restatement
          adjustments (see Note 3) 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 for fiscal 2006
          and 2005:



                                                                       YEARS ENDED MARCH 31,
                                   ------------------------------------------------------------------------------------------------
                                                      2006                                              2005
                                   --------------------------------------------       ---------------------------------------------
                                       AS                                                 AS
                                   PREVIOUSLY                           AS            PREVIOUSLY                            AS
                                    REPORTED       ADJUSTMENTS      RESTATED(1)        REPORTED      ADJUSTMENTS        RESTATED(1)
                                   ----------      -----------      -----------       ----------     -----------        -----------
                                                                                                     
Net income                          $ 15,787         $ (4,371)        $  11,416        $  33,269        $(2,052)           $ 31,217
Add: Stock-based compensation
  expense included in reported
  net income, net of tax                   -              641               641                -            757                 757
Deduct: Stock-based compensation
  using the fair value based
  method for all awards               (2,433)            (236)           (2,669)          (2,463)        (1,301)             (3,764)
                                    -------------------------------------------        --------------------------------------------
Pro forma net income                $ 13,354         $ (3,966)        $   9,388        $  30,806        $(2,596)           $ 28,210
                                    ===========================================        ============================================
Earnings per share:
  Basic - Class A common            $   0.33         $  (0.09)        $    0.24        $    0.71        $ (0.03)           $   0.68
  Basic - Class B common                0.28            (0.08)             0.20             0.59          (0.03)               0.56
  Diluted - Class A common              0.31            (0.08)             0.23             0.63          (0.03)               0.60
  Diluted - Class B common                                                 0.20                                                0.52

Earnings per share - pro forma:
  Basic - Class A common            $   0.28         $  (0.08)        $    0.20        $    0.66        $ (0.05)           $   0.61
  Basic - Class B common                0.23            (0.06)             0.17             0.55          (0.04)               0.51
  Diluted - Class A common              0.26            (0.07)             0.19             0.59          (0.04)               0.55
  Diluted - Class B common                                                 0.16                                                0.48


          ------------
          (1)  See Note 3 "Restatement of Consolidated Financial Statements."


          The restated stock-based compensation expense included in net
          income, net of tax, was $1,657, $939, $2,098, $1,581, $1,936,
          $508, $2,372, $656, and $829 for the years ended March 31,
          2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997 and 1996,
          respectively.


                                  91





          COMPREHENSIVE INCOME
          --------------------

          Comprehensive income includes all changes in equity during a
          period except those that resulted from investments by or
          distributions to the Company's shareholders. Other
          comprehensive income refers to revenues, expenses, gains and
          losses that, under generally accepted accounting principles,
          are included in comprehensive income, but excluded from net
          income as these amounts are recorded directly as an adjustment
          to shareholders' equity. For the Company, other comprehensive
          income (loss) is comprised of the net changes in unrealized
          gains and losses on available-for-sale securities.

          FAIR VALUE OF FINANCIAL INSTRUMENTS
          -----------------------------------

          The Company's financial instruments consist primarily of cash
          and cash equivalents, marketable securities, receivables,
          investments, trade accounts payable, the convertible debt,
          embedded derivatives related to the issuance of the
          convertible debt and a mortgage loan agreement entered into in
          March 2006. The carrying amounts of cash and cash equivalents,
          receivables and trade accounts payable are representative of
          their respective fair values due to their relatively short
          maturities. The fair values of marketable securities are based
          on quoted market prices. The Company estimates the fair value
          of its fixed rate long-term obligations based on quoted market
          rates of interest and maturity schedules for similar issues.
          The carrying value of these obligations approximates their
          fair value.


          The Company's $11,406 investment in the preferred stock of
          Strides Arcolab Limited had a fair value of $12,600 at March
          31, 2007, based on an annual independent valuation analysis.
          Based on quoted market rates, the Company's convertible debt
          had a fair value of $229,240 and $214,860 at March 31, 2007
          and 2006, respectively. The carrying amount of the mortgage
          loan agreement approximates its fair value because its terms
          are similar to those which can be obtained for similar
          financial instruments in the current marketplace.

          DERIVATIVE FINANCIAL INSTRUMENTS
          --------------------------------

          The Company's derivative financial instruments consist of
          embedded derivatives related to the convertible debt. These
          embedded derivatives include certain conversion features and a
          contingent interest feature. Although the conversion features
          represent embedded derivative financial instruments, based on
          the de minimis value of these features at the time of issuance
          and at March 31, 2007, no value has been assigned to these
          embedded derivatives. The contingent interest feature provides
          unique tax treatment under the Internal Revenue Service's
          contingent debt regulations. In essence, interest accrues, for
          tax purposes, on the basis of the instrument's comparable
          yield (the yield at which the issuer would issue a fixed rate
          instrument with similar terms).

          NEW ACCOUNTING PRONOUNCEMENTS
          -----------------------------

          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 expects
          the adoption of FIN 48 on April 1, 2007, will not have a
          material effect on its consolidated financial statements.

                               92






          In May 2007, the FASB issued FASB Staff Position No. FIN 48-1,
          "Definition of "Settlement" in FASB Interpretation No. 48"
          ("FSP FIN 48-1"), which provides guidance on how a company
          should determine whether a tax position is effectively settled
          for the purpose of recognizing previously unrecognized tax
          benefits. FSP FIN 48-1 is effective upon initial adoption of
          FIN 48, which the Company adopted on April 1, 2007, as
          indicated above.

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

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

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

                           93





          on a consideration of the following factors: the nature and
          terms of the arrangement; the nature of the entities'
          operations; and whether the partners' payments are within the
          scope of existing GAAP. To the extent such costs are not
          within the scope of other authoritative accounting literature,
          the income statement characterization for the payments should
          be based on an analogy to authoritative accounting literature
          or a reasonable, rational, and consistently applied accounting
          policy election. The provisions of Issue 07-1 are effective
          for fiscal years beginning on or after December 15, 2008, and
          companies will be required to apply the provisions through
          retrospective application. The Company plans to adopt Issue
          07-1 at the beginning of fiscal 2010 and is evaluating the
          impact of the adoption of Issue 07-1 on its financial
          condition and results of operations.

          In 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 December 2007, the FASB issued SFAS No. 141 (revised 2007),
          "Business Combinations" ("SFAS 141(R)") which replaces SFAS
          141 but retains the fundamental concept of purchase method of
          accounting in a business combination and improves reporting by
          creating greater consistency in the accounting and financial
          reporting of business combinations, resulting in more
          complete, comparable, and relevant information for investors
          and other users of financial statements. To achieve this goal,
          the new standard requires the acquiring entity in a business
          combination to recognize all the assets acquired and
          liabilities assumed in the transaction and any non-controlling
          interest at the acquisition date at their fair value as of
          that date. This statement requires measuring a non-controlling
          interest in the acquiree at fair value which will result in
          recognizing the goodwill attributable to the non-controlling
          interest in addition to that attributable to the acquirer.
          This statement also requires the recognition of assets
          acquired and liabilities assumed arising from contractual
          contingencies as of the acquisition date, measured at their
          acquisition fair values. SFAS 141(R) is effective for 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 No. 160,
          "Non-controlling Interests in Consolidated Financial
          Statements" ("SFAS 160") an amendment of ARB No. 51, which
          will affect only those entities that have an outstanding
          non-controlling interest in one or more subsidiaries or that
          deconsolidate a subsidiary by requiring all entities to report
          non-controlling (minority) interests in subsidiaries in the
          same way as equity in the Consolidated Financial Statements.
          In addition, SFAS 160 eliminates the diversity that currently
          exists in accounting for transactions between an entity and
          non-controlling interests by requiring they be treated as
          equity transactions. SFAS 160 is effective for fiscal years
          beginning after December 15, 2008. The Company plans to adopt
          SFAS 160 at the beginning of fiscal 2010, and is evaluating the
          impact of SFAS 160 on its financial condition and results of
          operations.

                           94






3.   RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
     ------------------------------------------------

     REVIEW OF STOCK OPTION GRANT PRACTICES

     BACKGROUND AND CONCLUSIONS

     The Company has restated its consolidated statements of income,
     comprehensive income, shareholders' equity and cash flows for the
     fiscal years ended March 31, 2006 and 2005, and its consolidated
     balance sheet as of March 31, 2006. In addition, because the
     impacts of the restatement adjustments extend back to the fiscal
     year ended March 31, 1996, we have recognized the cumulative
     restatement adjustments through March 31, 2004, as a net decrease
     to beginning shareholders' equity as of April 1, 2004.

     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").

     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 no
     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 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 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.

                                   95





     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 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 Compensation under
     APB 25 and FIN 44", specifically Paragraph 78 and Issue 33 (a),
     "Accounting for Early Exercise".  In accordance with EITF No. 00-
     23, cash paid by an employee for the exercise price is considered
     a deposit or a prepayment of the exercise price that is recognized
     as a current liability when received by the Company at the
     beginning of the two-year forfeiture period. The receipt of the
     exercise price is recognized as a current liability because the
     options are deemed not exercised and the option shares are not
     considered issued until an employee bears the risk and rewards of
     ownership. The options are accounted for as exercised when the
     two-year forfeiture period lapses. In addition, because the
     options are not considered exercised for accounting purposes, the
     shares in the two-year forfeiture period are not considered
     outstanding for purposes of computing basic EPS.

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

     As noted above, the Special Committee determined that the
     Company's accounting for most of the stock option grants during
     the periods fiscal 1996 through fiscal 2006 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 be
     consistent with the accounting literature and guidance from the
     Securities and Exchange Commission ("SEC"), the Company organized
     the grants into categories based on grant type and process by
     which the grant was finalized. Based on the relevant facts and
     circumstances, the Company applied the authoritative accounting
     standard (APB 25 and related interpretations) to determine, for
     every grant within each category, the proper measurement date. If
     the measurement date was not the originally assigned grant date,
     accounting adjustments were made as required, resulting in stock-
     based compensation expense and related tax effects. The grants
     were classified as follows: (1) promotion/retention grants to
     executives and employees and new hire grants ("employee options");
     (2) grants to persons elected or appointed to the Board of
     Directors ("director options"); and (3) bonus option grants to the
     CEO in lieu of cash bonus payments under the terms of his
     employment agreement ("bonus options").

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

                                   96






     APB 25 for determining measurement dates and guidance from the
     staff of the SEC, the Company has concluded 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, net of related tax effects, of $603 on 1,461
     stock option grants for fiscal 2006, $614 on 1,422 stock option
     grants for fiscal 2005 and $4,752 on 2,268 stock option grants as
     a cumulative adjustment to beginning shareholders' equity as of
     April 1, 2004.

     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
     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. Prior to this change in grant
     practice, the Company concluded 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, net of related tax effects, of $34 on
     19 stock option grants for fiscal 2006, $51 on 16 stock option
     grants for fiscal 2005 and $606 on 11 stock option grants as a
     cumulative adjustment to beginning shareholders' equity as of
     April 1, 2004.

     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 annual 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 the CEO's annual bonus is based on
     fiscal year net income.

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

     Based on the facts and circumstances relative to the process for
     granting the bonus options, the Special Committee determined, and
     the Company has agreed, that the measurement dates for these
     options should be the end of the fiscal year in which they were
     granted. The end of the fiscal year was used as the measurement
     date because that is the date on which the amount of the annual
     bonus could be determined and therefore the terms of the option
     could be fixed under APB  25. This conclusion is predicated on the
     assumption that the terms of the option were linked to the amount
     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 that would not be forfeitable prior to the end of the
     year, 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

                                   97





     quoted market value of the shares covered by the option grant to
     the exercise price at each intervening balance sheet date until
     the terms of the option become fixed.

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

     OTHER MODIFICATIONS OF OPTION TERMS

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

     Based on management's analysis, the Company has concluded that a
     new measurement date should have been recognized in two
     situations: (1) 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 (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, net of related
     tax effects, of $4 on two stock option grants for fiscal 2006, $92
     on one stock option grant for fiscal 2005 and $274 on 24 stock
     option grants as a cumulative adjustment to beginning
     shareholders' equity as of April 1, 2004.

                                   98





     STOCK OPTION ADJUSTMENTS

     A discussion of the stock option restatement adjustments and
     tables reflecting the impact of these adjustments is presented
     below beginning on page 101.

     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
     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.  Therefore, it was included as a cumulative adjustment
     to the stock-based compensation expense for fiscal 1996.  The
     aggregate understatement of pre-tax, stock-based compensation
     expense for the eleven-year restatement period from 1996 through
     2006 was $15,632 on 2,891 stock option grants.

     As previously discussed, the Company now considers the two-year
     repurchase option specified in the option plans to be a forfeiture
     provision that goes into effect when stock options are exercised.
     Therefore, the service period necessary for an employee to earn an
     award varies based on the timing of stock option exercises.  The
     Company initially expenses each award (i.e., all tranches of an
     option award) on a straight-line basis over ten years, which is
     the period that stock options become exercisable.  The Company
     ensures the cumulative compensation expense for an award as of any
     date is at least equal to the measurement-date intrinsic value of
     those options that have vested (i.e., when the two-year forfeiture
     period has ended).  If stock options expire unexercised or an
     employee terminates employment after options become exercisable,
     no compensation expense associated with the exercisable, but
     unexercised options, is reversed.  In those instances where an
     employee terminates employment before options become exercisable
     or the Company 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 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 and granted prior to April 2, 2006, might not
     be qualified under the tax regulations, and

                                   99





     therefore should be accounted for as if they were NSOs for
     financial accounting purposes. An income tax benefit has resulted
     from the determination that certain NSOs for which stock-based
     compensation expense was recorded will create an income tax
     deduction.  This tax benefit has resulted in an increase to the
     Company's deferred tax assets for stock options prior to the
     occurrence of a taxable event or the forfeiture of the related
     options.  Upon the occurrence of a taxable event or forfeiture of
     the underlying options, the corresponding deferred tax asset is
     reversed and the excess or deficiency in the deferred tax assets
     is recorded to paid-in capital in the period in which the taxable
     event or forfeiture occurs.  The Company has recorded a deferred
     tax asset of $1,320 as of March 31, 2006, related to stock options.

     REVIEW OF TAX POSITIONS (UNRELATED TO STOCK OPTIONS)

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

     OTHER ADJUSTMENTS (UNRELATED TO STOCK OPTIONS)

     In addition to the restatement adjustments associated with stock
     options and income taxes discussed above, 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 incorrectly 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.

                                   100




The table below reflects the impact of the restatement adjustments
discussed above on the Company's Consolidated Statements of Income for
the periods presented below:




                                                                                       CUMULATIVE
                                                              YEARS ENDED MARCH 31,       1996
                                                              ---------------------     THROUGH
CATEGORY OF ADJUSTMENTS:                                        2006        2005         2004 (a)
- ------------------------                                       ------      ------        --------
                                                                               
Pretax income impact:
  Stock-based compensation expense
    related to measurement date changes (b)                    $  927      $1,080         $13,626
  Payroll taxes, interest and penalties (b)                     2,294         545             439
  Other adjustments                                              (160)       (897)          1,666
                                                               ------      ------         -------
   Total pretax income reduction                                3,061         728          15,731
                                                               ------      ------         -------

Income tax expense (benefit):
  Measurement date changes                                       (286)       (323)         (1,050)
  Payroll taxes and interest                                     (635)       (151)           (123)
  Other income tax adjustments (c)                              2,171       1,498           1,689
 Other adjustments                                                 60         300            (584)
                                                               ------      ------         -------
   Total income tax increase (reduction)                        1,310       1,324             (68)
                                                               ------      ------         -------

Total net income reduction                                     $4,371      $2,052         $15,663
                                                               ------      ------         -------

- ------------
(a) The cumulative effect of the restatement adjustments from fiscal
    1996 through fiscal 2004 is summarized below:




                                                                                                            DECREASE/
                                  STOCK OPTION ADJUSTMENTS(e)                        OTHER ADJUSTMENTS     (INCREASE)
YEAR ENDED                        ---------------------------     OTHER INCOME    -----------------------    TO NET
MARCH 31,                         PRETAX         INCOME TAX     TAX ADJUSTMENTS   PRETAX       INCOME TAX    INCOME
- ----------                        ------         ----------     ---------------   ------       ----------   ---------
                                                                                           
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
                                 =======         ========          =========     =========       =======     =======


(b) Stock-based compensation expenses, including related payroll taxes,
    interest and penalties, have been recorded as adjustments to the
    selling and administrative expense line item in the Company's
    consolidated statements of income for each period.

(c) This represents liabilities associated with tax positions claimed on
    filed tax returns for these years, partially offset by certain
    expected tax refunds.

(d) Includes additional expense from 1986 to 1995 totaling $636, the
    effect of which on the consolidated financial statements for 1996
    and for each year 1986 to 1995 was not considered material.

(e) Includes adjustments for payroll taxes, interest and penalties.


                                  101




Consolidated Balance Sheet Impact

The following table reconciles the consolidated balance sheet previously
    reported to the restated amounts as of March 31, 2006:



                                                                     MARCH 31, 2006
                                            --------------------------------------------------------------------
                                              AS PREVIOUSLY                                            AS
                                                 REPORTED       ADJUSTMENTS                         RESTATED
                                                 --------       -----------                         --------
                                                                                        
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 liabilities                           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 loss                 (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
                                               ==========        ========                          ==========


- -----------
(a) Adjustment for accrued interest associated with certain expected tax
    refunds.
(b) Adjustment for stock-based compensation expense pursuant to APB 25
    ($15,632) and income tax impact associated with stock-based
    compensation expense pursuant to APB 25 ($1,658), partially offset
    by net effect of tax benefit realized in accrued taxes ($2,432) and
    excess tax benefit reflected in paid-in capital ($2,094).
(c) Adjustment for payroll taxes, interest and penalties associated with
    stock-based compensation expense ($3,278) and the related income tax
    benefit ($909).
(d) Adjustment for exercise deposits received by the Company for stock
    options in the two-year forfeiture period ($1,916).
(e) Adjustment for additional liabilities associated with tax positions
    claimed, partially offset by certain expected tax refunds ($5,407).
(f) Adjustment to record 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; increase in
    inventories of $388; decrease in deferred tax assets of $125;
    decrease in accrued liabilities of $414; and decrease in retained
    earnings of $498).
(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).


                                   102





Consolidated Statements of Income Impact

The following table reconciles the Company's previously reported results
to the restated Consolidated Statements of Income for the years ended
March 31, 2006 and 2005:


                                                                         YEARS ENDED MARCH 31,
                                         -------------------------------------------------------------------------------------
                                                             2006                                       2005
                                         ---------------------------------------     -----------------------------------------
                                              AS                                         AS
                                          PREVIOUSLY                       AS        PREVIOUSLY                       AS
                                           REPORTED     ADJUSTMENTS     RESTATED      REPORTED     ADJUSTMENTS     RESTATED
                                           --------     -----------     --------     ----------    -----------     --------

                                                                                              
Net revenues                              $ 367,618      $     22       $367,640      $303,493      $  1,163     $ 304,656
Cost of sales                               123,894            41        123,935       107,682           266       107,948
                                          --------------------------------------     -------------------------------------
Gross profit                                243,724           (19)       243,705       195,811           897       196,708
                                          --------------------------------------     -------------------------------------
Operating expenses:
   Research and development                  28,886             -         28,886        23,538             -        23,538
   Purchased in-process research and
      development and transaction costs      30,441             -         30,441             -             -             -
   Selling and administrative               140,395         3,042        143,437       116,638         1,625       118,263
   Amortization of intangibles                4,784             -          4,784         4,653             -         4,653
   Litigation                                     -             -              -        (1,430)            -        (1,430)
                                          --------------------------------------     -------------------------------------
Total operating expenses                    204,506         3,042        207,548       143,399         1,625       145,024
                                          --------------------------------------     -------------------------------------
Operating income                             39,218        (3,061)        36,157        52,412          (728)       51,684
                                          --------------------------------------     -------------------------------------
Other expense (income):
   Interest expense                           6,045             -          6,045         5,432             -         5,432
   Interest and other income                 (5,737)            -         (5,737)       (3,048)            -        (3,048)
                                          --------------------------------------     -------------------------------------
Total other expense (income)                    308             -            308         2,384             -         2,384
                                          --------------------------------------     -------------------------------------
Income before income taxes                   38,910        (3,061)        35,849        50,028          (728)       49,300
   Provision for income taxes                23,123         1,310         24,433        16,759         1,324        18,083
                                          --------------------------------------     -------------------------------------
   Net income                             $  15,787      $ (4,371)      $ 11,416      $ 33,269      $ (2,052)    $  31,217
                                          ======================================     =====================================

Earnings per share:
   Basic - Class A common                 $    0.33      $  (0.09)      $   0.24      $   0.71      $  (0.03)    $    0.68
   Basic - Class B common                      0.28         (0.08)          0.20          0.59         (0.03)         0.56
   Diluted - Class A common                    0.31         (0.08)          0.23          0.63         (0.03)         0.60
   Diluted - Class B common (a)                                             0.20                                      0.52

Shares used in per share calculation:
   Basic - Class A common                    36,277          (435)(b)     35,842        34,228          (494)(b)    33,734
   Basic - Class B common                    13,065          (147)(b)     12,918        15,005          (172)(b)    14,833
   Diluted - Class A common                  50,729          (732)(b)     49,997        59,468          (835)(b)    58,633
   Diluted - Class B common (a)                                           13,113                                    15,072


(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.


                                   103




CONSOLIDATED STATEMENTS OF CASH FLOWS IMPACT

The following table reconciles the Company's previously reported results
to the restated Consolidated Statements of Cash Flows for the years
ended March 31, 2006 and 2005:



                                                                       YEARS ENDED MARCH 31,
                                                 ----------------------------------------------------------
                                                                              2006
                                                 ----------------------------------------------------------
                                                      AS
                                                  PREVIOUSLY                                          AS
                                                   REPORTED        ADJUSTMENTS                     RESTATED
                                                   --------        -----------                     --------
                                                                                      
Operating Activities:
Net income                                         $  15,787        $ (4,371)(a)(b)(c)(d)(e)       $  11,416
Adjustments to reconcile
   net income to net cash
   provided by operating activities:
   Acquired in-process research
         and development                              29,570               -                          29,570
   Depreciation, amortization and
       other non-cash charges                         18,002               -                          18,002
   Deferred income tax provision                       6,707            (645)(a)(b)(d)(e)              6,062
   Deferred compensation                                 965               -                             965
   Stock-based compensation                                -             927(a)                          927
   Litigation                                              -               -                               -
Changes in operating assets and liabilities:
   Decrease in receivables, net                        7,615             (22)(d)                       7,593
   Increase in inventories                           (16,833)             41(d)                      (16,792)
   Decrease in prepaid and other
        assets                                         1,372             (39)(c)                       1,333
   Increase in accounts payable and accrued
       liabilities                                     1,424           4,109(b)(c)(d)(e)               5,533
                                                   ---------------------------------------------------------
Net cash provided by operating activities             64,609               -                          64,609
                                                   ---------------------------------------------------------
Investing Activities:
   Purchase of property and equipment                (58,334)              -                         (58,334)
   Purchase of marketable securities                 (61,187)              -                         (61,187)
   Purchase of preferred stock                       (11,300)              -                         (11,300)
   Product acquisition                               (25,643)              -                         (25,643)
                                                   ---------------------------------------------------------
Net cash used in investing activities               (156,464)              -                        (156,464)
                                                   ---------------------------------------------------------
Financing Activities:
   Principal payments on long-term debt                 (892)              -                            (892)
   Proceeds from borrowing of long-term debt          32,764               -                          32,764
   Dividends paid on preferred stock                     (70)              -                             (70)
   Purchase of common stock for treasury                (253)              -                            (253)
   Cash deposits received for stock options            1,187               -                           1,187
                                                   ---------------------------------------------------------
Net cash provided by
   financing activities                               32,736               -                          32,736
                                                   ---------------------------------------------------------
Decrease in cash and cash equivalents                (59,119)              -                         (59,119)
Cash and cash equivalents:
   Beginning of year                                 159,825               -                         159,825
                                                   ---------------------------------------------------------
   End of year                                     $ 100,706        $      -                       $ 100,706
                                                   =========================================================



                                                                        YEARS ENDED MARCH 31,
                                                  ----------------------------------------------------------
                                                                               2005
                                                  ----------------------------------------------------------
                                                      AS
                                                  PREVIOUSLY                                          AS
                                                   REPORTED         ADJUSTMENTS                     RESTATED
                                                   --------         -----------                     --------
                                                                                      
Operating Activities:
Net income                                         $ 33,269          $ (2,052)(a)(b)(c)(d)          $ 31,217
Adjustments to reconcile net income to
   net cash provided by operating activities:
   Depreciation, amortization and
    other non-cash charges                           13,904                 -                         13,904
   Deferred income tax provision                     13,582              (487)(a)(b)(d)               13,095
   Deferred compensation                              1,355                 -                          1,355
   Stock-based compensation                               -             1,080(a)                       1,080
   Litigation                                          (843)                -                           (843)
Changes in operating assets and liabilities:
   Decrease in receivables, net                       3,511            (1,163)(d)                      2,348
   Increase in inventories                           (3,248)              266(d)                      (2,982)
   Increase in prepaid and other
    assets                                           (3,520)              (10)(c)                     (3,530)
   Decrease in accounts payable and accrued
      liabilities                                    (8,980)            2,366(b)(c)(d)(e)             (6,614)
                                                   ---------------------------------------------------------
Net cash provided by operating activities            49,030                 -                         49,030
                                                   ---------------------------------------------------------
Investing Activities:
   Purchase of property and equipment               (63,622)                -                        (63,622)
   Purchase of marketable securities                (10,565)                -                        (10,565)
                                                   ---------------------------------------------------------
Net cash used in investing activities               (74,187)                -                        (74,187)
                                                   ---------------------------------------------------------
Financing Activities:
   Principal payments on long-term debt              (8,179)                -                         (8,179)
   Dividends paid on preferred stock                    (70)                -                            (70)
   Purchase of common stock for treasury             (2,468)                -                         (2,468)
   Cash deposits received for stock options           4,118                 -                          4,118
                                                   ---------------------------------------------------------
Net cash used in financing activities                (6,599)                -                         (6,599)
                                                   ---------------------------------------------------------
Decrease in cash and cash equivalents               (31,756)                -                        (31,756)
Cash and cash equivalents:
   Beginning of year                                191,581                 -                        191,581
                                                   ---------------------------------------------------------
   End of year                                     $159,825          $      -                       $159,825
                                                   =========================================================


(a)  Adjustment for stock-based compensation expense pursuant to APB 25
     and the related income tax impact.
(b)  Adjustment for payroll taxes, interest and penalties associated
     with stock-based compensation expense and the related income tax
     impact.
(c)  Adjustment for additional liabilities associated with tax
     positions, partially offset by certain expected tax refunds.
(d)  Adjustment for 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.


                                   104




4.    ACQUISITIONS AND LICENSE AGREEMENT
      ----------------------------------

      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 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 was responsible
      for milestone payments and royalties specified in the original
      licensing agreement, and secured exclusive worldwide rights
      for use of the FemmePharma technology for vaginal anti-
      infective products. For the year ended March 31, 2006, 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 U.S. and Canada for ten new generic
      drugs.  Under the agreement, Strides is responsible for
      developing, submitting for regulatory approval and
      manufacturing the ten products and the Company is
      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 $11,406 at March 31,
      2007.  This investment has been accounted for using the cost
      method and is included in "Other assets" in the accompanying
      Consolidated Balance Sheet at March 31, 2007.

                                   105



5.    MARKETABLE SECURITIES
      ---------------------

      The carrying amount of available-for-sale securities and
      their approximate fair values at March 31, 2007 and 2006
      were as follows.

  
  
                                                    MARCH 31, 2007
                              -------------------------------------------------------
                                                 GROSS         GROSS
                                              UNREALIZED    UNREALIZED       FAIR
                                COST             GAINS        LOSSES        VALUE
                                ----          ----------    ----------      ------
                                                             
  Auction rate securities...  $119,150            $ -        $   -        $119,150
  Equity securities.........    38,612             50            -          38,662
                              --------            ---        ------       --------
      Total.................  $157,762            $50        $   -        $157,812
                              ========            ===        ======       ========

  

  
  
                                                    MARCH 31, 2006
                              -------------------------------------------------------
                                                 GROSS         GROSS
                                              UNREALIZED    UNREALIZED       FAIR
                                COST             GAINS        LOSSES        VALUE
                                ----          ----------    ----------      ------
                                                             

  Auction rate securities...  $ 70,000            $ -        $   -        $ 70,000
  Equity securities.........    37,082              -         (319)         36,763
                              --------            ---        -----        --------
      Total.................  $107,082            $ -        $(319)       $106,763
                              ========            ===        =====        ========

 

      The Company's marketable securities are classified as
      available-for-sale and are recorded at fair value based on
      quoted market prices using the specific identification
      method.  These investments are classified as current assets
      as the Company has the ability to use them for current
      operating and investing purposes. For the year ended March
      31, 2007, a realized loss of $270 was recognized when the
      Company determined that its unrealized loss on equity
      securities had become other-than-temporary as the duration
      of the losses had surpassed 24 months and the Company no
      longer intended to hold these securities to recovery.  There
      were no realized gains or losses for the years ended March
      31, 2006 and 2005.

      Included in the Company's marketable securities at March 31,
      2007 and 2006 are $119,150 and $70,000, respectively, of
      auction rate securities. Auction rate securities are
      investments with an underlying component of long-term debt
      or an equity instrument. These auction rate securities trade
      or mature on a shorter term than the underlying instrument
      based on an auction bid that resets the interest rate of the
      security. The auction or reset dates occur at intervals that
      are typically less than three months providing high
      liquidity to otherwise longer term investments (see Note
      24, Subsequent Events, for further discussion of the
      Company's investments in auction rate securities).

                            106



6.    INVENTORIES
      -----------

      Inventories as of March 31, consist of:


                                                                       2007              2006
                                                                       ----              ----
                                                                                     (as restated)
                                                                               
           Finished goods......................................     $  35,420         $  29,365
           Work-in-process.....................................        13,294             7,969
           Raw materials.......................................        42,801            33,832
                                                                    ---------         ---------
                                                                    $  91,515         $  71,166
                                                                    =========         =========


7.    PROPERTY AND EQUIPMENT
      ----------------------

      Property and equipment as of March 31, consist of:


                                                                       2007              2006
                                                                       ----              ----
                                                                               
           Land and improvements...............................     $   6,253         $   5,763
           Buildings and building improvements.................       108,631           101,135
           Machinery and equipment.............................        73,461            57,021
           Office furniture and equipment......................        27,819            24,573
           Leasehold improvements..............................        21,057            21,044
           Construction-in-progress............................         5,865            10,265
                                                                    ---------         ---------
                                                                      243,086           219,801
           Less accumulated depreciation.......................       (56,186)          (41,759)
                                                                    ---------         ---------
              Net property and equipment.......................     $ 186,900         $ 178,042
                                                                    =========         =========


     Capital additions to property and equipment were $25,066, $58,334
     and $63,622 for the years ended March 31, 2007, 2006 and 2005,
     respectively.  Depreciation of property and equipment was $16,208,
     $11,916 and $7,775 for the years ended March 31, 2007, 2006 and
     2005, respectively.

     Property and equipment projects classified as
     construction-in-progress at March 31, 2007, are projected to be
     completed during the next 12 months at an estimated cost of $2,832.

     During the years ended March 31, 2006 and 2005, the Company
     recorded capitalized interest on qualifying construction projects
     of $940 and $1,511, respectively.  In fiscal 2007, the Company did
     not record any capitalized interest.

                                107







8.   INTANGIBLE ASSETS AND GOODWILL
     ------------------------------

     Intangible assets and goodwill as of March 31, consist of:



                                                                     2007                      2006
                                                       ---------------------------   ------------------------
                                                           GROSS                       GROSS
                                                         CARRYING      ACCUMULATED    CARRYING    ACCUMULATED
                                                          AMOUNT      AMORTIZATION     AMOUNT    AMORTIZATION
                                                          ------      ------------     ------    ------------
                                                                                     

            Product rights - Micro-K(R).............     $ 36,140      $(14,513)      $ 36,140     $(12,708)
            Product rights - PreCare(R).............        8,433        (3,233)         8,433       (2,811)
            Trademarks acquired:
               Niferex(R)...........................       14,834        (2,967)        14,834       (2,225)
               Chromagen(R)/StrongStart(R)..........       27,642        (5,528)        27,642       (4,147)
            License agreements......................        4,400          (480)         4,400         (300)
            Covenant not to compete.................          375           (72)           375          (34)
            Trademarks and patents..................        4,196          (774)         3,403         (604)
                                                         --------      --------       --------     --------
               Total intangible assets..............       96,020       (27,567)        95,227      (22,829)
            Goodwill................................          557             -            557            -
                                                         --------      --------       --------     --------
                                                         $ 96,577      $(27,567)      $ 95,784     $(22,829)
                                                         ========      ========       ========     ========

     As of March 31, 2007, the Company's intangible assets have a
     weighted average useful life of approximately 19 years.
     Amortization of intangible assets was $4,809, $4,784 and $4,653 for
     the years ended March 31, 2007, 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 $4,818
     in each of the five succeeding fiscal years.

                                 108






9.   OTHER ASSETS
     ------------

     Other assets as of March 31, consist of:


                                                           2007           2006
                                                           ----           ----
                                                                 
            Cash surrender value of life insurance....   $  3,874       $  3,416
            Preferred stock investments...............     11,806         11,052
            Accrued dividends on preferred stock......      1,198            509
            Deferred financing costs, net.............      2,159          2,879
            Deposits..................................      1,366          1,170
                                                         --------       --------
                                                         $ 20,403       $ 19,026
                                                         ========       ========


10.  ACCRUED LIABILITIES

     Accrued liabilities as of March 31, consist of:
 

                                                           2007           2006
                                                           ----           ----
                                                                      (AS RESTATED)
                                                                 

            Salaries, wages, incentives and benefits..   $ 20,669       $ 14,411
            Income taxes - current....................      5,558          3,145
            Accrued interest payable..................      2,192          1,875
            Professional fees.........................      5,921          1,854
            Stock option deposits.....................      2,560          1,916
            Other.....................................      1,876          1,475
                                                         --------       --------
                                                         $ 38,776       $ 24,676
                                                         ========       ========


11.  LONG-TERM DEBT

     Long-term debt as of March 31, consists of:


                                                           2007           2006
                                                           ----           ----
                                                                 
            Building mortgages........................   $ 41,348       $ 43,000
            Convertible notes.........................    200,000        200,000
                                                         --------       --------
                                                          241,348        243,000
            Less current portion......................     (1,897)        (1,681)
                                                         --------       --------
                                                         $239,451       $241,319
                                                         ========       ========



     In June 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 debt.  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.  At
     March 31, 2007, the Company had $850 in open letters of credit
     issued under the new revolving credit line and no cash borrowings
     under the facility.

     In March 2006, the Company entered into a $43,000 mortgage loan
     agreement with one of its primary lenders, in part, to refinance
     $9,859 of existing mortgages.  The $32,764 of net proceeds the
     Company received from the

                                   109






     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.

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

     The Company may redeem some or all of the Notes at any time on or
     after May 21, 2006, at a redemption price, payable in cash, of 100%
     of the principal amount of the Notes, plus accrued and unpaid
     interest, including contingent interest, if any.  Holders may
     require the Company to repurchase all or a portion of their Notes
     on May 16, 2008, 2013, 2018, 2023 and 2028 or upon a change in
     control, as defined in the indenture governing the Notes, at a
     purchase price, payable in cash, of 100% of the principal amount of
     the Notes, plus accrued and unpaid interest, including contingent
     interest, if any.  The Company classified the Notes as a current
     liability as of June 30, 2007, due to the right the holders have to
     require the Company to repurchase the Notes on May 16, 2008. The
     Notes are subordinate to all of our existing and future senior
     obligations.

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

            *     during any quarter commencing after June 30, 2003, if
                  the closing sale price of the Company's Class A Common
                  Stock over a specified number of trading days during
                  the previous quarter is more than 120% of the
                  conversion price of the Notes on the last trading day
                  of the previous quarter. The Notes are initially
                  convertible at a conversion price of $23.01 per share,
                  which is equal to a conversion rate of approximately
                  43.4594 shares per $1,000 principal amount of Notes;
            *     if the Company has called the Notes for redemption;
            *     during the five trading day period immediately
                  following any nine consecutive 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 8,691,880 shares of Class A Common Stock
     for issuance in the event the Notes are converted.

     The contingent interest feature of the Notes meets the criteria of
     and qualifies as an embedded derivative.  Although this feature
     represents an embedded derivative financial instrument, based on
     its de minimis value at the time of issuance and at March 31, 2007,
     no value has been assigned to this embedded derivative.

     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.

                                   110






     The aggregate maturities of long-term debt as of March 31, 2007 are
     as follows:

            Due in one year..........................    $  1,897
            Due in two years.........................     202,020
            Due in three years.......................       2,144
            Due in four years........................       2,276
            Due in five years........................       2,411
            Thereafter...............................      30,600
                                                         --------
                                                         $241,348
                                                         ========

     The Company paid interest of $7,316 for the year ended March 31,
     2007.  During the years ended March 31, 2006 and 2005, the Company
     paid interest, net of capitalized interest, of $4,692 and $4,156,
     respectively.

12.  TAXABLE INDUSTRIAL REVENUE BONDS
     --------------------------------

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

13.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

     LEASES

     The Company leases manufacturing, office and warehouse facilities,
     equipment and automobiles under operating leases expiring through
     fiscal 2013.  Total rent expense for the years ended March 31,
     2007, 2006 and 2005 was $4,132, $3,819 and $5,734, respectively.

     Future minimum lease commitments under non-cancelable operating
     leases are as follows:

                    2008...................  $3,668
                    2009...................     938
                    2010...................     724
                    2011...................     697
                    2012...................     584
                    Thereafter.............   1,111

                                 111






     CONTINGENCIES

     The Company is currently subject to legal proceedings and claims
     that have arisen in the ordinary course of business.  While the
     Company is not presently able to determine the potential liability,
     if any, related to such matters, the Company believes none of the
     matters it currently faces, individually or in the aggregate, will
     have a material adverse effect on its financial position or
     operations except for the specific cases described in "Litigation"
     below.

     The Company has licensed the exclusive rights to co-develop and
     market various generic equivalent products with other drug delivery
     companies.  These collaboration agreements require the Company to
     make up-front and ongoing payments as development milestones are
     attained.  If all milestones remaining under these agreements were
     reached, payments by the Company could total up to $35,800.

     LITIGATION

     The Company is named as a defendant in a patent infringement case
     filed in the U.S. District Court for the District of New Jersey by
     Janssen, L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil
     Neurologics, Inc. (collectively, "Janssen") on December 14, 2007
     and styled Janssen, L.P. et al. v. KV Pharmaceutical Company.
     After the Company filed an ANDA with the FDA seeking permission to
     market a generic version of the 8 mg and 16 mg strengths of
     Razadyne(R) ER (formerly Reminyl(R)) galantamine hydrobromide
     extended-release capsules, Janssen filed 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. 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 lawsuit against KV for patent infringement under the
     provisions of the Hatch-Waxman Act with respect to three Purdue patents.
     In the Company's Paragraph IV certification, KV contended that its
     proposed generic versions do not infringe Purdue's patents. On February
     12, 2007, a second patent infringement

                                     112






     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 for the District of Minnesota.  CIMA alleged that the Company
     and ETHEX infringed on a CIMA patent in connection with the
     manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable
     Tablets, 0.125 mg.  The court has entered a stay pending the
     outcome of the U.S. Patent and Trademark Office's reexamination of
     a patent at issue in the suit.  The Patent and Trademark Office
     has, to date, issued a final office action rejecting all existing
     and proposed new claims by CIMA with respect to this patent.  CIMA
     has certain rights of appeal of this rejection of its claims and
     has exercised those rights.  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

                                   113






     Axcan ScandiPharm Inc. v. ETHEX Corporation et. al., filed in
     U.S. District Court in Minnesota on June 1, 2007. In general, Axcan
     alleges that ETHEX's comparative promotion of its Pangestyme(TM)
     UL12 and Pangestyme(TM) UL18 products to Axcan's Ultrase(R) MT12
     and Ultrase(R) MT18 products resulted in false advertising and
     misleading statements under various federal and state laws, and
     constituted unfair and deceptive trade practices. The Company filed
     a motion for judgment on the pleadings in its favor on several
     grounds. The motion has been granted in part and denied in part by
     the court on October 19, 2007, with the court applying the statute
     of limitations to cut off Axcan's claims concerning conduct prior
     to June 2001, determining that it was too early to determine
     whether laches or res judicata barred the suit, and rejecting the
     remaining bases for dismissal. Discovery has since commenced and a
     trial date has been set for January 2010. 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 U.S. 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 U.S. 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

                                  114






     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 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

                                115






     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 attorneys' fees, in addition to equitable relief,
     including an injunction to require the Company to change certain of
     its corporate governance and internal control procedures. On May
     11, 2007, the Company learned of the filing of another lawsuit,
     captioned Gradwell v. Hermelin et. al., also in the U.S. District
     Court for the Eastern District of Missouri. The complaint was
     brought by the same law firms that brought the Krasick litigation
     and was substantively the same as in the Krasick litigation, other
     than being brought on behalf of a different plaintiff and
     eliminating one individual defendant from the suit. On July 18,
     2007, the Krasick and Gradwell suits were refiled as a consolidated
     action in U.S. District Court for the Eastern District of Missouri,
     styled In re K-V Pharmaceutical Company Derivative Litigation,
     which was substantively the same as the Krasick and Gradwell suits.
     The Company 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 3, 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 by 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 the ultimate outcome of such
     other proceedings will not have a material adverse effect on its
     results of operations or financial condition.

                              116






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

14.  EMPLOYMENT AGREEMENTS
     ---------------------

     The Company has employment agreements with certain officers and key
     employees which extend for one to five years.  These agreements
     provide for base levels of compensation and, in certain instances,
     also provide for incentive bonuses and separation benefits.  Also,
     the agreement with the Chief Executive Officer ("CEO") contains
     provisions for partial salary continuation under certain
     conditions, contingent upon noncompete restrictions and providing
     consulting services to the Company as specified in the agreement.
     In addition, the CEO is entitled to receive retirement compensation
     paid in the form of a single annuity equal to 30% of the CEO's
     final average compensation payable each year beginning at
     retirement and continuing for the longer of ten years or the life
     of the CEO.  In accordance with this agreement, the Company
     recognized retirement expense of $877, $965 and $1,355 for the
     years ended March 31, 2007, 2006 and 2005, respectively.

15.  GAIN FROM LEGAL SETTLEMENT
     --------------------------

     In January 2007, the Company received a $3,600 payment from an
     insurance company in accordance with a settlement agreement entered
     into with the insurance company for insurance coverage associated
     with the Healthpoint litigation.  The payment was reflected by the
     Company in the "Litigation" line item of operating income and was
     recorded net of approximately $1,192 of attorney-related fees.

16.  INCOME TAXES
     ------------

     The income tax provisions for the years ended March 31, 2007, 2006
     and 2005, are based on estimated federal and state taxable income
     using the applicable statutory rates.  The current and deferred
     federal and state income tax provisions, excluding income taxes
     related to the cumulative effect of a change in accounting, for the
     years ended March 31, 2007, 2006 and 2005 are as follows:





                                              2007                    2006               2005
                                              ----                    ----               ----
                    PROVISION                                    (as restated)      (as restated)
                                                                           
                      Current:
                        Federal...........  $23,434                 $17,035            $ 4,607
                        State.............    1,918                   1,552                368
                                            -------                 -------            -------
                                             25,352                  18,587              4,975
                                            -------                 -------            -------
                      Deferred:
                        Federal...........    7,042                   5,521             12,036
                        State.............      564                     325              1,072
                                            -------                 -------            -------
                                              7,606                   5,846             13,108
                                            -------                 -------            -------
                                            $32,958                 $24,433            $18,083
                                            =======                 =======            =======


                                      117






     The reasons for the differences between the provision for income
     taxes and the expected federal income taxes at the U.S. statutory
     rate are as follows:




                                                  2007                2006               2005
                                                  ----                ----               ----
                                                                 (as restated)      (as restated)
                                                                            

         Expected income tax expense.........   $31,175             $12,547            $17,255
         Purchased in-process research.......
           and development...................        --              10,654                 --
         State income taxes, net of
           federal income tax benefit........     1,613               1,218                922
         Business credits....................      (945)               (831)            (1,080)
         Other...............................     1,115                 845                986
                                                -------             -------            -------
         Provision for income tax expense....   $32,958             $24,433            $18,083
                                                =======             =======            =======


     Other includes additional tax liabilities associated with tax
     positions claimed on filed tax returns (unrecognized tax benefits).

     As of March 31, 2007 and 2006, the tax effect of temporary
     differences between the tax basis of assets and liabilities and
     their financial reporting amounts are as follows:




                                                           2007                                2006
                                                ---------------------------            ---------------------
                                                CURRENT         NON-CURRENT            CURRENT   NON-CURRENT
                                                -------         -----------            -------   -----------
                                                                                         (as restated)
                                                                                      
Fixed asset basis differences................   $    --           $(14,121)            $    --     $ (8,701)
Reserves for inventory and
   receivables...............................    10,307                 --               7,422           --
Vacation pay reserve.........................       336                 --                 378           --
Deferred compensation........................        --              2,320                  --        1,973
Amortization.................................        --             (3,440)                 --       (2,884)
Convertible notes interest...................        --            (22,766)                 --      (15,699)
Stock-based compensation.....................     1,525                 --               1,320           --
Payroll taxes................................     2,196                 --                 909           --
Other........................................        --                 --                  43           90
                                                -------           --------             -------     --------
   Net deferred tax asset (liability)........   $14,364           $(38,007)            $10,072     $(25,221)
                                                =======           ========             =======     ========



     In assessing the realizability of deferred tax assets, management
     considers whether it is more likely than not that some portion or
     all of the deferred tax assets will not be realized.  The ultimate
     realization of deferred tax assets is dependent upon the generation
     of future taxable income during the periods in which those
     temporary differences become deductible.  Management considers the
     timing of deferred tax liability reversals and projected future
     taxable income.  Based upon the level of historical taxable income
     and projections for future taxable income over the periods in which
     the temporary differences are deductible, management believes it
     more likely than not the Company will realize the benefits of these
     deductible differences.

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

                                 118






     The Company paid income taxes of $22,164, $15,482, and $8,769
     during the years ended March 31, 2007, 2006 and 2005, respectively.


     The Company currently is being audited by the IRS for its March 31,
     2006 tax year.  The IRS is also currently auditing the employment
     tax returns of the Company for calendar years 2004, 2005, and 2006.
     Various information requests with respect to the periods under
     audit have been received and responded to.  We expect the IRS to
     issue additional information requests.

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

     As previously discussed, 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, which creates a taxable event.  The
     Company and the affected employees may also be subject to interest
     and penalties for failing to properly withhold taxes and report the
     taxable event on their respective tax returns.  The Company is
     currently reviewing the potential disqualification of ISO grants
     and the related withholding tax implications with the IRS in an
     effort to reach agreement on the resulting tax liability.  The
     Company recorded liabilities related to this matter of $6,750 as of
     March 31, 2007.

17.  STOCK-BASED COMPENSATION
     ------------------------

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

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

                                  119






     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) and is revised when an option exercise occurs.

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

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

     In accordance with the provisions of SFAS 123R, share-based
     compensation expense recognized during a period is based on the
     value of the portion of share-based awards that are expected to
     vest with employees. Accordingly, the recognition of share-based
     compensation expense beginning April 1, 2006 has been reduced for
     estimated future forfeitures. SFAS 123R requires forfeitures to be
     estimated at the time of grant with adjustments recorded in
     subsequent period compensation expense if actual forfeitures differ
     from those estimates.  Prior to adoption, the Company accounted
     for forfeitures as they occurred for the disclosure of pro forma
     information presented in the Notes to Consolidated Financial
     Statements for prior periods.  Upon adoption of SFAS 123R on April
     1, 2006, the Company recognized the cumulative effect of a change
     in accounting principle to reflect the effect of estimated
     forfeitures related to outstanding awards that are not expected to
     vest as of the adoption date.  The cumulative adjustment increased
     net income by $1,976, 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 expense of $3,984 and a related tax benefit of $1,134
     for the year ended March 31, 2007.  As a result of the restatement
     discussed in Note 3, stock-based compensation expense of $927 and
     $1,080 and related tax benefits of $286 and $323 were recognized in
     the years ended March 31, 2006 and 2005, respectively.  There was
     no stock-based employee compensation cost capitalized as of March
     31, 2007.  Cash received as deposits for option exercises was
     $4,264, $1,187, and $4,118 and the actual tax benefit realized for
     the tax deductions from option exercises (at expiration of two-year
     forfeiture period) was $934, $1,709, and $403 for 2007, 2006 and
     2005, respectively.

     The following weighted average assumptions were used for stock
     options granted during the years ended March 31, 2007, 2006 and
     2005:





                                                             YEARS ENDED MARCH 31,
                                              ---------------------------------------------------
                                                 2007                2006               2005
                                                 ----                ----               ----
                                                                 (as restated)      (as restated)
                                                                           
         Dividend yield....................        None                None               None
         Expected volatility...............         45%                 48%                50%
         Risk-free interest rate...........       4.93%               4.91%              4.88%
         Expected term.....................   8.9 years           8.8 years          8.7 years
         Weighted average fair value per
           share at grant date.............   $   12.98            $  12.74           $  14.27


                                     120






     A summary of the changes in the Company's stock option plan for the
     years ended March 31, 2007, 2006 and 2005 consisted of the
     following:



                                                                                        WEIGHTED
                                                                   WEIGHTED             AVERAGE
                                                                    AVERAGE            REMAINING   AGGREGATE
                                                                   EXERCISE           CONTRACTUAL  INTRINSIC
                                                 SHARES              PRICE               TERM        VALUE
                                                 ------              -----               ----        ------
                                                                                      
Balance, March 31, 2004 (as restated)........     3,355              $10.44
Options granted..............................       737               21.61
Options exercised............................       (88)               4.24                          $ 1,443
Options canceled.............................      (150)              14.24
                                                 ------
Balance, March 31, 2005 (as restated)........     3,853               12.53
Options granted..............................       955               18.99
Options exercised............................      (481)               5.80                            8,519
Options canceled.............................      (401)              14.59
                                                 ------
Balance, March 31, 2006 (as restated)........     3,926               14.71
Options granted..............................       555               21.64
Options exercised............................      (360)               8.80                            5,631
Options canceled.............................      (455)              16.62
                                                 ------
Balance, March 31, 2007......................     3,666              $16.11                5.2       $30,909
                                                 ======
Expected to vest at
     March 31, 2007.........................      2,841              $16.11                5.2       $23,954

Options exercisable at March 31, 2007
 (excluding shares in the two-year
     forfeiture period)......................     1,310              $15.61                4.0       $12,022


     As of March 31, 2007, the Company had $35,258 of total unrecognized
     compensation expense, related to stock option grants, which will be
     recognized over the remaining weighted average period of 4.8 years.


18.  EMPLOYEE BENEFITS
     -----------------

     PROFIT SHARING PLAN

     The Company has a qualified trustee profit sharing plan (the
     "Plan") covering substantially all non-union employees.  The
     Company's annual contribution to the Plan, as determined by the
     Board of Directors, is discretionary and was $500, $400 and $300
     for the years ended March 31, 2007, 2006 and 2005, respectively.
     The Plan includes features as described under Section 401(k) of the
     Internal Revenue Code.

     The Company's contributions to the 401(k) investment funds are 50%
     of the first 7% of the salary contributed by each participant.
     Contributions of $2,227, $1,877 and $1,547 were made to the 401(k)
     investment funds for the years ended March 31, 2007, 2006 and 2005,
     respectively.

                                121



     PENSION PLANS

     Contributions are made to a multi-employer defined benefit plan
     administered by Teamsters Negotiated Pension Plan for certain union
     employees. In the event of a withdrawal from the multi-employer
     pension plan, the Company would incur an obligation to the plan for
     the portion of the unfunded benefit obligation applicable to its
     employees covered by the plan. (See Note 24, Subsequent Events, for
     further discussion of the Company's obligation under the plan).
     Amounts charged to pension expense and contributed to these plans
     were $197, $180 and $200 for the years ended March 31, 2007, 2006
     and 2005, respectively.

     HEALTH AND MEDICAL INSURANCE PLAN

     The Company contributes to health and medical insurance programs
     for its non-union and union employees.  For non-union employees,
     the Company self-insures the first $150,000 of each employee's
     covered medical claims.  In fiscal 2005, the Company established a
     Voluntary Employees' Beneficiary Association ("VEBA") for its
     non-union employees to fund payments made by the Company for
     covered medical claims.  As a result of funding this plan, the
     Company's liability for claims incurred but not reported was
     reduced by $935 and $850 at March 31, 2007 and 2006, respectively.
     For union employees, the Company participates in a fully funded
     insurance plan sponsored by the union.  Total health and medical
     insurance expense for the two plans was $12,029, $9,662 and $9,431
     for the years ended March 31, 2007, 2006 and 2005, respectively.

19.  RELATED PARTY TRANSACTIONS
     --------------------------

     The Company currently leases certain real property from an
     affiliated partnership of the Chairman and CEO of the Company.
     Lease payments made for this property for the years ended March 31,
     2007, 2006 and 2005 totaled $296, $284, and $277, respectively.

20.  EQUITY TRANSACTIONS
     -------------------

     As of March 31, 2007 and 2006, the Company had 40,000 shares of 7%
     Cumulative Convertible Preferred Stock (par value $.01 per share)
     outstanding at a stated value of $25 per share.  The preferred
     stock is non-voting with dividends payable quarterly.  The
     preferred stock is redeemable by the Company at its stated value.
     Each share of preferred stock is convertible into Class A Common
     Stock at a conversion price of $2.96 per share.  The preferred
     stock has a liquidation preference of $25 per share plus all
     accrued but unpaid dividends prior to any liquidation distributions
     to holders of Class A or Class B Common Stock.  No dividends may be
     paid on Class A or Class B Common Stock unless all dividends on the
     Cumulative Convertible Preferred Stock have been declared and paid.
     There were no undeclared and accrued cumulative preferred dividends
     at March 31, 2007 and 2006.  Also, under the terms of its credit
     agreement, the Company may not pay cash dividends in excess of 25%
     of the prior fiscal year's consolidated net income.

     The Company has reserved 750,000 shares of Class A Common Stock for
     issuance under KV's 2002 Consultants Plan.  These shares may be
     issued from time to time in consideration for consulting and other
     services provided to the Company by independent consultants.  Since
     inception of this plan, the Company has issued 47,732 Class A
     shares as payment for certain milestones under product development
     agreements.

     Holders of Class A Common Stock are entitled to receive dividends
     per share equal to 120% of the dividends per share paid on the
     Class B Common Stock and have one-twentieth vote per share in the
     election of directors and on other matters.

     Under the terms of the Company's current loan agreement (see Note
     11), the Company has limitations on paying dividends, except in
     stock, on its Class A and Class B Common Stock.  Payment of
     dividends may also be restricted under Delaware corporation law.

                                  122

21.  EARNINGS PER SHARE
     ------------------

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



                                                              2007                      2006                   2005
                                                     ---------------------      -------------------     -------------------
                                                     CLASS A       CLASS B      CLASS A     CLASS B     CLASS A     CLASS B
                                                     -------       -------      -------    --------     -------     -------
                                                                                   (AS RESTATED)           (AS RESTATED)
                                                                                               
Basic earnings per share:
 Numerator:
  Allocation of undistributed earnings
   before cumulative effect of change
   in accounting principle                          $ 43,768      $ 12,276     $  8,725     $ 2,621    $ 22,795    $ 8,352
  Allocation of cumulative effect of
    change in accounting principle                     1,543           433            -           -           -          -
                                                    --------      --------     --------     -------    --------    -------
  Allocation of undistributed earnings              $ 45,311      $ 12,709     $  8,725     $ 2,621    $ 22,795    $ 8,352
                                                    ========      ========     ========     =======    ========    =======
Denominator:
  Weighted average shares outstanding                 37,180        12,455       36,277      13,065      34,228     15,005
  Less - weighted average unvested
   common shares subject to repurchase                  (367)          (65)        (435)       (147)       (494)      (172)
                                                    --------      --------     --------     -------    --------    -------
  Number of shares used in per
   share computations                                 36,813        12,390       35,842      12,918      33,734     14,833
                                                    ========      ========     ========     =======    ========    =======
Basic earnings per share before cumulative
  effect of change in accounting principle          $   1.19      $   0.99     $   0.24     $  0.20    $   0.68    $  0.56
Per share effect of cumulative effect of
  change in accounting principle                        0.04          0.04            -           -           -          -
                                                    --------      --------     --------     -------    --------    -------
Basic earnings per share                            $   1.23      $   1.03     $   0.24     $  0.20    $   0.68    $  0.56
                                                    ========      ========     ========     =======    ========    =======
Diluted earnings per share:
  Numerator:
   Allocation of undistributed earnings
    for basic computation before
    cumulative effect of change in
    accounting principle                            $ 43,768      $ 12,276     $  8,725     $ 2,621    $ 22,795    $ 8,352
   Reallocation of undistributed earnings
    as a result of conversion of Class B
    to Class A shares                                 12,276             -        2,621           -       8,352          -
   Reallocation of undistributed earnings to
    Class B shares                                         -        (1,297)           -         (12)          -       (492)
   Add - preferred stock dividends                        70             -           70           -          70          -
   Add - interest expense convertible notes            3,883             -            -           -       3,903          -
                                                    --------      --------     --------     -------    --------    -------
   Allocation of undistributed earnings
    for diluted computation before cumulative
    effect of change in accounting principle          59,997        10,979       11,416       2,609      35,120      7,860
   Allocation of cumulative effect of
    change in accounting principle                     1,976           362            -           -           -          -
                                                    --------      --------     --------     -------    --------    -------
   Allocation of undistributed earnings             $ 61,973      $ 11,341     $ 11,416     $ 2,609    $ 35,120    $ 7,860
                                                    ========      ========     ========     =======    ========    =======

  (CONTINUED)

                                    123





                                                              2007                      2006                   2005
                                                     ---------------------      -------------------     -------------------
                                                     CLASS A       CLASS B      CLASS A     CLASS B     CLASS A     CLASS B
                                                     -------       -------      -------     -------     -------     -------
                                                                                   (AS RESTATED)           (AS RESTATED)
                                                                                               
Diluted earnings per share (continued):
 Denominator:
  Number of shares used in basic computation          36,813        12,390       35,842      12,918      33,734     14,833
  Weighted average effect of dilutive securities:
   Conversion of Class B to Class A shares            12,390             -       12,918           -      14,833          -
   Employee stock options                                720            99          899         195       1,036        239
   Convertible preferred stock                           338             -          338           -         338          -
   Convertible notes                                   8,692             -            -           -       8,692          -
                                                    --------      --------     --------     -------    --------    -------
  Number of shares used in per share
   computations                                       58,953        12,489       49,997      13,113      58,633     15,072
                                                    ========      ========     ========     =======    ========    =======
Diluted earnings per share before cumulative
  effect of change in accounting principle            $ 1.02        $ 0.88       $ 0.23      $ 0.20      $ 0.60     $ 0.52
Per share effect of cumulative effect of
  change in accounting principle                        0.03          0.03            -           -           -          -
                                                    --------      --------     --------     -------    --------    -------
Diluted earnings per share (1) (2)                    $ 1.05        $ 0.91       $ 0.23      $ 0.20      $ 0.60     $ 0.52
                                                    ========      ========     ========     =======    ========    =======
- ---------


     (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 years ended March 31, 2007, 2006
          and 2005, excluded from the computation were options to
          purchase 216, 291 and 616 of Class A and Class B common
          shares, respectively.

     (2)  For the year ended March 31, 2006, the $200,000 principal
          amount of Convertible Subordinated Notes convertible into
          8,692 shares of Class A Common Stock were excluded from the
          computation of diluted earnings per share because their effect
          would have been anti-dilutive.



                                     124




22.      QUARTERLY FINANCIAL RESULTS (UNAUDITED)
         ---------------------------------------

         The following table sets forth selected unaudited consolidated
         quarterly financial information for the years ended March 31, 2007
         and 2006. The Company amended its Quarterly Report on Form 10-Q for
         the quarter ended June 30, 2006, and filed Quarterly Reports on Form
         10-Q for the quarters ended September 30, 2006 and December 31, 2006,
         that include the restatement of the consolidated statements of
         operations for the quarters ended June 30, 2006, December 31, 2005,
         September 30, 2005 and June 30, 2005. Information for the quarter
         ended March 31, 2006 has been restated from previously reported
         information filed in the Company's 2006 Form 10-K, as a result of the
         restatement of its consolidated financial statements discussed in
         Note 3 "Restatement of Consolidated Financial Statements."



                                                              1ST             2ND            3RD             4TH
                                                            QUARTER         QUARTER        QUARTER         QUARTER         YEAR
                                                        -------------------------------------------------------------------------
                                                                                                       
 YEAR ENDED MARCH 31, 2007
 -------------------------
 Net revenues..........................................    $ 96,200      $ 108,983       $ 117,949      $ 120,495      $ 443,627
 Gross profit..........................................      62,738         70,104          79,510         84,012        296,364
 Income before income taxes and cumulative
      effect of change in accounting principle.........      13,335         19,655          28,048         28,034         89,072
 Income before cumulative effect of change
      in accounting principle..........................       8,122         12,085          18,462         17,445         56,114
 Cumulative effect of change in accounting
      principle........................................       1,976              -               -              -          1,976
 Net income............................................      10,098         12,085          18,462         17,445         58,090

Earnings per share before effect of change
  in accounting principle:
        Basic - Class A common.........................       $0.17          $0.26           $0.39          $0.37          $1.19
        Basic - Class B common.........................        0.14           0.21            0.33           0.31           0.99
        Diluted - Class A common.......................        0.15           0.22            0.33           0.31           1.02
        Diluted - Class B common.......................        0.13           0.19            0.29           0.27           0.88
Per share effect of cumulative effect of
  change in accounting principle:
        Basic - Class A common.........................        0.04              -               -              -           0.04
        Basic - Class B common.........................        0.04              -               -              -           0.04
        Diluted - Class A common.......................        0.04              -               -              -           0.03
        Diluted - Class B common.......................        0.03              -               -              -           0.03
Earnings per share:
        Basic - Class A common.........................        0.21           0.26            0.39           0.37           1.23
        Basic - Class B common.........................        0.18           0.21            0.33           0.31           1.03
        Diluted - Class A common.......................        0.19           0.22            0.33           0.31           1.05
        Diluted - Class B common.......................        0.16           0.19            0.29           0.27           0.91


                                                          1ST             2ND           3RD           4TH           FULL
                                                        QUARTER         QUARTER       QUARTER       QUARTER         YEAR
                                                  ----------------------------------------------------------------------------
 YEAR ENDED MARCH 31, 2006                                                                       (AS RESTATED)  (AS RESTATED)
- ---------------------------
                                                                                                   
Net revenues                                           $ 85,043        $ 92,322      $101,752      $ 88,523       $367,640
Gross profit                                             59,008          59,682        66,763        58,252        243,705
Income (loss) before income taxes                       (18,322)         13,814        22,190        18,167         35,849
Net income (loss)                                       (22,888)          8,590        14,706        11,008         11,416

Earnings (loss) per share:
   Basic - Class A common                                 (0.47)           0.18          0.31          0.23           0.24
   Basic - Class B common                                 (0.47)           0.15          0.26          0.20           0.20
   Diluted - Class A common                               (0.47)           0.16          0.27          0.20           0.23
   Diluted - Class B common                               (0.47)           0.14          0.23          0.18           0.20


                                     125




         The following table presents the effect of the financial statement
         restatement adjustments on the Company's previously reported
         consolidated statement of income for the three months ended March 31,
         2006.


                                                          THREE MONTHS ENDED MARCH 31, 2006
                                         -------------------------------------------------------------------
                                                AS
                                            PREVIOUSLY                                              AS
                                             REPORTED         ADJUSTMENTS                        RESTATED
                                             --------         -----------                        --------
                                                                                       
Net revenues                              $       87,430    $         1,093  (d)                $    88,523
Cost of sales                                     29,907                364  (d)                     30,271
                                         ----------------  -----------------                   -------------
Gross profit                                      57,523                729                          58,252
                                         ----------------  -----------------                   -------------
Operating expenses:
    Research and development                       8,017                  -                           8,017
    Selling and administrative                    30,648                897  (a)(b)(e)               31,545
    Amortization of intangibles                    1,195                  -                           1,195
                                         ----------------  -----------------                   -------------
Total operating expenses                          39,860                897                          40,757
                                         ----------------  -----------------                   -------------
Operating income                                  17,663               (168)                         17,495
                                         ----------------  -----------------                   -------------
Other expense (income):
    Interest expense                               1,663                  -                           1,663
    Interest and other income                     (2,335)                 -                          (2,335)
                                         ----------------  -----------------                   -------------
Total other expense (income)                        (672)                 -                            (672)
                                         ----------------  -----------------                   -------------
Income before income taxes                        18,335               (168)                         18,167
    Provision for income taxes                     6,533                626  (a)(b)(c)(d)(e)          7,159
                                         ----------------  -----------------                   -------------
    Net income                            $       11,802    $          (794)                    $    11,008
                                         ================  =================                   =============

Earnings per share:
    Basic - Class A common                $         0.25    $         (0.02)                    $      0.23
    Basic - Class B common                          0.21              (0.01)                           0.20
    Diluted - Class A common                        0.21              (0.01)                           0.20
    Diluted - Class B common (f)                                                                       0.18

Shares used in per share calculation:
    Basic - Class A common                        36,647               (339) (g)                     36,308
    Basic - Class B common                        12,774               (105) (g)                     12,669
    Diluted - Class A common                      59,693               (778) (g)                     58,915
    Diluted - Class B common (f)                                                                     12,865


(a)  Adjustment for stock-based compensation expense pursuant to APB 25 ($240)
     and the related income tax impact ($75).
(b)  Adjustment for payroll taxes, interest and penalties associated with
     stock-based compensation expense pursuant to APB 25 ($836) and the
     related income tax impact ($231).
(c)  Adjustment for additional liabilities associated with tax positions
     claimed on filed tax returns, partially offset by certain expected tax
     refunds ($571).
(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 ($179) and the related income
     tax impact ($66).
(f)  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.
(g)  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.


                                     126




23.      SEGMENT REPORTING
         -----------------

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

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

         The following represents information for the Company's reportable
         operating segments for fiscal 2007, 2006 and 2005.



                            FISCAL YEAR
                               ENDED          BRANDED     SPECIALTY     SPECIALTY      ALL
                             MARCH 31,       PRODUCTS      GENERICS     MATERIALS     OTHER     ELIMINATIONS    CONSOLIDATED
                             ---------       --------      --------     ---------     -----     ------------    ------------
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                               
NET REVENUES
                      2007                    $188,681     $235,594       $17,436     $1,916   $        -        $443,627
                      2006 (AS RESTATED)(1)    145,503      203,787        16,988      1,362            -         367,640
                      2005 (AS RESTATED)(1)     90,628      194,022        18,345      1,661            -         304,656
- ------------------------------------------------------------------------------------------------------------------------------
SEGMENT PROFIT (LOSS)
                      2007                      87,346      125,596         2,799   (126,669)           -          89,072
                      2006 (AS RESTATED)(1)     58,704      100,731         1,082   (124,668)           -          35,849
                      2005 (AS RESTATED)(1)     24,510      104,893         3,043    (83,146)           -          49,300
- ------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
                     2007                       32,995       84,581         8,410    582,955       (1,158)        707,783
                     2006 (AS RESTATED)(1)      23,582       62,953         7,353    526,583       (1,158)        619,313
                     2005 (AS RESTATED)(1)      24,650       66,806         8,001    460,653       (1,158)        558,952
- ------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT ADDITIONS
                     2007                           96            -           108     24,862            -          25,066
                     2006                          540        1,097           269     56,428            -          58,334
                     2005                        2,463            -           318     60,841            -          63,622
- ------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
                     2007                          709          338           163     21,178            -          22,388
                     2006                          587          317           173     16,925            -          18,002
                     2005                          217          235           140     13,312            -          13,904
- ------------------------------------------------------------------------------------------------------------------------------


(1) See Note 3 "Restatement of Consolidated Financial Statements."



                                     127




         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.

24.      SUBSEQUENT EVENTS
         -----------------

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

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

                                     128




         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. 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 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.


                                     129





            Report of Independent Registered Public Accounting Firm
            -------------------------------------------------------


The Board of Directors and Shareholders
K-V Pharmaceutical Company:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting (Item 9A(a)),
that K-V Pharmaceutical Company (the Company) did not maintain effective
internal control over financial reporting as of March 31, 2007, because of the
effect of material weaknesses identified in management's assessment, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weaknesses have been identified
and included in management's assessment:

*    Stock-Based Compensation--The design of the Company's policies and
     procedures 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

                                     130




     likelihood of a material misstatement in the Company's financial
     statements in each of the following areas:

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

     Additionally, 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, and the Company's finance
     and accounting personnel involved in the stock option granting and
     administration process were inadequately trained. These deficiencies each
     result in a more than remote likelihood of a material misstatement in the
     Company's financial statements.

*    Income Taxes--The design of the Company's policies and procedures did not
     adequately address the financial reporting risks associated with
     uncertain tax positions. Additionally, the Company's policies and
     procedures to ensure that the necessary information was captured and
     communicated to those responsible for accounting for uncertain tax
     positions were inadequate. These deficiencies each result in a more than
     remote likelihood of a material misstatement in the Company's financial
     statements.

*    Revenue Recognition--The design of the Company's policies and procedures
     did not adequately address the financial reporting risks associated with
     customer shipping terms. This deficiency results in a more than remote
     likelihood of a material misstatement in the Company's financial
     statements.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
K-V Pharmaceutical Company and subsidiaries as of March 31, 2007 and 2006, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 2007. These material weaknesses were considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the March 31, 2007 consolidated financial statements, and this report does
not affect our report dated March 25, 2008, which expressed an unqualified
opinion on those consolidated financial statements.

In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of March 31, 2007, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by COSO. Also, in our opinion,
because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of March 31,
2007, based on criteria established in Internal Control--Integrated Framework
issued by COSO.


/s/ KPMG LLP

St. Louis, Missouri
March 25, 2008



                                     131




ITEM 9A. CONTROLS AND PROCEDURES
         -----------------------

         (a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Our management is responsible for establishing and maintaining
         adequate internal control over financial reporting, as defined in
         Exchange Act Rule 13a-15(f) under the Securities Exchange Act of
         1934, as amended (the "Exchange Act"). Our management, including our
         Chief Executive Officer and Chief Accounting Officer, conducted an
         evaluation of the effectiveness of our internal control over
         financial reporting as of March 31, 2007. In making this assessment,
         our management used the criteria established in Internal Control --
         Integrated Framework, issued by the Committee of Sponsoring
         Organizations of the Treadway Commission ("COSO").

         Internal Control Over Financial Reporting is a process designed by,
         or under the supervision of, the company's principal executive and
         principal financial officers, or persons performing similar
         functions, and effected by the company's board of directors,
         management, and other personnel, to provide reasonable assurance
         regarding the reliability of financial reporting and the preparation
         of financial statements for external purposes in accordance with
         generally accepted accounting principles and includes those policies
         and procedures that:

         (1) Pertain to the maintenance of records that, in reasonable detail,
         accurately and fairly reflect the transactions and dispositions of
         the assets of the company;

         (2) Provide reasonable assurance that transactions are recorded as
         necessary to permit preparation of financial statements in accordance
         with generally accepted accounting principles, and that receipts and
         expenditures of the company are being made only in accordance with
         authorizations of management and directors of the company; and

         (3) Provide reasonable assurance regarding prevention or timely
         detection of unauthorized acquisition, use or disposition of the
         company's assets that could have a material effect on the financial
         statements.

         Because of inherent limitations, internal control over financial
         reporting may not prevent or detect misstatements. Also, projections
         of any evaluation of effectiveness to future periods are subject to
         the risk that controls may become inadequate because of changes in
         conditions, or that the degree of compliance with the policies or
         procedures may deteriorate.

         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
         financial statements will not be prevented or detected. A significant
         deficiency is a control deficiency, or combination of control
         deficiencies, that adversely affects the Company's ability to
         initiate, authorize, record, process or report external financial
         data reliably in accordance with U.S. Generally Accepted Accounting
         Principles ("GAAP") such that there is more than a remote likelihood
         that a misstatement of the Company's annual or interim financial
         statements that is more than inconsequential will not be prevented or
         detected.

         Based on our evaluation of internal control over financial reporting
         as of March 31, 2007, management has determined that the following
         material weaknesses existed in our internal control over financial
         reporting.

         Stock-Based Compensation

         The design of the Company's policies and procedures 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

                                     132




         financial statements in each of the following areas:

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

         Additionally, 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, and the
         Company's finance and accounting personnel involved in the stock
         option granting and administration process were inadequately trained.
         These deficiencies each result in a more than remote likelihood of a
         material misstatement in the Company's financial statements.

         Income Taxes

         The design of the Company's policies and procedures did not
         adequately address the financial reporting risks associated with
         uncertain tax positions. Additionally, the Company's policies and
         procedures to ensure that the necessary information was captured and
         communicated to those responsible for accounting for uncertain tax
         positions were inadequate. These deficiencies each result in a more
         than remote likelihood of a material misstatement in the Company's
         financial statements.

         Revenue Recognition

         The design of the Company's policies and procedures did not
         adequately address the financial reporting risks associated with
         customer shipping terms. This deficiency results in a more than
         remote likelihood of a material misstatement in the Company's
         financial statements.

         The aforementioned material weaknesses resulted in material errors in
         the accounting for stock-based compensation, income taxes, and
         revenue recognition, and in the restatement of our historical
         consolidated financial statements. As a result of the material
         weaknesses described above, management has concluded that the Company
         did not maintain effective internal control over financial reporting
         as of March 31, 2007 based on the criteria established in COSO's
         Internal Control - Integrated Framework.

         KPMG LLP, our independent registered public accounting firm, who
         audited the consolidated financial statements of the Company included
         in this annual report has issued an unqualified opinion on
         management's assessment of our internal control over financial
         reporting, and expressed an adverse opinion on the effectiveness of
         our internal control over financial reporting as of March 31, 2007.
         This report appears on pages 130-131 of this annual report.

         (b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         No changes in our internal control over financial reporting occurred
         during the quarter ended March 31, 2007 that have materially
         affected, or are reasonably likely to materially affect, our internal
         control over financial reporting.

         (c) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
         including our Chief Executive Officer and Chief Accounting Officer,
         we conducted an evaluation of the effectiveness of our disclosure
         controls and procedures, as such terms are defined in Rules 13a-15(e)
         and 15d-15(e) promulgated under the Exchange Act, as of March 31,
         2007, the end of the period covered by this Annual Report on Form
         10-K.

         Disclosure controls and procedures are controls and procedures
         designed to ensure that information required to be disclosed in the
         Company's reports filed under the Exchange Act, such as this Report,
         is recorded, processed,

                                     133




         summarized and reported within the time periods specified in the
         SEC's rules and forms. Disclosure controls are also designed to
         ensure that such information is accumulated and communicated to the
         Company's management, including the Chief Executive Officer and Chief
         Financial Officer, as appropriate to allow timely decisions regarding
         required disclosure.

         As a result of the material weaknesses in our internal control over
         financial reporting described above, our management, including our
         Chief Executive Officer and our Chief Financial Officer concluded
         that our disclosure controls and procedures were not effective as of
         March 31, 2007. Notwithstanding the material weaknesses described
         above, our management, based upon the substantial work performed
         during the restatement process have concluded that our consolidated
         financial statements for the periods covered by and included in this
         Annual Report on Form 10-K are fairly stated in all material respects
         in accordance with U.S. generally accepted accounting principles for
         each of the periods presented herein.

         (d) REMEDIATION ACTIVITIES

         Subsequent to March 31, 2007, we have taken several steps to
         remediate the material weaknesses related to accounting for
         stock-based compensation, income taxes and revenue recognition
         described in (a) above. We have implemented or are in the process of
         implementing internal control improvements as follows:

         Stock-Based Compensation

         *    Expanding the General Counsel's role to include oversight of the
              process of documenting stock option grants.
         *    Engaging an outside professional services firm to advise us on
              improving the design of the internal controls over our stock
              option processes and controls over the preparation and review of
              stock-based compensation information in the Company's financial
              reports.
         *    Establishing an Employee Compensation Reporting Committee
              comprised of senior tax, legal, human resource, and
              accounting/finance personnel, to review stock option grants and
              the reasonableness of the key assumptions used in the valuation
              of stock options and any variances (e.g. modifications or
              deviations) from the Company's standard stock option awards
              granted to employees.
         *    Establishing a procedure whereby senior financial management
              will review employment agreements, employment offers, and other
              agreements with employees to ensure proper accounting based upon
              the terms and conditions of such agreements.
         *    Enhancing training and education to ensure that all relevant
              personnel involved in the administration of and accounting for
              stock option grants, including tax personnel, understand the
              terms of the Company's stock option plans and the relevant
              accounting guidance under U.S. generally accepted accounting
              principles.
         *    Utilizing the Company's internal audit function to conduct
              testing of controls relating to stock option activity and the
              accuracy of the model used in valuing the Company's stock
              options.

         Income Taxes

         *    Enhancing training and education to ensure that personnel
              reviewing tax provision calculations and disclosures understand
              the relevant accounting guidance under U.S. generally accepted
              accounting principles.
         *    Engaging a third party professional services firm, as necessary,
              to review significant and/or unusual tax matters and obtain
              guidance on the appropriate tax and accounting treatment.
         *    Enhancing communication of relevant business issues through
              regular meetings between the tax department, operating division
              executives and other management personnel.
         *    Implementing procedures to improve documentation and review of
              tax liabilities.

         Revenue Recognition

         *    Implementing a procedure to verify actual customer receipt dates
              of shipments made during the last several days of a period end
              for the FOB destination customers.
         *    Implementing a policy requiring that shipping terms for all
              customers are properly documented and reviewed by
              finance/accounting personnel.


                                     134




ITEM 9B. OTHER INFORMATION
         -----------------

         On March 23, 2008, Gerald R. Mitchell, the Company's Chief Financial
         Officer, retired and the Company appointed Ronald J. Kanterman, age
         53, to succeed Mr. Mitchell as the Company's Chief Financial Officer.
         Mr. Kanterman will continue to serve as the Company's Treasurer and
         Assistant Secretary.

         In connection with his retirement, the Company entered into a
         consulting agreement with Mr. Mitchell with an initial term of 24
         months from its effective date, and which renews for successive
         12-month periods unless terminated by the Company or Mr. Mitchell,
         provided, however, that the agreement may be terminated at any time
         by either party on 60 days' notice.

         Pursuant to the consulting agreement, Mr. Mitchell will provide up to
         80 hours per month of consulting services at an hourly rate of $115
         per hour. The consulting agreement provides for a guaranteed minimum
         of 80 hours per month for the first year. Mr. Mitchell will also be
         entitled to reimbursement of expenses incurred in providing services
         to the Company under the consulting agreement. The consulting
         agreement also provides that any stock options previously granted to
         Mr. Mitchell will continue to be exercisable, and with respect to
         unvested options vest and become exercisable, for so long as the
         consulting agreement is in effect.

         The consulting agreement also provides that the restrictive covenants
         in Mr. Mitchell's employment agreement that prevent him from
         competing against the Company or soliciting customers or employees of
         the Company for a period of three years after the end of his
         employment with the Company will remain in force and will be
         unaffected by the consulting agreement.

         Mr. Kanterman previously served as the Company's Vice President,
         Strategic Financial Management, Treasurer and Assistant Secretary
         since March 2006, and as Vice President, Treasury from January 2004
         to March 2006. Mr. Kanterman's prior responsibilities included
         significant roles in financial planning, investor relations and
         project management. Prior to joining the Company, Mr. Kanterman
         served as a partner at Brown Smith Wallace, LLP from 1993 to 2004.
         Previously, Mr. Kanterman was a partner at Arthur Andersen & Co.,
         from 1987 to 1993.

         In connection with his appointment as Chief Financial Officer, the
         Company and Mr. Kanterman entered into an amendment to his employment
         agreement effective March 23, 2008. The employment agreement, as
         amended, continues until March 31, 2013, and renews for successive
         12-month periods unless terminated by the Company or Mr. Kanterman,
         provided, however, that the agreement may be terminated at any time
         after the initial term by Mr. Kanterman on 120 days' notice. The
         employment agreement, as amended, provides for a base salary of
         $330,000.

         In addition, Mr. Kanterman is also entitled to receive an incentive
         bonus based on his participation in an Incentive Plan, which gives
         Mr. Kanterman the opportunity to earn up to a percentage of his base
         salary, based upon certain performance criteria.

         Mr. Kanterman is also eligible to receive stock-based awards under
         the Company's Incentive Stock Option Plan and to participate in the
         Company's profit Sharing and 401(k) Plans. In connection with his
         appointment as Chief Financial Officer, Mr. Kanterman was awarded
         options to acquire 25,000 shares of the Company's Class A Common
         Stock.

         Under the terms of his employment agreement, if he is terminated by
         the Company without cause, Mr. Kanterman is entitled to severance
         payments equal to 50% of his base compensation paid over a six-month
         period and continuation of his Company provided medical, disability
         and life insurance benefits for six months.

         The employment agreement also contains restrictive covenants
         preventing Mr. Kanterman from competing against the Company or
         soliciting customers or employees of the Company for a period of 36
         months after the end of his employment with the Company.


                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
         --------------------------------------------------

         The Company's Certificate of Incorporation, as amended, and Bylaws,
         as amended, provide for a division of the Board of Directors into
         three classes. One of the classes is elected each year to serve a
         three-year term. The terms of the current Class C Directors expire at
         the 2007 Annual Meeting. The Company's Bylaws, as amended, specify
         that the number of directors shall be determined by the Board of
         Directors from time to time. The Board of Directors currently has set
         the number of directors at seven. There are currently seven directors
         and no vacancies on the Board of Directors.

         The following sets forth certain information about our current
         Directors.

         CLASS C DIRECTORS:  TO SERVE AS DIRECTORS UNTIL OUR NEXT ANNUAL MEETING
         Jean M. Bellin (age 57). Mr. Bellin has served as a Director since
         2003. Mr. Bellin has been the President of Metagenics, Inc., a life
         sciences company and distributor of science-based medical foods and
         nutraceuticals since September 2006. He was previously the CEO of
         Mountain View Pharmaceuticals, Inc., a biopharmaceutical company
         focused on the development of long-acting therapeutic proteins. Prior
         to that he was a Vice President at Osteohealth Company and Luitpold
         Animal Health from 2003 to 2004 and from 1997 to 2001 he was the CEO
         and a Director of New Medical Concepts.

         Terry B. Hatfield (age 59). Mr. Hatfield has served as a Director
         since 2004. He has been President of ZeaVision, a company focused on
         zeaxanthin and its benefits to those suffering (or at risk of)
         age-related vision loss since 2003. From 2001 to 2003 he was a
         consultant for merger and acquisition transactions.

                                     135




         Norman D. Schellenger (age 75). Mr. Schellenger has served as a
         Director since 1998. He has also been a Director of ProEthics
         Pharmaceuticals, Inc. since 2004. He retired from UCB Pharma in 1996
         where he served as Vice President Sales and Marketing from 1995 to
         1996. Prior to that he was President of Whitby Pharmaceuticals from
         1992 to 1994.

         CLASS A DIRECTORS: TO CONTINUE TO SERVE AS DIRECTORS UNTIL 2008
         Kevin S. Carlie (age 52). Mr. Carlie has served as a Director since
         2001. He has been a member or partner since 1984 in the Certified
         Public Accounting Firm of Stone Carlie & Company, LLC, and its
         predecessors.

         Marc S. Hermelin (age 66). Mr. Hermelin has been the Chairman of the
         Board and Chief Executive Officer of the Company since August 2006.
         From 1974 to August 2006 he was the Vice Chairman of the Board and
         Chief Executive Officer of the Company. He is the father of David S.
         Hermelin.

         CLASS B DIRECTORS: TO CONTINUE TO SERVE AS DIRECTORS UNTIL 2009
         David S. Hermelin (age 41). Mr. Hermelin has served as a Director
         since 2004. He has been the Vice President of Corporate Strategy and
         Operations Analysis of the Company since 2002. From 1995 to 2002 he
         was Vice President of Corporate Planning and Administration for the
         Company. He is the son of Marc S. Hermelin, the Chairman and Chief
         Executive Officer of the Company.

         Jonathon E. Killmer (age 66). Mr. Killmer has served as a Director
         since 2006. He retired in 2004. From 2002 to 2004 he provided
         consulting services to Hypercom Corporation, an electronic payment
         products and services company. He was the Chief Operating Officer and
         Chief Financial Officer of Hypercom from 1999 to 2002. He has been a
         director of Blue Cross Blue Shield of Minnesota since 1999. He is
         presently Chairman of the Board of Blue Plus, a Minnesota domiciled
         HMO.

         Gerald R. Mitchell (age 68). Mr. Mitchell has been Vice President and
         Chief Financial Officer of the Company since 1981.

         Gerald R. Mitchell was a Class B Director at March 31, 2007. Mr.
         Mitchell has retired from the Company and resigned from the Board of
         Directors effective March 23, 2008.

         SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
         requires the Company's executive officers, the Company's directors
         and persons who own more than 10% of a registered class of the
         Company's equity securities to file periodic reports of ownership and
         changes in ownership with the Securities and Exchange Commission.
         Such individuals are required by Securities and Exchange Commission
         regulation to furnish the Company with copies of all such forms they
         file. Based solely on a review of the copies of all such forms
         furnished to the Company or written representations that no reports
         were required to be filed, the Company believes that such persons
         complied with all Section 16(a) filing requirements applicable to
         them with respect to transactions during fiscal 2007 except that each
         of Michael S. Anderson, David S. Hermelin, Marc S. Hermelin, Patricia
         K. McCullough, and Jerald J. Wenker had a late filing for a Statement
         of Change in Beneficial Ownership of Securities on Form 4.


                                     136




         AUDIT COMMITTEE

         Structure and Responsibilities. The Company has a standing Audit
         ------------------------------
         Committee of the Board of Directors consisting of Kevin S. Carlie,
         CPA (Chairman), Jonathon E. Killmer and Terry B. Hatfield. The
         Company's Board of Directors adopted the Audit Committee's written
         charter. The Board of Directors has determined that each member of
         the Audit Committee meets the standards of independence required by
         the New York Stock Exchange, as well as the independence requirements
         for audit committee members under Rule 10A-3 promulgated under the
         Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
         addition, the Board of Directors has determined that each member is
         financially literate and possesses sufficient accounting or related
         financial management expertise within the meaning of the listing
         standards of the New York Stock Exchange and that each of Mr. Carlie
         and Mr. Killmer qualifies as an "audit committee financial expert"
         under the definition set forth in Item 407(d)(5) of Regulation S-K.
         The Audit Committee annually appoints the Company's independent
         registered public accounting firm, reviews with the independent
         registered public accounting firm a plan and scope of the audit and
         audit fees, meets periodically with representatives of the
         independent registered public accounting firm, the internal auditors,
         the Board of Directors and management to monitor the adequacy of
         reporting, internal controls and compliance with the Company's
         policies, reviews its annual and interim consolidated financial
         statements and performs the other functions or duties provided in the
         Audit Committee Charter.

         The Board of Directors has adopted a set of corporate governance
         guidelines establishing general principles with respect to, among
         other things, director qualifications and responsibility. These
         Corporate Governance Guidelines establish certain criteria,
         experience and skills requirements for potential candidates. There
         are no established term limits for service as a director of the
         Company. In general, it is expected that each director of the Company
         will have the highest personal and professional ethics and integrity
         and be devoted to representing the interests of the Company and its
         stockholders. In addition, it is expected that the Board of Directors
         as a whole will be made up of individuals with diverse experiences in
         business, government, education and technology. The Company's
         Corporate Governance Guidelines are available on its website at
         http://www.kvph.com and can be obtained free of charge by written
         request to the attention of the Assistant Secretary of the Company at
         the address appearing on the first page of this Form 10-K or by
         telephone at (314) 645-6600.

         STANDARDS OF BUSINESS ETHICS POLICY

         All directors and employees of the Company, including its Chief
         Executive Officer, Chief Financial Officer, Chief Accounting Officer
         and other principal finance and accounting officers, are required to
         comply with the Company's Standards of Business Ethics Policy to
         ensure that the Company's business is conducted in a legal and
         ethical manner. The Company's Standards of Business Ethics Policy
         covers all areas of professional conduct, including employment
         policies and practices, conflicts of interest and the protection of
         confidential information, as well as strict adherence to all laws and
         regulations applicable to the conduct of our business. Employees and
         directors are required to report any suspected violations of our
         Standards of Business Ethics Policy. The Company, through the Audit
         Committee, has procedures in place to receive, retain and treat
         complaints received regarding accounting, internal accounting control
         or auditing matters and to allow for the confidential and anonymous
         submission by employees of concerns regarding questionable accounting
         or auditing matters. The Company's Standards of Business Ethics
         Policy can be reviewed on the Company's website, http://www.kvph.com,
         or by contacting the Company at the address appearing on the first
         page of this Form 10-K to the attention of the Assistant Secretary of
         the Company, or by telephone at (314) 645-6600.

         The Company has also established a Senior Executives Code of Ethics
         as a supplement to the Standards of Business Ethics Policy. The
         Senior Executives Code of Ethics applies to the Chief Executive
         Officer, Chief Financial Officer, Chief Accounting Officer and any
         other officer of the Company serving in a finance, accounting,
         treasury, tax or investor relations role. The Senior Executives Code
         of Ethics requires each of such officers to provide accurate and
         timely information related to the Company's public disclosure
         requirements. The

                                     137




         Company's Senior Executives Code of Ethics can be reviewed on the
         Company's website, http://www.kvph.com, or by contacting the Company
         at the address appearing on the first page of this Form 10-K to the
         attention of the Assistant Secretary of the Company, or by telephone
         at (314) 645-6600. The Company intends to post any amendment to, or
         waiver of, the Senior Executives Code of Ethics on its website.

ITEM 11. EXECUTIVE COMPENSATION
         ----------------------

                           COMPENSATION OF DIRECTORS
                           -------------------------

         The following table sets forth the annual compensation to
         non-employee directors for the fiscal year ended March 31, 2007:



                        ------------------------------------------------------------------------------------
                                                    FEES
                                                  EARNED OR                    OPTION
                                                   PAID IN       STOCK         AWARDS
                                                    CASH        AWARDS          ($)             TOTAL
                                 NAME                ($)          ($)           (2)              ($)
                        ------------------------------------------------------------------------------------
                                                                                  
                        Jean M. Bellin             23,750          -           15,187          38,937
                        ------------------------------------------------------------------------------------
                        Kevin S. Carlie            41,650          -           40,279          81,929
                        ------------------------------------------------------------------------------------
                        Terry B. Hatfield          33,650          -           13,733          47,383
                        ------------------------------------------------------------------------------------
                        Jonathon E. Killmer        30,400          -            3,287          33,687
                        ------------------------------------------------------------------------------------
                        Norman D. Schellenger      27,300          -            5,973          33,273
                        ------------------------------------------------------------------------------------
                        David A. Van Vliet (1)      9,500          -           13,899          23,399
                        ------------------------------------------------------------------------------------

- -------------------------------
(1)  David A. Van Vliet resigned as a Director in October 2006 to accept a
     position as the Company's Chief Administration Officer.

(2)  Option awards represent the compensation expense recognized for financial
     statement reporting purposes for the fiscal year ended March 31, 2007 in
     accordance with SFAS 123(R) for stock options granted in and prior to
     fiscal 2007. Fair value is based on the Black-Scholes option pricing
     model using the fair value of the underlying shares at the measurement
     date. Stock option awards with a fair value of $25,302 (per share value
     of $12.65) and $63,522 (per share value of $12.70) were granted to Mr.
     Carlie and Mr. Killmer, respectively, during fiscal 2007. For additional
     discussion on the valuation assumptions used in determining stock-based
     compensation and the grant date fair value for stock options, see
     Stock-Based Compensation in Note 17 to our Consolidated Financial
     Statements. Effective as of March 31, 2007, the following Non-Officer
     Directors had the following outstanding unexercised options (the amounts
     in the table reflect the effect of repricing certain stock options as a
     result of the Special Committee's investigation into the Company's stock
     option grant practices):


                                     138





     ---------------------------------------------------------------------------------------------------------
                                 NUMBER OF SECURITIES
                                  UNDERLYING OPTIONS (#)
     ---------------------------------------------------------------------------------------------------------
                                                                   OPTION         OPTION       OPTION GRANT
                                CLASS A            CLASS B        EXERCISE      EXPIRATION       DATE FAIR
              NAME           COMMON STOCK       COMMON STOCK     PRICE ($)         DATE          VALUE ($)
     ---------------------------------------------------------------------------------------------------------
                                                                                 
     Jean M. Bellin                                 7,500          18.87         5/23/2008        85,225
                                                    2,500          18.42         9/10/2009        26,973
                                 2,500                             19.99        11/01/2010        30,067
     ---------------------------------------------------------------------------------------------------------
     Kevin S. Carlie                                  450          19.37         4/01/2008         5,893
                                                    2,500          18.42         9/10/2009        26,973
                                 7,500                             19.70        11/01/2010        88,358
                                 2,000                             23.70        10/05/2011        25,302

     ---------------------------------------------------------------------------------------------------------
     Terry B. Hatfield                              5,000          25.25         6/29/2009        73,283
                                                    2,500          18.42         9/10/2009        26,973
                                 2,500                             19.26        11/01/2010        28,524

     ---------------------------------------------------------------------------------------------------------
     Jonathon E. Killmer                            5,000          23.80        10/05/2011        63,522



     ---------------------------------------------------------------------------------------------------------
     Norman D. Schellenger                          2,500          18.42         9/10/2009        25,903
                                 2,500                             19.99        11/01/2010        30,067


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



         Additional Information About Director Compensation
         --------------------------------------------------

Director compensation is designed to attract individuals who have the required
background, experiences and functional expertise to provide strategic
direction and oversight to the Company. Only those directors who are not also
officers of the Company are compensated for their services as directors of the
Company ("Non-Officer Directors"). With respect to such Non-Officer Directors,
the Compensation Committee of the Board recommends the appropriate levels of
compensation to the Board, and the full Board of Directors approves the actual
compensation to be paid to the Non-Officer Directors.

The Company's director compensation program consists of a combination of cash
compensation and stock options in order to align the interest of the directors
with those of the Company's shareholders.

Basic Retainer - The cash compensation component for new Non-Officer Directors
consists of a base retainer of $15,000 per year ($20,000 for the Chairman of
the Audit Committee).

Meeting Fees - In addition, such directors also receive $1,000 per day for
in-person meetings of the Board of Directors or other Committees on which the
director serves. Fees for telephonic meetings are $500. Total annual
compensation received by the Non-Officer Directors, therefore, is determined
by the number of Committee and Board meetings attended each year.

Expense Reimbursement - The Company also pays for the ordinary and necessary
out-of-pocket expenses incurred by the Non-Officer Directors for attendance at
Board of Directors and Committee meetings.

Stock Options - As stated above, the stock option component of the director
compensation program is designed to align the interest of the directors with
those of the Company's shareholders. As such, upon appointment as a director,
each Non-Officer Director is currently granted options to acquire 7,500 shares
of Class B Common Stock. Subsequent grants for Non-Officer Directors who are
not members of the Compensation Committee are determined periodically by the
Board based on the recommendation of the Compensation Committee. Subsequent
grants for members of the Compensation Committee are determined periodically
by the Board. Such options are granted as non-qualified options under the
Company's Incentive Stock Option Plan and generally vest ratably over five
years. The shares acquired upon exercise are subject to a two-year forfeiture
period, during which time they cannot be sold.

                                     139




                     COMPENSATION DISCUSSION AND ANALYSIS
                     ------------------------------------

The Compensation Committee of the Company's Board of Directors is responsible
for establishing and periodically reviewing the Company's executive
compensation philosophy and guiding principles. No less frequently than
annually, the Compensation Committee evaluates its plans and policies against
current and emerging competitive practices, legal and regulatory developments
and corporate governance trends. The purpose of the review is to provide
assurance that in light of the changing corporate environment, the Company's
executive compensation program continues to help attract and retain the talent
necessary to foster strong sales growth, long-term financial performance and
shareholder returns.

Compensation and Benefits Philosophy
- ------------------------------------

The Company's executive compensation program is designed with the goal of
providing compensation that is fair, reasonable and competitive. The program
is intended to help the Company recruit and retain highly qualified and
experienced executives and to provide rewards that are linked to performance
while also aligning the interests of executives with those of the Company's
shareholders. The program is based on the following guiding principles:

Performance - The Company believes the best way to accomplish alignment of
compensation plans with the interest of its shareholders is to link executive
pay directly to the Company's performance.

Competitiveness - The Company's executive compensation and benefits program is
designed to be competitive with those provided at companies in the
pharmaceutical and drug delivery industries for similar talent. The benefits
component of the program is designed to provide competitive levels of
protection and financial security and is not based on individual performance.

Cost - The Company's total compensation and benefit program is designed to be
cost-effective and affordable, ensuring that the interests of the Company's
shareholders are considered in determining executive pay levels. The Company
seeks to adequately fund its executive compensation program while, at the same
time, ensuring that enough funding remains for its short-term and long-term
goals.

The Company believes that its philosophy of aligning management and
shareholder interests is an important element in creating an environment of
trust and teamwork that furthers the long-term interests of the organization.

Components of Total Compensation
- --------------------------------

The Company's total compensation program for executive officers has two main
components: direct compensation and benefit plans.

The key components of direct compensation for executive officers are:

Base salary - Base salary is designed to attract and retain highly experienced
executives who can manage the Company to achieve its short-term and long-term
strategic goals. Executive salaries are based on an individual's overall
experience, Company tenure, level and scope of responsibility and the general
and industry-specific business competitive environment.

Cash earned incentives - This component of direct compensation is designed to
place a significant portion of an executive's annual compensation at risk -
that is, linked to both the Company's and the individual's annual performance.
Cash earned incentives are based on individual performance, performance of the
Company and performance of the department or division under the responsibility
of the executive, measured in terms of the attainment of both defined and
general objectives.

                                     140




Stock option grants - This component of direct compensation is designed to
strengthen the link between compensation and increased returns for
shareholders and, thereby, align management's interest in the Company's
long-term success with the interests of the Company's shareholders. Awards
granted to executive officers are discretionary under the Company's Incentive
Stock Option Plan. The size of individual awards is dependent upon the
executive's position, tenure and number of vested and previously exercised
options.

The above-described criteria are applied to each executive officer
subjectively, based upon the Compensation Committee's evaluation of each
executive officer's performance and value to the Company.

Benefit plans for executive officers include:

Insurance plans - The Company provides standard company-sponsored insurance
plans to its employees, including the executive officers. The core insurance
package includes health, dental, disability and basic group life insurance
coverage. In general, executives participate in these benefits on the same
basis as other Company employees.

401(k) Plan - Through the Company's 401(k) Plan the named executive officers
are provided an opportunity to save for retirement on a tax-favored basis.
Participation in the 401(k) Plan is generally available to all Company
employees the beginning of each pay period (except for union employees covered
by a collective bargaining agreement). The Company matches employee
contributions to the 401(k) Plan at 50% of the first 7% of the employee's
contributions.

Perquisites - Executives are generally provided a car allowance or company
car. The Chief Executive Officer is entitled to receive certain perquisites
under the terms of his employment agreement, which are more fully described in
the footnotes to the Summary Compensation Table under the heading "Other
Compensation."

Determining Benefit Levels. The Compensation Committee periodically reviews
the benefits offered to the executives to ensure that the benefits program
provided is competitive and cost-effective for the Company, and support its
need for a qualified and experienced executive team. The benefits component of
the executive compensation program is not tied to the Company's or individual
performance.

Establishing Overall Compensation Levels. The Company makes this decision
based on the competitive market value for the area of responsibility as well
as the education and experience of the executive.

Direct compensation levels (base salary, cash earned incentive and stock
option grant awards) are established based on performance. The performance
factor consists of how well the individual executive and her or his area of
responsibility performed against goals and objectives which were established
before the fiscal year commenced as well as how the executive promoted an
environment of results, teamwork and talent development in their areas of
responsibility.

Determining Incentive Compensation Allocation - Annual and Long-Term
Incentives. The amount allocated to annual versus long-term compensation is
determined based on the amount of available funding for the Company's overall
compensation programs, including executive compensation. The overall funding
levels are ultimately subject to the judgment and approval of the Compensation
Committee to ensure an appropriate alignment with the interests of the
Company's shareholders and the Company's ability to meet its long-term
strategic goals. In determining individual executive officer pay levels, the
Compensation Committee considers the total compensation to be delivered to
individual executives and, as such, may exercise discretion in determining the
portion allocated to annual versus long-term incentives. The Company believes
this "total compensation" approach - permitting flexibility to shift the mix
of annual and long-term compensation - provides the ability to align pay
decisions with the short- and long-term needs of the business. It also allows
for the flexibility needed to recognize differences in performance by
providing differentiated pay.

Each named executive officer is evaluated on an annual basis and, to the
extent the Compensation Committee determines to grant options to such named
executive officer, options are typically granted at the end of the review
period. The Company has not adopted any policy with respect to coordinating
option grant dates with the release of material


                                     141




non-public information. Rather, the grant date with respect to any options
granted to a named executive officer generally is the date the Compensation
Committee determines to grant such options. In general, stock options are
granted on a company-wide basis on the last trading day of each fiscal
quarter. As such, there may be times when the Compensation Committee grants
options when the Board or Compensation Committee is in possession of material
non-public information. The Compensation Committee typically does not take
such information into account when determining whether and in what amount to
make option grants.

Determining Individual Compensation Levels

Named Executive Officers Other than the Chief Executive Officer. Compensation
levels for named executive officers are determined based on the overall
performance of the Company and individual performance, as well as the
executive's experience and tenure at the Company.

Individual performance objectives target specific areas for improvement or set
specific goals against key performance indicators within an executive's area
of responsibility. The objectives are proposed by the executive and approved
by a committee that includes the Chief Executive Officer.

(1) Base Salary. The Company grants regular, annual base salary increases to
    -----------
executives who are performing at or above expectations at the beginning of
each fiscal year. Among other factors, annual increases seek to achieve an
appropriate competitive level to account for increases in the cost of living
and similar factors and/or to address changes in the external competitive
market for a given position.

(2) Cash Earned Incentives and Stock Option Awards. Cash earned incentives for
    ----------------------------------------------
executive officers are generally determined based on the terms of their
individual Incentive Plans. These plans typically provide for a range of
pay-outs expressed as a percentage of annual salary that are tied to the
successful completion of the executive's individual and department performance
objectives. At the end of the fiscal year, each executive's performance
against his or her objectives is evaluated by a committee that includes the
Chief Executive Officer to determine the incentive pay-out level per the
Incentive Plan. These evaluations are submitted to the Compensation Committee
for approval along with the Incentive Plan for review after the end of the
fiscal year when incentive compensation decisions are made.

The Company has entered into Incentive Compensation Plans with certain
executive officers, for the fiscal year ended March 31, 2007, to reward
achievement of certain corporate objectives, as determined at fiscal year end.
The officer is entitled to receive a percentage of his/her base salary as
determined by the percentage of goals achieved. If the employee is actively
employed at fiscal year end, incentives are payable in one lump sum within 90
days. If the participant is promoted or transferred within the Company to a
position of greater or equal authority, all eligibilities under the plan
terminate unless otherwise stipulated.

The Company entered into Incentive Compensation Plans with Michael Anderson,
currently Vice President of Industry Presence and Development, Jerald Wenker,
formerly President of Ther-Rx Corporation and Patricia McCullough, Chief
Executive Officer of the ETHEX Corporation, rewarding each for achieving
specific objectives.

Under the terms of his Incentive Compensation Plan, Mr. Wenker was entitled to
receive up to 60% of his base salary for achieving corporate and management
objectives and meeting revenue goals. Mr. Wenker could earn up to 20% of his
base salary for achieving 100% of Ther-Rx operating income, net revenues and
corporate objectives. The fiscal 2007 operating income objectives for Mr.
Wenker included achieving gross sales targets for Ther-Rx, maintaining Ther-Rx
expenses at specific levels, and achieving net income targets for Ther-Rx. The
corporate objectives for Mr. Wenker related to achieving prescription volume
and sales targets for each Ther-Rx product for fiscal 2007. Mr. Wenker could
also earn up to 15% of his base salary for achieving net revenues targets for
all products, excluding acquisitions. In addition, Mr. Wenker could earn up to
15% of his base salary for identifying, acquiring and launching new products
that achieve certain revenue and margin targets. Finally, Mr. Wenker could
earn up to 10% of his base salary for meeting management objectives related to
the development and expansion of Ther-Rx. Mr. Wenker left the Company in
January

                                     142




2007. Mr. Wenker was not awarded any compensation pursuant to his Incentive
Compensation Plan for fiscal 2007 because he was no longer with the Company.

Under the terms of her Incentive Compensation Plan, Ms. McCullough was
entitled to receive up to 55% of her base salary for achieving corporate and
management objectives and meeting certain revenue goals. Ms. McCullough could
earn up to 20% of her base salary for achieving 100% of ETHEX corporate
objectives, which for fiscal 2007, included financial objectives and
objectives related to corporate culture, corporate environment, performance
and productivity. Ms. McCullough could also earn up to 10% of her base salary
for identifying and launching new products that achieve certain revenue and
margin targets, and identifying and pursuing strategic opportunities to
acquire products and submit FDA approval applications for such products. In
addition, Ms. McCullough could earn up to 20% of her base salary for achieving
net revenue targets for all products and for existing products. Finally, Ms.
McCullough could earn up to 5% of her base salary for meeting objectives
related to expanding the use of innovative marketing concepts, managing
marketing expenses so that they do not exceed budgeted amounts, increasing
product profitability and reducing cost of goods sold. Based on her
achievement of objectives under her Incentive Compensation Plan, Ms.
McCullough was awarded compensation of $57,000 for the 2007 fiscal year.

Under the terms of his employment arrangement, Mr. Anderson was guaranteed,
and was paid, incentive compensation of $166,000 for the 2007 fiscal year.

In determining the amount of an executive's variable compensation - the cash
earned incentive and stock option awards - the Compensation Committee
generally considers the executive's performance and the desired mix between
the annual and long-term awards. The Compensation Committee exercises its
discretion to determine the overall total compensation to be awarded to each
executive, and the amount of that total that will be paid in the form of an
annual cash earned incentive and stock option awards. As a result, the amounts
paid in the form of annual cash earned incentive and in the form of stock
option awards are designed to work together in conjunction with base salary to
deliver a total compensation package to the executive believed to be
appropriate.

The Company believes that the design of its variable compensation program
supports its overall compensation objectives by: allowing for significant
differentiation of pay based on performance; providing the flexibility
necessary to ensure that pay packages for the executive officers are
competitive relative to the external market; and providing the Committee with
the ability to deliver compensation in a manner that is linked to results that
benefit the Company's shareholders, and appropriately reflects the
contributions of each executive to the short- and long-term success of the
Company.

Chief Executive Officer. The Chief Executive Officer's compensation is based
upon an evaluation of the compensation received by chief executive officers at
similarly situated companies, historical performance of the Chief Executive
Officer and the terms of his Employment Agreement. For a description of the
compensatory elements of the Employment Agreement please refer to the
information under "-Employment Arrangements with Named Executive Officers"
below.

                                     143




                     COMPENSATION IN THE LAST FISCAL YEAR
                     ------------------------------------

SUMMARY COMPENSATION TABLE

The following table sets forth certain information regarding the annual and
long-term compensation for services rendered to us in all capacities for the
fiscal year ended March 31, 2007 of those persons who were (1) our principal
executive officer, (2) our principal financial officer, (3) the three most
highly compensated executive officers other than the principal executive
officer and principal financial officer who were serving as executive officers
at fiscal year end, and (4) one individual, Jerald J. Wenker, who was not
serving as an executive officer at fiscal year end (each, a "named executive
officer" and collectively, the "named executive officers").



- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Change in
                                                                                        Pension Value
                                                                                             and
                                                                         Non-Equity     Nonqualified
                                                                         Incentive        Deferred           All
    Name and                                                                Plan        Compensation        Other
   Principal       Fiscal      Salary      Bonus         Option         Compensation      Earnings       Compensation      Total
    Position        Year        ($)         ($)      Awards ($) (6)       ($) (7)          ($) (8)         ($) (9)          ($)
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
Marc S.             2007      1,281,764          -                -        2,545,857          877,000         602,652    5,307,273
Hermelin,
Chairman of the
Board and Chief
Executive
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
Gerald R.           2007        208,526     50,000           16,213                -                -          12,511      287,250
Mitchell,                                      (3)
Vice President
and Chief
Financial
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
Michael S.          2007        332,000    166,000          113,028                -                -          13,582      624,610
Anderson Vice                                  (4)
President,
Industry
Presence and
Development
- -----------------------------------------------------------------------------------------------------------------------------------
Patricia K.         2007        285,607          -           65,197           57,000                -          15,194      422,998
McCullough,
Chief Executive
Officer ETHEX
Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
David A. Van        2007        176,641     72,916           74,914                -                -           3,170      327,641
Vliet                                          (5)              (5)
Chief
Administration
Officer (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Jerald J.           2007        302,990          -          130,812                -                -          15,659      449,461
Wenker
Former
President,
Ther-Rx
Corporation (2)
- -----------------------------------------------------------------------------------------------------------------------------------

                                     144





(1)  Mr. Van Vliet joined the Company in October 2006. His salary covers the
     period October 1, 2006 through March 31, 2007.

(2)  Mr. Wenker left the Company in January 2007. In connection with his
     departure, all vested and non-vested stock options were forfeited.

(3)  Mr. Mitchell received a discretionary bonus for his individual
     performance as recommended at the end of the fiscal year by the Chairman
     and CEO and subsequently approved by the Compensation Committee.

(4)  Mr. Anderson was guaranteed a one-time bonus of $166,000 per the terms of
     his Fiscal 2007 Incentive Compensation Plan.

(5)  Mr. Van Vliet was guaranteed a bonus of $72,916 per the terms of his
     employment offer. In addition, he received a stock option grant of
     100,000 Class A shares under the terms of our 2001 Incentive Stock Option
     Plan.

(6)  Option awards represent the compensation expense recognized by us for
     financial statement reporting purposes for the fiscal year ended March
     31, 2007 in accordance with SFAS 123(R). Grant date fair value is based
     on the Black-Scholes option pricing model on the date of grant. For
     additional discussion on the valuation assumptions used in determining
     the compensation expense, see "Stock-Based Compensation" in Note 17 to
     our Consolidated Financial Statements.

(7)  Non-equity incentive plan compensation represents payment for fiscal year
     2007 under our annual cash incentive award programs. For additional
     discussion on our annual cash incentive award programs, see "Cash Earned
     Incentives and Stock Option Awards" above under the heading "Compensation
     Discussion and Analysis".

(8)  Per the terms of his Employment Agreement, Mr. Hermelin is entitled to
     receive retirement compensation paid in the form of a single life annuity
     equal to 30% of his final average compensation payable each year
     beginning at retirement and continuing for the longer of ten years or
     life. Based on this agreement, we recognized expense of $877,000 in
     accordance with APB Opinion No. 12, Omnibus Opinion, as amended by SFAS
     106, Employers' Accounting for Postretirement Benefits Other than
     Pensions, ("APB 12") based on an annual actuarial valuation of the
     liability assuming retirement at age 75.

(9)  All other compensation includes the following:



                                    Car      401(k)  Split Dollar     Group Term       Other      Total Other
                                 Allowance   Match  Life Insurance   Life Insurance Perquisites   Compensation
Name                                ($)       ($)         ($)             ($)           ($)           ($)
- -------                         ------------ ------ ---------------- -------------- ------------ --------------
                                                                                   
Marc S. Hermelin                    2,072     7,765      508,794           495         83,526        602,652
Gerald R. Mitchell                  4,147     7,602            -           762              -         12,511
Michael S. Anderson                 4,297     8,968            -           317              -         13,582
Patricia K. McCullough              8,400     6,536            -           258              -         15,194
David A. Van Vliet                      -     3,096            -            74              -          3,170
Jerald J. Wenker                   11,400     2,947            -            69          1,243         15,659


Other compensation for Mr. Hermelin includes $508,794 of premiums paid by us
under split dollar life insurance agreements with Mr. Hermelin dated July 1,
1990, November 8, 1991 and June 9, 1999. Under the terms of the agreements,
the policies are collaterally assigned to us to secure repayment of the
premiums paid by us, which are to be paid out of the cash surrender value of
the policies if the policies are terminated or canceled, or from the death
benefit proceeds if Mr. Hermelin should die while the agreements and policies
remain in force. The policies have a total death benefit of $19.5 million.
Cumulative premiums paid since the date of the agreements total $4,120,391. We
have recorded the cash surrender value of the policies as an asset, the value
of which was $3,736,494 as of March 31, 2007. During fiscal 2007, the cash
surrender value of the

                                     145




policies increased by $446,742, which when compared to the premiums paid of
$508,794 resulted in a net cost to the Company of $62,052.

Other perquisites for Mr. Hermelin include the following:

Disability Insurance - Under the terms of his employment agreement, we are
required to provide disability insurance for Mr. Hermelin equal to 60% of his
base salary. The value of the disability protection is imputed to Mr. Hermelin
currently in order for the ultimate disability benefits to be tax free. The
amount of compensation relative to this perquisite for fiscal 2007 was
$13,934.

Tax Gross-up - Represents the taxes due on the imputed value of life and
disability insurance. The amount of tax gross-up was $59,592 for fiscal 2007.

Financial Services - Under the terms of his employment agreement, Mr. Hermelin
is entitled to an annual allowance of up to $10,000 to be used for tax
preparation, estate planning and similar financial services. The amount of
compensation relative to this perquisite for fiscal 2007 was $10,000.

GRANTS OF PLAN-BASED AWARDS

The following table provides information about equity and non-equity awards
granted to named executive officers for fiscal 2007:



                                                                        All Other
                                                                          Option
                                       Estimated Possible Payouts        Awards:                Grant Date
                                             Under Non-Equity           Number of  Exercise or  Fair Value
                                         Incentive Plan Awards(1)      Securities  Base Price    of Stock
                                     --------------------------------  Underlying  of Option    and Option
                                     Threshold   Target     Maximum      Options     Awards       Awards
Name                    Grant Date      ($)       ($)         ($)          (#)       ($/Sh)       ($)(2)
- ----                    ----------   --------- ---------  ----------- ------------ ----------- ------------
                                                                            
Marc  S. Hermelin (3)         N/A        0     2,545,857          0             0           0            0

Gerald R. Mitchell (4)        N/A        0             0          0             0           0            0

Michael S. Anderson (5)       N/A        0             0          0             0           0            0

Patricia K.
  McCullough (6)              N/A        0        57,000    157,000             0           0            0

David A. Van Vliet (7)        N/A        0             0          0
                        10/5/2006                                         100,000       23.70    1,420,320

Jerald J. Wenker (8)          N/A        0             0          0
                        6/30/2006                                          10,000       18.66      113,376


(1)  We provide performance-based annual cash incentive awards to our chief
     executive officer under the terms of his employment agreement and for
     certain of our executive officers under individual fiscal 2007 Incentive
     Compensation Plans. These columns indicate the ranges of possible payouts
     targeted for fiscal 2007 performance under the applicable annual cash
     incentive award plan for each named executive officer. Actual cash
     incentive awards for fiscal year 2007 performance are set forth in the
     "Summary Compensation Table". For additional discussion on our annual
     cash incentive award programs, see "Cash Earned Incentives and Stock
     Option Awards" above under the heading "Compensation Discussion and
     Analysis".

(2)  The grant date fair value of stock option awards is based on the
     Black-Scholes option pricing model using the fair value of the underlying
     shares at the measurement date, in accordance with SFAS 123(R). For
     additional discussion on the valuation assumptions used in determining
     the grant date fair value and the accounting for stock options, see
     Share-Based Compensation in Note 17 to our consolidated financial
     statements included in the Company's Annual Report on Form 10-K for the
     fiscal year ended March 31, 2007.


                                     146




(3)  The target amount is the result of applying the bonus formula in Mr.
     Hermelin's Employment Agreement (See Employment Agreements with named
     executive officers below for a description of the formula) to the
     Company's net income for the 2007 fiscal year. There are no threshold,
     target or maximum amounts established for Mr. Hermelin's non-equity
     incentive compensation. The terms of his Employment Agreement determine
     the amount earned.

(4)  Mr. Mitchell did not receive non-equity incentive compensation but did
     receive a discretionary bonus for fiscal 2007 as described in the Summary
     Compensation Table.

(5)  Mr. Anderson did not receive non-equity incentive compensation but was
     entitled to a guaranteed bonus for fiscal year 2007 as described in the
     Summary Compensation Table.

(6)  The target amount represents the actual non-equity incentive plan pay-out
     to Ms. McCullough for fiscal 2007 under the terms of her incentive plan.
     Under the plan she has the ability to earn up to 55% of her base salary
     in incentive pay, which is shown as the maximum pay-out. There are no
     threshold or target amounts established for Ms. McCullough's non-equity
     incentive compensation.

(7)  Mr. Van Vliet did not receive non-equity incentive compensation but was
     entitled to a guaranteed bonus for fiscal year 2007 as described in the
     Summary Compensation Table. The stock option award granted to Mr. Van
     Vliet on October 5, 2006 was authorized in connection with the terms of
     his offer of employment as an executive officer of the Company. The
     option grant has a ten-year term and becomes exercisable in ten equal
     annual installments commencing October 5, 2006. Once exercised, the
     shares are subject to a two-year forfeiture period during which they are
     restricted from sale.

(8)  The stock option award granted to Mr. Wenker was authorized in connection
     with his performance during fiscal 2006. The award which was unvested was
     forfeited upon his departure from the Company in January 2007.



             EMPLOYMENT ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS
             -----------------------------------------------------

Chief Executive Officer

The Company has an employment agreement with Marc S. Hermelin, Chairman and
Chief Executive Officer, that commenced in 1996 and was extended in November
2004 through March 2010, and automatically renews for successive 12-month
periods thereafter unless terminated by Mr. Hermelin or the Company. Pursuant
to the terms of his employment agreement, Mr. Hermelin's base compensation
increases annually by the greater of the consumer price index (CPI) or 8%. Mr.
Hermelin's base salary for fiscal 2007 was $1,281,764. In addition, Mr.
Hermelin is entitled to receive an incentive bonus based on the Company's net
income for each fiscal year. The annual bonus is to be calculated on and
payable with respect to each incremental level of net income as follows: for
net income of $200,000 and below, the bonus percentage is zero; for net income
between $200,000 and $600,000, the bonus percentage is 5%; for net income
between $600,000 and $3,000,000 the bonus percentage is 7%; for net income
between $3,000,000 and $5,000,000, the bonus percentage is 6%; for net income
between $5,000,000 and $10,000,000, the bonus percentage is 5%; and for net
income in excess of $10,000,000, the bonus percentage is 4%.

The bonus is payable in one or more of the following forms: stock options,
shares of restricted stock, discounted stock options or cash, as agreed upon
by the Company and Mr. Hermelin. Mr. Hermelin is also provided a Company
vehicle and an annual allowance up to $10,000 for personal financial planning
services. Mr. Hermelin is provided the opportunity to defer up to 50% of his
base salary and up to 100% of any bonus during his employment pursuant to the
terms of a Deferred Compensation Plan effective January 1,1997. As of March
31, 2007, Mr. Hermelin has not elected to defer any compensation.

Mr. Hermelin is also insured under life insurance policies for which the
premium is to be repaid to the Company out of policy proceeds, in accordance
with split dollar agreements between the Company and Mr. Hermelin dated July
1, 1990,


                                     147




November 8, 1991 and June 9, 1999. Mr. Hermelin is entitled to participate in
the Company's group life and health insurance programs or other comparable
coverage at the Company's expense for the duration of his life.

Upon his retirement, Mr. Hermelin is entitled to receive compensation for
consulting services and consideration for complying with certain restrictive
covenants, paid in the form of a single life annuity equal to 15% of final
average base salary/bonus for each, and retirement benefits in the form of
single life annuity payments equal to 30% of final average base salary/bonus.
Such payments would be adjusted annually by the greater of CPI or 8% for the
longer of 10 years or life, and continue the longer of 10 years or life,
payable to his beneficiaries upon his death. Final average base salary/bonus
is the average of total salary/bonus paid for the three highest consecutive
years in the five-year period ending coincident with the retirement date.

Under the terms of his employment agreement, Mr. Hermelin is entitled to
benefits in the event of his termination other than voluntary termination,
retirement or termination as a result of death or disability, or if his
employment is terminated following a change in control of the Company. Please
see "Potential Payments Upon Termination or Change-in-Control" for a
description of these benefits.

Based on a recommendation from the Compensation Committee, in 2004 the Board
of Directors approved an amendment to the Chief Executive Officer's Employment
Agreement extending it to March 31, 2010. The recommendation to extend the
agreement was based on the Chief Executive Officer's performance.

In 2004, the Compensation Committee engaged Watson Wyatt, a compensation,
employee benefit and human resources consulting firm, to review the terms of
Mr. Hermelin's employment agreement to determine if his compensation package
and contract terms were fair and reasonable relative to industry standards and
comparable peer groups. Watson Wyatt concluded that the sum of the financial
components in the employment contract was competitive with the median total
direct compensation of comparable peer group companies. While Mr. Hermelin's
salary and bonus were high within the group, long-term incentives were low
resulting in total compensation below the peer group's median.

In reaching its conclusion, Watson Wyatt compared Mr. Hermelin's compensation
to a peer group of 13 companies in the pharmaceutical industry similar in size
to the Company. Mr. Hermelin's total direct compensation (base salary, bonus
and stock option grants) was between the 25th percentile and median of the
peer group. Mr. Hermelin's base salary and bonus were in the top quartile of
the peer group, whereas his long-term incentives were below the 25th
percentile of the peer group. Watson Wyatt noted that Mr. Hermelin had 31
years experience at the Company and 29 years as the Company's chief executive
officer, where the tenures of chief executives in the peer group ranged from
one to 21 years with an average of 9.7 years.

Watson Wyatt also concluded that the provisions of Mr. Hermelin's employment
contract were within the range of market practices. It pointed out that all
provisions were within the market range, such as annual salary increase, the
bonus formula, continued medical coverage and certain charitable
contributions. Although Watson Wyatt noted that terms providing for retirement
consulting arrangements and payments for non-compete covenants were not
typical in employment agreements, it pointed out that Mr. Hermelin's tenure
was significantly longer than the chief executive officers of the peer
companies.

The Compensation Committee also reviewed a Bank of America report on chief
executive officers' compensation in the specialty pharmaceutical industry. The
Bank of America report reviewed compensation practices of 21 specialty
pharmaceutical companies. Based on the report, Mr. Hermelin's then total
compensation package of $2.6 million was less than both the median and average
total compensation packages of $3.6 million and $4.5 million paid to chief
executive officers in the specialty pharmaceutical sector. The study also
provided, and the Compensation Committee considered, the mix of cash and
non-cash (such as stock options) in chief executive officers' compensation
packages, the dilutive effect of stock options granted to chief executive
officers, and stock option compensation paid to the peer group chief executive
officers.


                                     148




Other Named Executive Officers

Consistent with the Company's executive compensation program, the other named
executive officers have employment agreements (extending from year to year)
establishing base levels of compensation, subject to normal compensation
reviews and an incentive bonus based on performance.

Chief Financial Officer

The Company has an employment agreement with Gerald R. Mitchell, Vice
President and Chief Financial Officer, which was restated and amended in 1994,
and which renews for successive 12-month periods unless terminated by the
Company or Mr. Mitchell. Mr. Mitchell initially received base compensation of
$130,400 in 1994, subject to the Company's normal compensation review. Mr.
Mitchell also receives a company vehicle. Mr. Mitchell may be entitled to
stock options as provided in a separate stock option agreement.

Under the terms of his employment agreement, Mr. Mitchell was entitled to
benefits if his employment was terminated following a change in control of the
Company. Please see "Potential Payments Upon Termination or Change-in-Control"
for a description of these benefits.

The employment agreement also contains restrictive covenants preventing Mr.
Mitchell from competing against the Company or soliciting customers or
employees of the Company for a period of 36 months after the end of his
employment with the Company.

Mr. Mitchell notified the Company of his intention to retire approximately
three years ago in order to allow the Company sufficient time to identify and
hire a successor. Effective March 23, 2008, Mr. Mitchell retired from the
Company and resigned from the Company's Board of Directors.

Chief Administration Officer

The Company has an employment agreement with David A. Van Vliet, Chief
Administration Officer, that commenced on September 29, 2006, continued until
March 31, 2007, and automatically renews for successive 12-month periods
unless terminated by the Company or Mr. Van Vliet. Mr. Van Vliet received a
base salary of $350,000 during fiscal 2007. In addition, Mr. Van Vliet is also
entitled to receive an incentive bonus based on his participation in an
Incentive Plan, which gives Mr. Van Vliet the opportunity to earn up to 50% of
his base salary, based upon certain performance criteria. Mr. Van Vliet had a
guaranteed incentive of $72,916 for his first five months of employment. Mr.
Van Vliet is also provided with a company vehicle.

Mr. Van Vliet is also eligible to receive stock-based awards under the
Company's Incentive Stock Option Plan. He has received a grant of stock
options with respect to 100,000 shares of KV Class A Common Stock. Mr. Van
Vliet is also eligible to participate in the Company's Profit Sharing and
401(k) Plans.

Under the terms of his employment agreement, Mr. Van Vliet is entitled to
benefits if his employment is terminated by the Company without cause or if
his employment is terminated following a change of control of the Company.
Please see "Potential Payments Upon Termination or Change-in-Control" for a
description of these benefits.

The employment agreement also contains restrictive covenants preventing Mr.
Van Vliet from competing against the Company or soliciting customers or
employees of the Company for a period of 36 months after the end of his
employment with the Company.


                                     149




Vice President, Industry Presence and Development

The Company has an employment agreement with Michael S. Anderson, Vice
President, Industry Presence and Development, that commenced on May 23, 1994
and was subsequently amended on May 5, 1997, February 16, 2000, and February
20, 2006 and continues through March 31, 2011, and automatically renews for
successive 12-month periods until terminated by the Company or Mr. Anderson.
Mr. Anderson's base salary was $332,000 effective February 20, 2006.

Under the terms of his employment agreement, Mr. Anderson is entitled to
benefits if his employment is terminated by the Company without cause or if
his employment is terminated following a change of control of the Company.
Please see "Potential Payments Upon Termination or Change-in-Control" for a
description of these benefits.

The employment agreement also contains restrictive covenants preventing Mr.
Anderson from competing against the Company or soliciting customers or
employees of the Company for a period of 36 months after the end of his
employment with the Company.

Chief Executive Officer of ETHEX Corporation

The Company has an employment agreement with Patricia K. McCullough, Chief
Executive Officer of ETHEX Corporation, that commenced on January 30, 2006 and
continued through April 1, 2007, and automatically renews for successive
12-month periods until terminated by the Company or Ms. McCullough. Ms.
McCullough's base salary in fiscal 2007 was $285,000 effective January 30,
2006.

Under the terms of her employment agreement, Ms. McCullough is entitled to
benefits if her employment is terminated by the Company. Please see "Potential
Payments Upon Termination or Change-in-Control" for a description of these
benefits.

The employment agreement also contains restrictive covenants preventing Ms.
McCullough from competing against the Company or soliciting customers or
employees of the Company for a period of 36 months after the end of her
employment with the Company.


   The Impact of Accounting and Tax Treatments on Forms of Compensation Paid

Based on regulations issued by the Internal Revenue Service, the Company has
taken the necessary actions to ensure deductibility of performance-based
compensation paid to named executive officers. Section 162(m) of the Internal
Revenue Code generally disallows a tax deduction to public companies for
compensation exceeding $1 million paid to the Chief Executive Officer and any
one of the four other most highly compensated executive officers for any
fiscal year. Qualifying performance-based compensation is not subject to the
limitation if certain requirements are met.


                                     150




                        INFORMATION AS TO STOCK OPTIONS
                        -------------------------------

The following tables list certain information concerning option exercises and
option holdings as of the end of fiscal 2007 of options held by the named
executive officers to acquire shares of Class A Common Stock and Class B
Common Stock.


                                      Outstanding Equity Awards At Fiscal Year-End

     ------------------------------------------------------------------------------------------------------------------
                                   NUMBER OF             NUMBER
                                  SECURITIES         OF SECURITIES
                                  UNDERLYING          UNDERLYING
                                  UNEXERCISED         UNEXERCISED         OPTION           OPTION       OPTION GRANT
                                  OPTIONS (#)         OPTIONS (#)        EXERCISE        EXPIRATION       DATE FAIR
              NAME                EXERCISABLE        UNEXERCISABLE       PRICE ($)          DATE           VALUE $
     ------------------------------------------------------------------------------------------------------------------
                                                                                           
     Marc S. Hermelin            100,000                   0               25.04          5/10/2008       1,061,334



     ------------------------------------------------------------------------------------------------------------------
     Gerald R. Mitchell            2,000               8,000 (1)           19.99         11/01/2015         131,477
                                   5,530                   0                6.70          8/15/2007          28,342
                                   4,705                   0                6.81          8/15/2007          24,610

     ------------------------------------------------------------------------------------------------------------------
     Michael S. Anderson          30,000              45,000 (2)           24.12          3/31/2011         992,977
                                   2,000               3,000 (3)           23.09          5/21/2014          74,824


     ------------------------------------------------------------------------------------------------------------------
     Patricia K. McCullough       10,000              40,000 (4)           24.12          3/31/2016         737,562



     ------------------------------------------------------------------------------------------------------------------
     David A. Van Vliet           10,000              90,000 (5)           23.70         10/05/2016       1,420,320



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


(1)  Option granted on 11/01/2005 and vests ratably as to 10% per year from
     date of grant.
(2)  Option granted on 3/31/2006 and vests ratably as to 20% per year from
     date of grant.
(3)  Option granted on 5/21/2004 and vests ratably as to 10% per year from
     date of grant.
(4)  Option granted on 3/31/2006 and vests ratably as to 10% per year from
     date of grant.
(5)  Option granted on 10/05/2006 and vests ratably as to 10% per year from
     date of grant.


                                     151





                                Option Exercises and Stock Vested

        ------------------------------------------------------------------------------------
                                                        NUMBER OF              VALUE
                                                         SHARES               REALIZED
                                                       ACQUIRED ON               ON
                          NAME                          EXERCISE              EXERCISE
                                                           (#)                  (a)
        ------------------------------------------------------------------------------------
                                                                        
                    Marc S. Hermelin                     96,450               $561,050
        ------------------------------------------------------------------------------------
                  Michael S. Anderson                     3,375                 63,754
        ------------------------------------------------------------------------------------

           ---------------------
        (a) Value realized on exercise is determined based on the difference
            between the market price of the stock on the date of exercise and
            the exercise price. Shares acquired on exercise of stock options
            are subject to a two-year forfeiture period, during which time
            they cannot be sold.


                                            PENSION PLANS
                                            -------------



                                                               Present Value of                 Payments During
        Name                   Plan Name                       Accumulated Benefit              Last Fiscal Year
        ----                   ---------                       -------------------              ----------------
                                                                                        
        MARC S. HERMELIN       K-V PHARMACEUTICAL COMPANY      $6,318,529                        $0
                               NON-QUALIFIED RETIREMENT PLAN


Under the terms of his Employment Agreement, Mr. Hermelin is entitled to
receive retirement compensation paid in the form of a single life annuity
equal to 30% of his final average compensation payable each year at the
beginning of retirement and continuing for the longer of ten years or life.
Final average compensation is based on the highest compensation (including
bonuses) earned during the three consecutive years of the five year period
ending immediately prior to the retirement date. The present value of the
accumulated benefit assumes retirement at age 75, a 10% annual increase in the
Company's net income for purposes of estimating future non-equity incentive
payments, and a 6% discount rate. If Mr. Hermelin were to retire at age 65
(his age at the end of fiscal year 2007) the present value of the accumulated
benefit would increase to $14,408,000.

In addition, the Employment Agreement entitles Mr. Hermelin to consulting
compensation for up to 300 hours annually and additional compensation in
consideration for complying with certain restrictive covenants each equal to
15% of final average compensation payable in the form of a single life annuity
for the longer of ten years or life.

Retirement expense is recognized under the requirements of APB 12. Under APB
12, to the extent the terms of the contract attribute all or a portion of the
expected future benefits to a period of service greater than one year, the
cost of those benefits are accrued over that period of the employee's service
in a systematic and rational manner. The method used for this calculation
allocates expense to each year as the difference between the present value of
accrued benefits (based upon updated compensation and discount rates) at the
end of the fiscal year and the beginning of the fiscal year. The present value
of the accumulated benefit is unfunded.

There are no defined benefit arrangements for the other named executive
officers.


                                     152




Potential Payments upon Termination or Change-in-Control
- --------------------------------------------------------

Certain of the Company's named executive officers are entitled, pursuant to
employment agreements, to benefits upon termination of employment or
termination of employment after a change of control of the Company. The
following discussion provides information with respect to payments to which
named executive officers are entitled upon termination of employment or
following termination resulting from a change in control of the Company. The
dollar amounts described below assume that the triggering event for each named
executive officer occurred at March 31, 2007, the last day of the Company's
last completed fiscal year. For additional discussion regarding employment
agreements with named executive officers, including discussion of conditions
and obligations applicable to the receipt of the payments described below, see
"Employment Arrangements with Named Executive Officers" above under the
heading "Compensation Discussion and Analysis."

Under the terms of his employment agreement, Mr. Hermelin is entitled to
benefits if his employment with the Company is terminated other than as a
result of a voluntary termination, his retirement or his termination as a
result of death or disability or if his employment is terminated following a
change of control of the Company.

In the event of his termination other than voluntary termination, retirement
or termination as a result of death or disability, Mr. Hermelin is entitled to
receive an amount equal to his then base salary and 36 monthly payments equal
to 75% of his last monthly base salary. In addition, all stock options would
become immediately vested and available for exercise up to two years following
termination. Assuming that Mr. Hermelin's employment was terminated as of
March 31, 2007, the value of these benefits would be:

      Base salary                                        $1,281,764
      Undiscounted value of 36 monthly payments           2,883,969
                                                         ----------
      Total value                                        $4,165,733
                                                         ==========

In the event of a termination following a change of control of the Company,
Mr. Hermelin has the right to elect to receive either the payments described
above or a lump sum cash payment equal to 2.5 times his base salary, bonus
payments over the 30 months following termination as if he had continued in
his position, acceleration of stock options, employee benefits for 30 months
following termination and unconditional retirement compensation equal to 60%
of his final average compensation payable in the form of a single life
annuity. In addition, Mr. Hermelin is entitled to a gross-up payment for any
payments made for a termination following a change of control that would be
considered excess parachute payments under Section 280G(b) and subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code. Assuming that
Mr. Hermelin's employment was terminated as of March 31, 2007 following a
change of control, the value of these benefits to Mr. Hermelin would be
approximately $33,302,935 calculated as follows:

                                                      
            2.5x BASE SALARY                             $ 3,204,410
            BONUS (a)                                      5,830,682
            ACCELERATION OF STOCK OPTIONS (b)                      -
            RETIREMENT COMPENSATION (c)                   21,371,000
            EMPLOYEE BENEFITS (d)                            235,793
            TAX GROSS-UP FOR SECTION 280G
            PAYMENTS (e)                                   2,661,050
                                                         -----------
              TOTAL VALUE                                $33,302,935
                                                         ===========

                                     153





            (a)  Represents the total amount of estimated bonuses to be paid
                 over the 30 months following termination assuming a 10%
                 annual increase in net income for each of the fiscal years
                 2008 and 2009, which are the years included in the 30 month
                 period following the triggering event. The bonus for the
                 fiscal year ended March 31, 2007 is excluded from the table
                 as the triggering event is assumed to have occured on the
                 last day of the performance period and thus the pay out would
                 be the same as if the termination had not occurred.
            (b)  Mr. Hermelin currently has no unvested stock options.
            (c)  Represents the present value of the accumulated benefit
                 assuming Mr. Hermelin retired on March 31, 2007.
            (d)  Represents the benefits to be paid to Mr. Hermelin including
                 car allowance, 401(k) match, group term insurance,
                 disability insurance, medical benefits and financial
                 services allowance, over the 30 months following termination
                 assuming no increase in cost over the cost incurred for the
                 12 months ended March 31, 2007.
            (e)  Represents the tax reimbursement needed to provide the
                 benefit outlined in the employment agreement related to the
                 excise tax imposed by Internal Revenue Code Section 4999 with
                 respect to excess parachute payments computed under Internal
                 Revenue Code Section 280 G(b).




Under the terms of his employment agreement, Mr. Mitchell is entitled to
benefits if his employment is terminated following a change of control of the
Company. In this situation, Mr. Mitchell would receive one and one-half times
his base salary, bonus payments over the next 18 months as if he had continued
in his position, acceleration of stock options and employee benefits for 24
months. Assuming that Mr. Mitchell's employment was terminated as of March 31,
2007 following a change of control, the value of these benefits to Mr.
Mitchell would be approximately $425,383 calculated as follows:

                                                        
            1.5x BASE SALARY                               $312,789
            BONUS (a)                                        75,000
            ACCELERATION OF STOCK OPTIONS (b)                11,060
            EMPLOYEE BENEFITS (c)                            26,534
                                                           --------
              TOTAL VALUE                                  $425,383
                                                           ========

            (a)  Represents estimated bonus to be paid assuming an annual
                 bonus continuing at $50,000 prorated over 18 months.
            (b)  Represents the aggregate value of the acceleration of
                 unvested stock options based on the spread between the
                 closing price of our Class A Common Stock on March 31, 2007
                 of $24.73 and the exercise price of the option.
            (c)  Represents the benefits to be paid to Mr. Mitchell including
                 car allowance, 401(k) match, group term insurance and medical
                 benefits, over the next 24 months assuming no increase in
                 cost over the cost incurred for the 12 months ended March 31,
                 2007.



Under the terms of his employment agreement, Mr. Anderson is entitled to
benefits if his employment is terminated by the Company without cause or if
his employment is terminated following a change of control of the Company.

In the event of involuntary termination, except for cause, Mr. Anderson is
entitled to receive severance pay equal to one half of his annual salary
payable in 12 equal installments, 12 months of continued medical, disability
and term life insurance coverage and acceleration of unvested stock options to
be immediately exercisable. Assuming that Mr. Anderson's employment was
terminated as of March 31, 2007, the value of these benefits would be
approximately $200,465 calculated as follows:

                                     154




                                                                
            0.5x BASE SALARY                                       $166,000
            ACCELERATION OF STOCK OPTIONS (a)                        32,370
            EMPLOYEE BENEFITS (b)                                     2,095
                                                                   --------
              TOTAL VALUE                                          $200,465
                                                                   ========

            (a)  Represents the aggregate value of the acceleration of
                 unvested stock options based on the spread between the
                 closing price of our Class A Common Stock on March 31, 2007
                 of $24.73 and the exercise price of the option.
            (b)  Represents the benefits paid for Mr. Anderson including group
                 term insurance, disability insurance and medical benefits.



In the event of a termination following a change of control of the Company,
Mr. Anderson is entitled to receive severance pay equal to 1.5 times base
compensation plus any bonus that would be payable to him for 18 months
following termination, and continued medical benefits for 24 months. In
addition, any outstanding stock options will fully vest and remain exercisable
for 90 days following termination. Assuming that Mr. Anderson's employment was
terminated as of March 31, 2007 following a change of control, the value of
these benefits to Mr. Anderson would be approximately $691,434 calculated as
follows:

                                                                
            1.5x BASE SALARY                                       $498,000
            BONUS (a)                                               149,400
            ACCELERATION OF STOCK OPTIONS (b)                        32,370
            EMPLOYEE BENEFITS (c)                                    11,664
                                                                   --------
            TOTAL VALUE                                            $691,434
                                                                   ========

            (a)  Represent estimated bonus to be paid assuming an annual bonus
                 of 30% of his base salary prorated over 18 months.
            (b)  Represents the aggregate value of the acceleration of
                 unvested stock options based on the spread between the
                 closing price of our Class A Common Stock on March 31, 2007
                 of $24.73 and the exercise price of the option.
            (c)  Represents the benefits to be paid to Mr. Anderson including
                 group term life insurance and medical benefits over the next
                 24 months assuming no increase in cost over the cost incurred
                 for the 12 months ended March 31, 2007.



Under the terms of his employment agreement, Mr. Van Vliet is entitled to
benefits if his employment is terminated by the Company without cause or if
his employment is terminated following a change of control of the Company. In
either case, Mr. Van Vliet is entitled to receive severance pay equal to his
annual base salary in effect at the date of termination, continued benefits
over the 12 month period and acceleration of unvested stock options to become
immediately exercisable. Assuming that Mr. Van Vliet's employment was
terminated as of March 31, 2007 either by the Company without cause or
following a change of control of the Company, the value of these benefits
would be approximately $433,692 calculated as follows:

                                                                
            ANNUAL BASE SALARY                                     $350,000
            ACCELERATION OF STOCK OPTIONS (a)                        82,400
            EMPLOYEE BENEFITS (b)                                     1,292
                                                                   --------
            TOTAL VALUE                                            $433,692
                                                                   ========

            (a)  Represents the aggregate value of the acceleration of
                 unvested stock options based on the spread between the
                 closing price of our Class A Common Stock on March 31, 2007
                 of $24.73 and the exercise price of the option.

                                     155




            (b)  Represents the benefits to be paid to Mr. Van Vliet including
                 401(k) match, group term life insurance and medical benefits
                 over the next 12 months assuming no increase in cost over the
                 cost incurred for the 12 months ended March 31, 2007.



Patricia K. McCullough's employment agreement with the Company does not
contain provisions related to severance or change of control. Ms. McCullough
is entitled to 120 days' notice of termination and is entitled to receive her
normal compensation for such period, even if the Company exercises its option
to request that Ms. McCullough not work during the notice period. Except for
this situation, Ms. McCullough is only entitled to benefits upon termination
or upon a change of control of the Company that are generally available to the
Company's salaried employees.

                       COMPENSATION COMMITTEE INTERLOCKS
                          AND INSIDER PARTICIPATION;
              TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS

Since June 2004, the Compensation Committee of the Board of Directors has
deliberated and taken any required actions regarding the compensation of the
Company's executive officers and reviewed the compensation process for the
entire Company.

Victor M. Hermelin, the founder and Chairman Emeritus of the Company and
father of Marc S. Hermelin, received a salary, consulting fees, royalties and
other compensation of $133,904, $145,566, $189,699 and $8,896, respectively.

Marc S. Hermelin, the Chairman and Chief Executive Officer of the Company, is
a partner in a partnership that leases certain real property to the Company.
Lease payments made by the Company to the partnership for this property during
fiscal year 2007 totaled $295,734.

David S. Hermelin, the son of Marc S. Hermelin and grandson of Victor M.
Hermelin, is a director and is employed by the Company as Vice President,
Corporate Strategy and Operations Analysis. Pursuant to the terms of his
employment agreement with the Company, for fiscal year 2007, David S. Hermelin
received a salary, earned incentive and other compensation of $254,610,
$88,900 and $2,795, respectively, from the Company. In addition, Mr. Hermelin
exercised options during the fiscal year with a realized value of $61,478.
Realized value is based on the difference between the market price of the
stock on the date of exercise and the exercise price.

Sarah R. Weltscheff is employed by the Company as Senior Vice President, Human
Resource Management and Corporate Communications. Ms. Weltscheff and Marc S.
Hermelin are married under religious law. For fiscal 2007, Ms. Weltscheff
received a salary, earned incentive and other compensation of $293,808,
$115,000, and $8,087, respectively, from the Company. In addition, Ms.
Weltscheff exercised options during the fiscal year with a realized value of
$1,309,515. Realized value is based on the difference between the market price
of the stock on the date of exercise and the exercise price.


                                     156




COMPENSATION COMMITTEE REPORT
- -----------------------------

In fulfilling its oversight responsibilities with respect to the Compensation
Disclosure and Analysis included in this Proxy Statement the Compensation
Committee, among other things, has:


     *   reviewed and discussed the Compensation Disclosure and Analysis with
         management; and

     *   following such review, the Compensation Committee approved the
         inclusion of such Compensation Disclosure and Analysis in this proxy
         statement.


                                     Respectfully submitted,

                                     THE COMPENSATION COMMITTEE OF THE BOARD OF
                                     DIRECTORS OF K-V PHARMACEUTICAL COMPANY
                                     Jonathon E. Killmer, Chairman
                                     Norman D. Schellenger, Member


NOTWITHSTANDING ANYTHING SET FORTH IN ANY OF OUR PREVIOUS FILINGS UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN
PART, THE PRECEDING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE IN
ANY SUCH FILINGS.


                                     157




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS


                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                -----------------------------------------------

     The following table sets forth information as of January 15, 2008, with
respect to each person known by the Company to be the beneficial owner of more
than 5% of the outstanding shares of our Class A or Class B Common Stock in
addition to those holders listed under "Security Ownership of Management."



        NAME AND ADDRESS                                                  AMOUNT AND NATURE       PERCENT OF            PERCENT OF
        OF BENEFICIAL OWNER                    TITLE OF CLASS            OF BENEFICIAL OWNER        CLASS A               CLASS B
        -------------------                    --------------            -------------------        --------              -------

                                                                                                                
        Neuberger Berman, Inc. (1)             Class A
        605 Third Avenue                       Common Stock                   4,884,241               13.9%                  --%
        New York, NY  10158


        Lord, Abbett & Co. LLC (2)             Class A
        90 Hudson Street                       Common Stock                   2,659,888               7.18%                  --%
        11th Floor
        Jersey City, NJ 07302


- ----------------------------
(1)  As reflected on the Schedule 13G dated February 12, 2008, filed by
     Neuberger Berman, Inc. ("NBI"). Shares reported by NBI were reported as
     being beneficially owned by its subsidiaries, Neuberger Berman, LLC,
     Neuberger Berman Management Inc., and Neuberger Berman Equity Funds of
     which Neuberger Berman, LLC serves as sub advisor and Neuberger Berman
     Management Inc. serves as investment manager. NBI reported sole voting
     power of 255,647 Class A shares; shared voting power of 3,474,643 Class A
     shares; no sole dispositive power; and shared dispositive power of
     4,884,241 Class A shares.

(2)  As reflected on the Schedule 13G dated February 14, 2008, filed by Lord,
     Abbett & Co. LLC ("Lord Abbett"). Lord Abbett reported sole voting power
     of 2,487,176 Class A shares, no shared voting power, sole dispositive
     power of 2,659,888 Class A shares, and no shared dispositive power.



                                     158




                       SECURITY OWNERSHIP OF MANAGEMENT
                       --------------------------------

Under regulations of the Securities and Exchange Commission, persons who have
power to vote or to dispose of our shares, either alone or jointly with
others, are deemed to be beneficial owners of those shares. The following
table shows, as of January 15, 2008, the beneficial ownership of (1) each of
the executive officers named in the Summary Compensation Table, (2) each
present director and nominee for director of the Company and (3) all present
directors and executive officers as a group of all of our shares of Class A
Common Stock and Class B Common Stock. Unless otherwise noted, voting and
dispositive power relating to the shares described below is exercised solely
by the listed beneficial owner. The individuals named have furnished this
information to us.



                                               AMOUNT OF                            AMOUNT OF
                                              BENEFICIAL                            BENEFICIAL
                                              OWNERSHIP-         PERCENT OF         OWNERSHIP-         PERCENT OF
          NAME AND ADDRESS                 CLASS A STOCK (a)     CLASS A (b)    CLASS B STOCK (a)     CLASS B (b)
          ----------------                 -----------------     -----------    -----------------     -----------
                                                                                             
Shares beneficially attributed to
Marc S. Hermelin pursuant to trusts:

     Lawrence Brody and Marc S.             1,270,560 (c)             3.4%        2,077,312 (c)           17.0%
     Hermelin, Trustees
     One Metropolitan Square
     St. Louis, MO 63101

     Lawrence Brody, Arnold L.              1,212,284 (d)             3.2%        2,082,375 (d)           17.0%
     Hermelin and Marc S.
     Hermelin, Trustees
     One Metropolitan Square
     St. Louis, MO 63101

     Lawrence Brody, Marc S.                1,647,994 (e)             4.4%        2,637,085 (e)           21.6%
     Hermelin and David S.
     Hermelin, Trustees
     One Metropolitan Square
     St. Louis, MO 63101

Marc S. Hermelin, individually owned          218,677                 0.6%        1,316,613 (h)           10.8%

           Total shares attributable        4,349,515                11.6%        8,113,385               66.4%
           to Marc S. Hermelin

Shares beneficially attributed to
David S. Hermelin pursuant to a trust:

     Lawrence Brody, Marc S.                1,647,994 (e)             4.4%        2,637,085 (e)           21.6%
     Hermelin and David S.
     Hermelin, Trustees
     One Metropolitan Square
     St. Louis, MO 63101

                                     159





                                               AMOUNT OF                            AMOUNT OF
                                              BENEFICIAL                            BENEFICIAL
                                              OWNERSHIP-         PERCENT OF         OWNERSHIP-         PERCENT OF
          NAME AND ADDRESS                 CLASS A STOCK (a)     CLASS A (b)    CLASS B STOCK (a)     CLASS B (b)
          ----------------                 -----------------     -----------    -----------------     -----------
                                                                                             
David S. Hermelin, individually owned          15,375                  *             92,875                 *

Total shares attributable                   1,663,369                 4.4%        2,709,960               22.1%
           to David S. Hermelin

Gerald R. Mitchell                             58,125 (g)              *             77,625                 *

Jean M. Bellin                                  1,500                  *              9,500                 *

Norman D. Schellenger                           1,500                  *              2,000                 *

Kevin S. Carlie                                 5,300                  *             15,500                 *

Terry B. Hatfield                               1,500                  *              6,000                 *

David A. Van Vliet                             21,500                  *              6,000                 *

Jonathon E. Killmer                             1,000                 ---             2,000                 *

Patricia K. McCullough                         10,000                  *                ---                ---

Michael S. Anderson                            80,100                  *                ---                ---

Jerald J. Wenker                                  ---                 ---               ---                ---

All current directors and executive         6,193,409 (f)            16.4%       10,941,970 (f)           89.4%
officers as a group (18 individuals)


- ---------------------
*    Less than one percent

(a)  Includes the following shares that were not owned by the persons listed
     but which could be purchased from the Company under options exercisable
     currently or within 60 days after January 15, 2008.



                                                           SHARES OF CLASS A         SHARES OF CLASS B
                                                             COMMON STOCK               COMMON STOCK
                                                             ------------               ------------
                                                                                     
         Marc S. Hermelin ...................                  100,000                        ---
         David S. Hermelin...................                      ---                     40,000
         Gerald R. Mitchell..................                    3,000                        ---
         Jean M. Bellin......................                    1,500                      9,500
         Norman D. Schellenger...............                    1,500                      2,000
         Kevin S. Carlie.....................                    5,300                      2,450
         Terry B. Hatfield...................                    1,500                      6,000
         David A. Van Vliet..................                   20,000                      6,000
         Jonathon E. Killmer.................                      ---                      2,000
         Patricia K. McCullough..............                   10,000                        ---
         Michael S. Anderson.................                   32,001                        ---

                                     160





(b)  In determining the percentages of shares deemed beneficially owned by
     each director and officer listed herein, the exercise of all options held
     by each person that are currently exercisable or will become exercisable
     within 60 days of January 15, 2008, is assumed.

(c)  These shares are held in an irrevocable trust created by another party,
     the beneficiary of which is Anne S. Kirschner.

(d)  These shares are held in an irrevocable trust created by another party,
     the beneficiary of which is Arnold L. Hermelin.

(e)  These shares are held in two irrevocable trusts created by another party,
     the beneficiaries of which are Marc S. Hermelin (as to 1,112,869 shares
     of Class A Common Stock, of which 189,716 shares are held as security for
     a loan and 1,614,460 shares of Class B Common Stock) and Minnette
     Hermelin, the mother of Marc S. Hermelin (as to 535,125 shares of Class A
     Common Stock, of which 56,250 shares are held as security for a loan and
     1,022,625 shares of Class B Common Stock). Mrs. Hermelin passed away on
     December 31, 2007.

(f)  All of such shares are owned, or represented by shares purchasable as set
     forth in footnote (a). In determining the percentage of shares deemed
     beneficially owned by all directors and executive officers as a group,
     the exercise of all options held by each person which are currently
     exercisable or exercisable within 60 days of January 15, 2008, is
     assumed. For such purposes, 37,708,248 shares of Class A Common Stock and
     12,233,802 shares of Class B Common Stock are assumed to be outstanding.

(g)  These shares include 22,635 shares beneficially owned by the officer
     listed herein, but constructively owned by relatives residing in his
     home. In addition, includes 11,475 shares held as security for a loan.

(h)  Includes 464,891 shares which are held as security for a loan.


         In addition to the 37,708,248 shares of Class A Common Stock
         outstanding as of January 15, 2008, 40,000 shares of the 7% Preferred
         Stock are issued and outstanding. Each share of 7% Preferred Stock is
         convertible into Class A Common Stock at a ratio of 8.4375 shares of
         Class A Common Stock for each share of 7% Preferred Stock. Other than
         as required by law, the 7% Preferred Stock has no voting rights. If
         all shares of the 7% Preferred Stock were converted, the aggregate
         voting power thereof would be equivalent to the voting power of
         16,875 shares of Class B Common Stock.

         In addition, all holders of Class B Common Stock have the right, at
         any time, to convert their Class B Common Stock into Class A Common
         Stock on a share-for-share basis. If all shares of Preferred Stock
         and all shares of Class B Common Stock were converted into Class A
         Common Stock, 50,279,550 shares of Class A Common Stock would be
         outstanding, and each person included in the previous table would
         hold the number of shares of Class A Common Stock equal to the number
         of shares of Class B Common Stock listed in the table plus the number
         of shares of Class A Common Stock listed in the table, which includes
         options exercisable by all directors and executive officers currently
         or within 60 days after January 15, 2008.

         In addition, the Company issued $200.0 million principal amount of
         Convertible Subordinated Notes due 2033 ("the 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. At the current conversion price, the Notes are
         convertible into 8,691,880 shares of Class A Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
         -----------------------------------------------------------
         INDEPENDENCE
         ------------

                    DETERMINATION OF DIRECTOR INDEPENDENCE
                    --------------------------------------

         Under the rules of the New York Stock Exchange ("NYSE"), a director
         of the Company only qualifies as "independent" if our Board of
         Directors affirmatively determines that the director has no material
         relationship with the Company (either directly or as a partner,
         shareholder or officer of an organization that has a relationship

                                     161




         with the Company). Our Board of Directors has established guidelines
         to assist it in determining whether a director has a material
         relationship with the Company. Under these guidelines, a director is
         not considered to have a material relationship with the Company if he
         or she does not meet any of the exceptions for determining
         independence under Section 303A.02 of the NYSE Listed Company Manual.

         Our Board of Directors has determined that Messrs. Schellenger,
         Killmer, Carlie, Bellin and Hatfield are "independent" as determined
         under Section 303A.02 of the NYSE Listed Company Manual.

         Since June 2004, the Compensation Committee of the Board of Directors
         has deliberated and taken any required actions regarding the
         compensation of the Company's executive officers and reviewed the
         compensation process for the entire Company.

         Victor M. Hermelin, the founder and Chairman Emeritus of the Company
         and father of Marc S. Hermelin, received a salary, consulting fees,
         royalties and other compensation of $133,904, $145,566, $189,699 and
         $8,896, respectively.

         Marc S. Hermelin, the Chairman and Chief Executive Officer of the
         Company, is a partner in a partnership that leases certain real
         property to the Company. Lease payments made by the Company to the
         partnership for this property during fiscal year 2007 totaled
         $295,734.

         David S. Hermelin, the son of Marc S. Hermelin and grandson of Victor
         M. Hermelin, is a director and is employed by the Company as Vice
         President, Corporate Strategy and Operations Analysis. Pursuant to
         the terms of his employment agreement with the Company, for fiscal
         year 2007, David S. Hermelin received a salary, earned incentive and
         other compensation of $254,610, $88,900 and $2,795, respectively,
         from the Company. In addition, Mr. Hermelin exercised options during
         the fiscal year with a realized value of $61,478. Realized value is
         based on the difference between the market price of the stock on the
         date of exercise and the exercise price.

         Sarah R. Weltscheff is employed by the Company as Senior Vice
         President, Human Resource Management and Corporate Communications.
         Ms. Weltscheff and Marc S. Hermelin are married under religious law.
         For fiscal 2007, Ms. Weltscheff received a salary, earned incentive
         and other compensation of $293,808, $115,000, and $8,087,
         respectively, from the Company. In addition, Ms. Weltscheff exercised
         options during the fiscal year with a realized value of $1,309,515.
         Realized value is based on the difference between the market price of
         the stock on the date of exercise and the exercise price.

              PROCEDURES FOR APPROVING RELATED PARTY TRANSACTIONS
              ---------------------------------------------------

         Pursuant to the written policies and procedures adopted by the Board
         of Directors of the Company (the "Related Party Transaction
         Guidelines"), the Nominating and Corporate Governance Committee is
         responsible for reviewing, approving and ratifying all related party
         transactions. A related party transaction is any transaction in which
         the Company is a party, and in which an executive officer, director,
         nominee for director, a shareholder owning 5% or more of the
         Company's securities or any of such person's immediate family
         members, is a party or is known by the Company to have a direct or
         indirect material benefit. In cases where a member of the Nominating
         and Corporate Governance Committee is a party to the related party
         transaction, such member shall not participate in approving the
         transaction. Compensation paid to related parties or their immediate
         family members need not be approved if (1) the total compensation
         amount is less than $120,000 a year, or (2) the compensation has
         otherwise been approved by the Compensation Committee or the Board of
         Directors.

         In determining whether a related party transaction is in, or not
         opposed to, the Company's best interest, the Nominating and Corporate
         Governance Committee may consider any factors deemed relevant or
         appropriate, including (but not be limited to):


                                     162




         *  whether there are any actual or apparent conflicts of interest;

         *  the nature, size or degree of those conflicts;

         *  whether such conflicts may be mitigated;

         *  the potential benefits and detriments to the Company of such
            related party transaction;

         *  whether the nature or terms of the related party transaction are
            unusual; and

         *  whether steps have been taken to ensure fairness to the Company.

         In making its decision, the Nominating and Corporate Governance
         Committee may consider the Company's compliance officer's written
         recommendation as to issues raised under the Company's Standard of
         Business Ethics Policy. In addition, the Nominating and Corporate
         Governance Committee may seek such additional information as it deems
         necessary, including, without limitation, any other legal or expert
         advice considered appropriate. All transactions above were approved
         under the Company's related party transfer guidelines.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
         --------------------------------------

         The following table sets forth the amount of audit fees,
         audit-related fees, tax fees and all other fees billed or expected to
         be billed by KPMG LLP, the Company's current independent registered
         public accounting firm, for the fiscal years ended March 31, 2007 and
         March 31, 2006, respectively:



                                                                     MARCH 31, 2007     MARCH 31, 2006
                                                                     --------------     --------------
                                                                                   
                         Audit Fees (1)                                $1,995,000        $    600,000
                      Audit-Related Fees                                        -                   -
                                                                       ----------        ------------
                            Total Fees                                 $1,995,000        $    600,000
                                                                       ==========        ============

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

         (1)  Includes fees for professional services rendered in connection
              with the audit of our consolidated financial statements and
              internal control over financial reporting and the review of
              consolidated financial statements included in our Forms 10-Q for
              the related annual period.



         PRE-APPROVAL POLICIES AND PROCEDURES

         The Audit Committee has adopted a policy that requires advance
         approval of all audit, audit-related, tax services, and other
         services provided to the Company by the independent registered public
         accounting firm. The policy provides for pre-approval by the Audit
         Committee of specifically defined audit and non-audit services.
         Unless the specific service has been previously pre-approved with
         respect to that year, the Audit Committee must approve the permitted
         service before the independent registered public accounting firm is
         engaged to perform it. The Audit Committee has delegated to the Chair
         of the Audit Committee authority to approve permitted services
         provided that the Chair reports any decisions to the Committee at its
         next scheduled meeting. The Audit Committee approved all audit and
         non-audit services provided by the independent registered public
         accounting firm for fiscal 2007. The Audit Committee, after review
         and discussion with KPMG LLP of the Company's pre-approval policies
         and procedures, determined that the provision of these services in
         accordance with such policies and procedures was compatible with
         maintaining KPMG LLP's independence.


                                     163




                                    PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
         ---------------------------------------



(a)      1. Financial Statements:                                                         Page
                                                                                       
         The following consolidated financial statements of the Company are
         included in Part II, Item 8:

         Report of Independent Registered Public Accounting Firm........................       78

         Consolidated Balance Sheets as of March 31, 2007 and 2006 .....................       79

         Consolidated Statements of Income for the Years Ended
         March 31, 2007, 2006 and 2005..................................................    80-81

         Consolidated  Statements of Comprehensive Income for
         the Years Ended March 31, 2007, 2006 and 2005..................................       82

         Consolidated Statements of Shareholders' Equity for
         the Years Ended March 31, 2007, 2006 and 2005..................................       83

         Consolidated Statements of Cash Flows for the Years
         Ended March 31, 2007, 2006 and 2005............................................       84

         Notes to Financial Statements..................................................   85-129

         Report of Independent Registered Public Accounting Firm........................  130-131

         Controls and Procedures........................................................      132

         Management's Report on Internal Control over
         Financial Reporting............................................................  132-134

         Changes in Internal Control over Financial Reporting...........................      133

         Evaluation of Disclosure Controls and Procedures...............................      133

         Remediation Activities.........................................................      134

         Other Information..............................................................      135

         2. Financial Statement Schedules:

         Schedule II - Valuation and Qualifying Accounts................................      166

         Exhibits. See Exhibit Index on pages 167 through 172 of this Report.
         Management contracts and compensatory plans are designated on the
         Exhibit Index.

         Consent of Independent Registered Public Accounting Firm.......................      174



                                     164




                                  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
      ------------------------------               ------------------------------------------------
                                                     Chairman of the Board and
                                                     Chief Executive Officer
                                                     (Principal Executive Officer)


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


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



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the dates indicated by the following persons
on behalf of the Company and in their capacities as members of the Board of
Directors of the Company:

                                              
Date:    March 25, 2008                          By       /s/  Marc S. Hermelin
      ------------------------------               ------------------------------------------------
                                                     Marc S. Hermelin


Date:    March 25, 2008                          By       /s/  Norman D. Schellenger
      ------------------------------               ------------------------------------------------
                                                     Norman D. Schellenger


Date:    March 25, 2008                          By       /s/  Kevin S. Carlie
      ------------------------------               ------------------------------------------------
                                                     Kevin S. Carlie


Date:    March 25, 2008                          By       /s/  Jonathon E. Killmer
      ------------------------------               ------------------------------------------------
                                                     Jonathon E. Killmer


Date:    March 25, 2008                          By       /s/  Jean M. Bellin
      ------------------------------               ------------------------------------------------
                                                     Jean M. Bellin


Date:    March 25, 2008                          By       /s/  Terry B. Hatfield
      ------------------------------               ------------------------------------------------
                                                     Terry B. Hatfield


Date:    March 25, 2008                          By       /s/  David S. Hermelin
      ------------------------------               ------------------------------------------------
                                                     David S. Hermelin




                                     165





                                                   SCHEDULE II
                                        VALUATION AND QUALIFYING ACCOUNTS


                                                                   ADDITIONS
                                                BALANCE AT        CHARGED TO         AMOUNTS           BALANCE
                                                 BEGINNING         COSTS AND       CHARGED TO          AT END
                                                  OF YEAR          EXPENSES         RESERVES           OF YEAR
                                                  -------          --------         --------           -------
                                                                       (in thousands)
                                                                                       
Year Ended March 31, 2005:
Allowance for doubtful accounts............    $         402    $         235     $         176    $          461
Reserves for sales allowances (as restated)           19,458          133,751           133,067            20,142
Inventory obsolescence.....................            1,002            3,182             2,891             1,293
                                               -------------    -------------     -------------    --------------
                                               $      20,862    $     137,168     $     136,134    $       21,896
                                               =============    =============     =============    ==============

Year Ended March 31, 2006:
Allowance for doubtful accounts............    $         461    $         (49)    $          15    $          397
Reserves for sales allowances (as restated)           20,142          154,662           146,107            28,697
Inventory obsolescence.....................            1,293            4,215             3,808             1,700
                                               -------------    -------------     -------------    --------------
                                               $      21,896    $     158,828     $     149,930    $       30,794
                                               =============    =============     =============    ==============

Year Ended March 31, 2007:
Allowance for doubtful accounts............    $         397    $         320     $           1    $          716
Reserves for sales allowances..............           28,697(1)       148,822           146,238            31,281
Inventory obsolescence.....................            1,700           11,979             4,650             9,029
                                               -------------    -------------     -------------    --------------
                                               $      30,794    $     161,121     $     150,889    $       41,026
                                               =============    =============     =============    ==============


(1) As restated.


Financial statements of K-V Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included in
the financial statements are wholly-owned and are not materially indebted to
any person other than through the ordinary course of business.


                                     166




                                 EXHIBIT INDEX

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

    3(a)         The Company's Certificate of Incorporation, which was filed
                 as Exhibit 3(a) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 1981, is incorporated herein by
                 this reference.

    3(b)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective March 7, 1983, which was filed as
                 Exhibit 3(c) to the Company's Annual Report on Form 10-K for
                 the year ended March 31, 1983, is incorporated herein by
                 this reference.

    3(c)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective June 9, 1987, which was filed as
                 Exhibit 3(d) to the Company's Annual Report on Form 10-K for
                 the year ended March 31, 1988, is incorporated herein by
                 this reference.

    3(d)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective September 24, 1987, which was filed
                 as Exhibit 3(f) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 1988, is incorporated herein by
                 this reference.

    3(e)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective July 17, 1986, which was filed as
                 Exhibit 3(e) to the Company's Annual Report on Form 10-K for
                 the year ended March 31, 1996, is incorporated herein by
                 this reference.

    3(f)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective December 23, 1991, which was filed as
                 Exhibit 3(f) to the Company's Annual Report on Form 10-K for
                 the year ended March 31, 1996, is incorporated herein by
                 this reference.

    3(g)         Certificate of Amendment to Certificate of Incorporation of
                 the Company, effective September 3, 1998, which was filed as
                 Exhibit 4(g) to the Company's Registration Statement on Form
                 S-3 (Registration Statement No. 333-87402), filed May 1,
                 2002, is incorporated herein by this reference.

    3(h)         Bylaws of the Company, as amended through November 18, 1982,
                 which was filed as Exhibit 3(e) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 1993, is
                 incorporated herein by this reference.

    3(i)         Amendment to Bylaws of the Company, effective July 2, 1984,
                 which was filed as Exhibit 4(i) to the Company's
                 Registration Statement on Form S-3 (Registration Statement
                 No. 333-87402), filed May 1, 2002, is incorporated herein by
                 this reference.

    3(j)         Amendment to Bylaws of the Company, effective December 4,
                 1986, which was filed as Exhibit 4(j) to the Company's
                 Registration Statement on Form S-3 (Registration Statement
                 No. 333-87402), filed May 1, 2002, is incorporated herein by
                 this reference.

    3(k)         Amendment to Bylaws of the Company, effective March 17,
                 1992, which was filed as Exhibit 4(k) to the Company's
                 Registration Statement on Form S-3 (Registration Statement
                 No. 333-87402), filed May 1, 2002, is incorporated herein by
                 this reference.

    3(l)         Amendment to Bylaws of the Company, effective November 18,
                 1992, which was filed as Exhibit 4(l) to the Company's
                 Registration Statement on Form S-3 (Registration Statement
                 No. 333-87402), filed May 1, 2002, is incorporated herein by
                 this reference.

                                     167




    3(m)         Amendment to Bylaws of the Company, effective December 30,
                 1993, which was filed as Exhibit 3(h) to the Company's
                 Annual Report on Form 10-K for the year ended March 31,
                 1996, is incorporated herein by this reference.

    3(n)         Amendment to Bylaws of the Company, effective September 24,
                 2002, which was filed as Exhibit 4(n) to the Company's
                 Registration Statement on Form S-3 (Registration Statement
                 No. 333-106294), filed June 19, 2003, is incorporated herein
                 by this reference.

    3(o)         Amendment to Bylaws of the Company, effective June 28, 2004,
                 which was filed as Exhibit 3(o) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 2006, is
                 incorporated herein by this reference.

    3(p)         Amendment to Bylaws of the Company, effective June 28, 2004,
                 which was filed as Exhibit 3(p) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 2006, is
                 incorporated herein by this reference.

    3(q)         Amendment to Bylaws of the Company, effective November 30,
                 2007, which was filed as Exhibit 99 to the Company's Current
                 Report on Form 8-K, filed December 31, 2007, is incorporated
                 herein by this reference.

    4(a)         Certificate of Designation of Rights and Preferences of 7%
                 Cumulative Convertible preferred stock of the Company,
                 effective June 9, 1987, and related Certificate of
                 Correction, dated June 17, 1987, which was filed as Exhibit
                 4(f) to the Company's Annual Report on Form 10-K for the
                 year ended March 31, 1987, is incorporated herein by this
                 reference.

    4(b)         Indenture dated as of May 16, 2003, by and between the
                 Company and Deutsche Bank Trust Company Americas, filed on
                 May 21, 2003, as Exhibit 4.1 to the Company's Current Report
                 on Form 8-K, is incorporated herein by this reference.

    4(c)         Registration Rights Agreement dated as of May 16, 2003, by
                 and between the Company and Deutsche Bank Securities, Inc.,
                 as representative of the several Purchasers, filed on May
                 21, 2003 as Exhibit 4.2 to the Company's Current Report on
                 Form 8-K, is incorporated herein by this reference.

    4(d)         Amended and Restated Loan Agreement, dated December 31, 2004
                 between the Company and its subsidiaries, LaSalle National
                 Bank Association and Citibank, F.S.B., filed on January 18,
                 2005, as Exhibit 10.2 to the Company's Current Report on
                 Form 8-K, is incorporated herein by this reference.

    4(e)         Promissory Note, dated March 23, 2006 between MECW, LLC and
                 LaSalle National Bank Association, filed on March 29, 2006,
                 as Exhibit 99 to the Company's Current Report on Form 8-K,
                 is incorporated herein by this reference.

    4(f)         Second Amendment to Amended and Restated Loan Agreement,
                 dated March 20, 2006 between the Company and its
                 subsidiaries, LaSalle National Bank Association and
                 Citibank, F.S.B., which was filed as Exhibit 4(f) to the
                 Company's Annual Report on Form 10-K for the year ended March
                 31, 2006, is incorporated herein by this reference.

    4(g)         Credit Agreement, dated as of June 9, 2006, among the
                 Company and its subsidiaries, LaSalle Bank National
                 Association, Citibank, F.S.B. and the other lenders thereto,
                 which was filed as Exhibit 4(g) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 2006, is
                 incorporated herein by this reference.

                                     168




    10(a)*       Restated and Amended Employment Agreement between the
                 Company and Gerald R. Mitchell, Vice President, Finance,
                 dated as of March 31, 1994, is incorporated herein by this
                 reference.

    10(b)*       Employment Agreement between the Company and Raymond F.
                 Chiostri, Corporate Vice-President and
                 President-Pharmaceutical Division, which was filed as
                 Exhibit 10(l) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 1992, is incorporated herein by
                 this reference.

    10(c)        Lease of the Company's facility at 2503 South Hanley Road,
                 St. Louis, Missouri, and amendment thereto, between the
                 Company as Lessee and Marc S. Hermelin as Lessor, which was
                 filed as Exhibit 10(n) to the Company's Annual Report on
                 Form 10-K for the year ended March 31, 1983, is incorporated
                 herein by this reference.

    10(d)        Amendment to the Lease for the facility located at 2503
                 South Hanley Road, St. Louis, Missouri, between the Company
                 as Lessee and Marc S. Hermelin as Lessor, which was filed as
                 Exhibit 10(p) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 1992, is incorporated herein by
                 this reference.

    10(e)*       KV Pharmaceutical Company Fourth Restated Profit Sharing
                 Plan and Trust Agreement dated September 18, 1990, which was
                 filed as Exhibit 4.1 to the Company's Registration Statement
                 on Form S-8 No. 33-36400, is incorporated herein by this
                 reference.

    10(f)*       First Amendment to the KV Pharmaceutical Company Fourth
                 Restated Profit Sharing Plan and Trust dated September 18,
                 1990, is incorporated herein by this reference.

    10(g)*       Fourth Amendment to and Restatement, dated as of January 2,
                 1997, of the KV Pharmaceutical Company 1991 Incentive Stock
                 Option Plan, which was filed as Exhibit 10(y) to the
                 Company's Annual Report on Form 10-K for the year ended
                 March 31, 1997, is incorporated herein by this reference.

    10(h)*       Agreement between the Company and Marc S. Hermelin, dated
                 December 16, 1996, with supplemental letter attached, which
                 was filed as Exhibit 10(z) to the Company's Annual Report on
                 Form 10-K for the year ended March 31, 1997, is incorporated
                 herein by this reference.

    10(i)        Amendment to Lease dated February 17, 1997, for the facility
                 located at 2503 South Hanley Road, St. Louis, Missouri,
                 between the Company as Lessee and Marc S. Hermelin as
                 Lessor, which was filed as Exhibit 10(aa) to the Company's
                 Annual Report on Form 10-K for the year ended March 31,
                 1997, is incorporated herein by this reference.

    10(j)*       Amendment, dated as of October 30, 1998, to Employment
                 Agreement between the Company and Marc S. Hermelin, which
                 was filed as Exhibit 10(ee) to the Company's Annual Report
                 on Form 10-K for the year ended March 31, 1999, is
                 incorporated herein by this reference.

    10(k)        Exclusive License Agreement, dated as of April 1, 1999
                 between Victor M. Hermelin as licenser and the Company as
                 licensee, which was filed as Exhibit 10(ff) to the Company's
                 Annual Report on Form 10-K for the year ended March 31, 1999
                 is incorporated herein by this reference.

    10(l)*       Amendment, dated December 2, 1999, to Employment Agreement
                 between the Company and Marc S. Hermelin, which was filed as
                 Exhibit 10(ii) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 2000, is incorporated by this
                 reference.


                                     169




    10(n)*       Consulting Agreement, dated as of May 1, 1999, between the
                 Company and Victor M. Hermelin, Chairman, which was filed as
                 Exhibit 10(kk) to the Company's Annual Report on Form 10-K
                 for the year ended March 31, 2000, is incorporated by this
                 reference.

    10(o)*       Stock Option Agreement dated as of April 9, 2001, granting a
                 stock option to Kevin S. Carlie, which was filed as Exhibit
                 10(ii) to the Company's Annual Report on Form 10-K for the
                 year ended March 31, 2002, is incorporated herein by this
                 reference.

    10(p)*       Stock Option Agreement dated as of July 26, 2002, granting a
                 stock option to Marc S. Hermelin, which was filed as Exhibit
                 10(rr) to the Company's Annual Report on Form 10-K for the
                 year ended March 31, 2003, is incorporated herein by this
                 reference.

    10(q)        Stock Option Agreement dated as of May 30, 2003, granting a
                 stock option to Marc S. Hermelin, which was filed as Exhibit
                 10(yy) to the Company's Annual Report on Form 10-K for the
                 year ended March 31, 2004, is incorporated herein by this
                 reference.

    10(r)*       Amendment, dated November 5, 2004, to Employment Agreement
                 between the Company and Marc S. Hermelin, which was filed as
                 Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
                 for the quarter ended September 30, 2004, is incorporated
                 herein by this reference.

    10(s)*       K-V Pharmaceutical 2001 Incentive Stock Option Plan, which
                 was filed as Exhibit 10.1 to the Company's Current Report on
                 Form 8-K filed November 22, 2005, is incorporated by this
                 reference.

    10(t)*       Form of 2001 Incentive Stock Option Plan Award Agreement for
                 Employees, which was filed as Exhibit 10.2 to the Company's
                 Current Report on Form 8-K filed November 22, 2005, is
                 incorporated by this reference.

    10(u)*       Form of 2001 Incentive Stock Option Plan Award Agreement for
                 Directors, which was filed as Exhibit 10.3 to the Company's
                 Current Report on Form 8-K filed November 22, 2005, is
                 incorporated by this reference.

    10(v)*       Employment Agreement between ETHEX and Patricia McCullough,
                 Chief Executive Officer of ETHEX, dated January 30, 2006,
                 which was filed as Exhibit 10(aa) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 2006, is
                 incorporated herein by this reference.

    10(w)*       Employment Agreement between the Company and Michael S.
                 Anderson, Corporate Vice President, Industry Presence and
                 Development, dated May 23, 1994, and amendments thereto,
                 which was filed as Exhibit 10(bb) to the Company's Annual
                 Report on Form 10-K for the year ended March 31, 2006, is
                 incorporated herein by this reference.

    10(x)*       Employment Agreement between the Company and Ronald J.
                 Kanterman, Vice President, Treasurer dated January 26, 2004,
                 filed herewith.

    10(y)*       Employment Agreement between the Company and Gregory S.
                 Bentley, Senior Vice President and General Counsel, dated
                 April 24, 2006, filed herewith.

    10(z)*       Employment Agreement between the Company and David A. Van
                 Vliet, Chief Administration Officer, dated September 29,
                 2006, filed herewith.

    10(aa)*      Employment Agreement between the Company and Rita E. Bleser,
                 President, Pharmaceutical Division, dated April 30, 2007,
                 filed herewith.


                                     170




    10(bb)*      Employment Agreement between Ther-Rx and Gregory J. Divis,
                 Jr., President, Ther-Rx Corporation, dated July 20, 2007,
                 filed herewith.

    10(cc)*      Employment Agreement by and between the Company and Richard
                 H. Chibnall, Vice President, Finance and Chief Accounting
                 Officer, dated December 22, 1995, as amended by amendment
                 dated April 1, 2005, filed herewith.

    10(dd)*      Employment Agreement by and between Particle Dynamics, Inc.
                 and Paul T. Brady, President, Particle Dynamics, Inc., dated
                 May 5, 2005, filed herewith.

    10(ee)*      Employment Agreement between the Company and David S.
                 Hermelin, Vice President, Corporate Strategy and Operations
                 Analysis, dated May 2, 1990, Employment Agreement between the
                 Company and David S. Hermelin, dated November 18, 1996,
                 Amendment, dated April 8, 1998 and Amendment dated August 16,
                 2004, filed herewith.


                                     171




    21           List of Subsidiaries, filed herewith.

    23.1         Consent of KPMG LLP, filed herewith.

    31.1         Certification of Chief Executive Officer pursuant to Rule
                 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002, is filed herewith.

    31.2         Certification of Chief Financial Officer pursuant to Rule
                 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002, is filed herewith.

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

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



*Management contract or compensation plan.


                                     172




                                   APPENDIX

Page 43 of the printed Form 10-K contains a Comparison of 5 Year Cumulative
Total Return graph. The information contained in the graph is depicted in
the table immediately following the graph.

EX-10.(X)

                                                                  Exhibit 10(x)

               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

         This Agreement ("Agreement") is entered into on January 26, 2004
                                                         ----------------
between Ronald J. Kanterman ("Employee") and KV PHARMACEUTICAL COMPANY ("KV"),
        -------------------
a Delaware corporation ("Employer").

         In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

         1. AFFILIATES. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement along with KV as the "Companies"). From time to
time, Employer and the Companies may exchange or use facilities, technology
and/or Confidential Information (as that term is defined in Paragraph 6 below)
of the other. The covenants in this Agreement are for the benefit and
protection of the Employer and the Companies.

         2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in
the position of Vice President, Treasurer. Employee acknowledges and agrees
                -------------------------
that his/her job title and/or responsibilities may change from time to time.
Employee further agrees that, at all times, (s)he shall devote his/her full
time and best efforts to performing all duties reasonably assigned by
Employer.

         3. COMPENSATION. As compensation for Employee's services to Employer,
Employee will receive a base salary at the rate of Two Hundred Fifty Thousand
                                                   --------------------------
Dollars per year ($250,000.00), payable at such intervals as Employer pays its
- -------           -----------
other employees at comparable employment levels. Employee will be entitled to
participate in the fringe benefits normally provided to other employees at
comparable employment levels. Employee's compensation will be subject to
Employer's normal compensation review.

         4. TERM. The initial term of this Agreement shall begin on January
                                                                    -------
26, 2004, and continue until March 31, 2004, unless terminated sooner in
- --------                     --------------
accordance with this Agreement. If not terminated sooner, this Agreement will
automatically renew for successive one (1) year periods unless and until
either party terminates this Agreement. Termination of this Agreement by
either party, for any reason, will in no manner affect the covenants contained
in Sections 6-11 of this Agreement.

         5. TERMINATION.

            A. Employee may terminate this Agreement, for any reason,
with one hundred twenty (120) calendar days' advance written notice. Employer
     ------------------------
may elect to have the Employee cease work at any time during the notice period
for any reason, including without limitation, the reasons set forth in
Paragraph 5C below. In such event, Employer's obligation to provide Employee
with compensation and benefits will end when Employee ceases to work
Employer's exercise of this option will not be construed as a termination by
Employer.

            B. Employer may terminate this Agreement for any reason by
giving the Employee thirty (30) calendar days' advance written notice.
                    -----------
Employer may, in its sole discretion, either permit Employee to work during
the notice period, or pay Employee in lieu of having Employee continue to
work. If Employer exercises this right and option, it shall pay Employee, on
Employer's regularly scheduled paydays and in accordance with Employer's
regular pay practices, either: (A) Employee's regular weekly compensation for
the notice period or (B) one-half (1/2) of Employee's regular weekly
compensation for a period of twice the notice period. Employer reserves the
right to cease the payment(s) described above if, in Employer's reasonable
determination, Employee breaches this Agreement during the period of such
payments. If Employer elects to pay Employee in lieu of Employee continuing to
work, Employer will pay






Employee's regular wages for the notice period, less whatever compensation
Employee receives from other full-time employment during the notice period.
Notwithstanding the foregoing, Employer may terminate this Agreement without
prior written notice to Employee or any continuing compensation obligations
if, in Employer's reasonable determination, Employee has breached this
Agreement or Employee has engaged in dishonesty, disloyalty, failure to
perform his/her duties to Employer or any act which may be harmful to the
reputation of Employer and/or the Companies.

            C. Employee agrees to faithfully, diligently, and to the best of
her/his ability, experience and talents, perform all of the duties required
prior to notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

         6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or suppliers (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

         7. PUBLICATION. It is expressly agreed between Employee and the
Companies that Employee will hold in confidence and not make use of any
Confidential Information at any time except as required in the course and
performance of the Employee's employment with Employer or as otherwise agreed
to in writing by the Corporate Communications Officer of Employer. Employee
agrees not to publish or cause or permit to be published or otherwise disclose
any article, oral presentation or material related to Employer and/or the
Companies, including without limitation the Employer's and/or the Companies'
Confidential Information and information related to any products or proposed
products, without obtaining the prior written consent of the Corporate
Communications Officer.

         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to Employer and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities. Employee agrees to promptly provide
Employer with a copy of any and all agreements listed below, and other
agreements which may prohibit or restrict his/her employment with Employer.
Employee further agrees not to disclose to Employer or the Companies, or to
seek to induce Employer or the Companies to use any confidential information,
material or trade secrets belonging to any other person or entity.

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

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

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

         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements,


                                    - 2 -




specifications, technical data, reports, business plans and other embodiments
of Employee's work conceived, made, discovered and/or produced by Employee
during the period of his/her employment by Employer, either solely or jointly
with others and in the course of performing his/her duties for Employer, which
are based, in whole or part, upon Confidential Information, the resources,
supplies, facilities or business, technical or financial information of
Employer and/or the Companies, or which relate to the business, the research
or the anticipated research and development of Employer and/or the Companies
(collectively referred to herein as "Work Product"), will be the sole property
of Employer and available to Employer at all times. Employee agrees to
promptly disclose and assign and hereby assigns to Employer, without royalty
or other additional consideration, any and all of Employee's proprietary
rights to any and all Work Product. Employee further agrees that during
his/her employment by Employer and after that employment ends, regardless of
how, when and why, (s)he will, upon Employer's request: (A) execute any and
all applications for copyright and/or patent of Work Product which may be
prepared for his/her signature, (B) assign to Employer and/or the Companies
any and all such applications, copyrights and patents relating to Work
Product, and (C) assist Employer and/or the Companies, as Employer and/or the
Companies deem necessary, in its application, defense and enforcement of any
copyright or patent relating to Work Product. Employer will pay all expenses
of preparing, filing, prosecuting and defending any such application and of
obtaining such copyrights and patents. In the event Employer does not employ
Employee at the time any request for such assistance is made by Employer,
Employer will pay Employee a reasonable amount for Employee's time and will
schedule any needed assistance so as not to interfere with Employee's then
current employment and obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with Employer, regardless of how, when and why that employment ends, Employee
will immediately deliver to Employer all property of Employer and all property
of the Companies, including, without limitation, all Company equipment,
records, documents and computer disks (including all copies). If Employee
fails to return to Employer all property of Employer and the Companies,
Employee authorizes Employer to deduct from his/her final paycheck such amount
to cover the loss, to the extent permitted by applicable law. Nothing
contained herein shall limit Employer's right to recover the full value of
such property from Employee in any proceeding.

         11. RESTRICTIVE COVENANTS.

             A. The parties agree that at the time this Agreement was
entered, the business of Employer was the development, manufacture, licensing
and sale of pharmaceutical products using drug delivery technologies
(hereafter "the business of Employer"). Employee agrees that during the
thirty-six (36) consecutive months immediately following termination of
Employee's employment with Employer, regardless of how, when or why that
employment ends, Employee will not in any manner or in any capacity, directly
or indirectly, for himself/herself or any other person or entity, actually or
attempt to do any of the following:

             (1) Perform any of the same or similar responsibilities as
         Employee performed for Employer on behalf of a competitor that
         engages in the business of Employer.

             (2) Solicit, contact, divert, interfere with or take away
         any customer of Employer and/or the Companies that has conducted
         business or negotiations with Employer or the Companies during the
         twenty-four (24) months immediately preceding termination of
         employment.

             (3) Interfere with any of the suppliers of Employer and/or
         the Companies, including, without limitation, reducing in any
         material way the willingness or capability of


                                    - 3 -




         any supplier to continue supplying Employer and/or the Companies with
         their present or contemplated requirements.

             (4) Solicit or interfere with the Employer's and/or the
         Companies' relationship with any of their employees or agents, or
         provide the names of any of Employer's and/or the Companies'
         employees or agents, to any third party.

             (5) Acquire any interest in any business that markets or
         sells any product or product line that is competitive with any
         product or product line Employer sold during the twenty-four (24)
         months immediately preceding termination of employment, except as
         permitted in Section 12 below.

             B. Employee further agrees that (s)he will not engage in any of
the activities listed above while employed by Employer.

             C. Employee acknowledges and agrees that his/her experience,
knowledge and capabilities are such that (s)he can obtain employment in
unrelated pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

             D. Employee agrees to fully disclose the terms of this Agreement
to any person or entity by which or with whom (s)he may hereafter become
employed or to which (s)he may hereafter render services, and agrees that
Employer may, if desired, send a copy of this Agreement, or otherwise make the
provisions hereof known, to any such entity.

             E. In the event of a breach by Employee of any of the terms of
Section 11, the period of time the obligations hereunder apply will be
automatically extended for a period of time equal to the length of time
Employee is in breach.

         12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the
right of Employee, as an investor, to hold or acquire the stock or other
investment securities of any business entity that is registered on a national
securities exchange or regularly traded on a generally recognized
over-the-counter market, so long as Employee's interest in any such business
entity does not exceed five percent (5%) of its ownership.

         13. MATERIAL BREACH. Any breach of this Agreement by the Employee
will be a material breach.

         14. EMPLOYEE CONSENT. In order to preserve their rights under this
Agreement, Employer and/or the Companies may advise any third party with whom
Employee may consider, establish or contract an employment, consulting or
service relationship of the existence of this Agreement and of its terms.
Employee agrees that Employer and the Companies will have no liability for so
acting.

         15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the


                                    - 4 -




State of Missouri, without regard to conflicts of laws principles. The parties
agree that any controversy arising with respect to this Agreement will fall
under the exclusive jurisdiction of the Circuit Court of the County of St.
Louis, Missouri, and each party hereby consents to the jurisdiction and venue
of that court.

         16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable injury
to Employer and/or the Companies. Employee further agrees that if Employee
were to violate the covenants in Section 1.1 of this Agreement, the
unauthorized disclosure of Confidential Information would be inevitable and
result in great damage and irreparable harm. Employee agrees that in the event
of a breach of this Agreement, the, Employer and/or the Companies have the
right to seek any and all legal and/or equitable remedies available for any
breach of this Agreement, including, but not limited to, enforcement by
injunction including ex. parte temporary restraining order relief, in view of
such irreparable harm. Employee agrees that enforcement by way of Injunction
would not prevent Employee from making a living as described in Paragraph 11C.
Employer is entitled to its attorneys' fees, costs, and any related expenses
incurred in the enforcement of this Agreement in the event of any breach by
Employee.

         17. SEVERABILITY. In the event any provision in this Agreement is
deemed unenforceable, in whole or in part, it will not invalidate either the
balance of the provisions or the remaining provisions of this Agreement. In
addition, the parties have attempted to limit Employee's right to compete only
to the extent necessary to protect Employer from unfair competition.
Consequently, the parties further agree that if any restrictive covenant in
this Agreement is deemed unenforceable, in whole or in part, because overly
broad in geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
will be binding upon Employee and Employee's heirs, executors and legal
and/or personal representatives. This Agreement is assignable by Employer, and
will inure to the benefit, of Employer, its successors and assigns. If
Employee subsequently accepts' employment with one of the Companies, this
Agreement will be automatically assigned, to the employing Company without
additional covenant or notice to Employee. In the event of this or any other
assignment, sale, merger, or other change in the ownership or structure of
Employer, the resulting entity will step into the place of the Employer under
this Agreement without additional covenant or notice to Employee. If the
Agreement is assigned, the term "Employer" will mean the then-employing
Company and the term "Companies" will mean the then-employing Company's
parents, subsidiaries and affiliates.

         19. NONWAIVER. Failure of Employer and/or the Companies to exercise
any of its/their rights in the event Employee breaches any of the promises in
this Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

         20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands
his/her right to discuss all aspects of this Agreement with the legal or
personal advisors of his/her choice, and warrants that, to the extent (s)he
desired, (s)he has done so, (s)he has carefully read and fully understands all
of the provisions of this Agreement, and (s)he has voluntarily entered into
this Agreement.

                                    - 5 -




         IN WITNESS WHEREOF, Employee and Employer have executed this
Agreement on the day and year first written above.

EMPLOYEE                               EMPLOYER


 /S/ Ronald J. Kanterman               By:    /S/ Gerald R. Mitchell
- --------------------------                   -------------------------
                                       Title: V-P, Treasurer and CFO
                                             -------------------------

                                    - 6 -

EX-10.(Y)

                                                                  Exhibit 10(y)

               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

         This Agreement ("Agreement") is entered into on April 24, 2006
                                                         --------------
between Greg Bentley ("Employee") and KV PHARMACEUTICAL COMPANY ("KV"), a
        ------------
Delaware corporation ("Employer").

         In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

         1. AFFILIATES. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement along with KV as the "Companies"). From time to
time, Employer and the Companies may exchange or use facilities, technology
and/or Confidential Information (as that term is defined in Paragraph 6 below)
of the other. The covenants in this Agreement are for the benefit and
protection of the Employer and the Companies.

         2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in
the position of Senior Vice President and General Counsel. Employee
                -----------------------------------------
acknowledges and agrees that his/her job title and/or responsibilities may
change from time to time. Employee further agrees that, at all times, (s)he
shall devote his/her full time and best efforts to performing all duties
reasonably assigned by Employer.

         3. COMPENSATION. As compensation for Employee's services to Employer,
Employee will receive a base salary at the rate of Three Hundred Thousand
                                                   ----------------------
Dollars per year ($300,000.00), payable at such intervals as Employer pays its
- -------           -----------
other employees at comparable employment levels. Employee will be entitled to
participate in the fringe benefits normally provided to other employees at
comparable employment levels. Employee's compensation will be subject to
Employer's normal compensation review.

         4. TERM. The initial term of this Agreement shall begin on April 24,
                                                                    --------
2006, and continue until March 31, 2007, unless terminated sooner in
- ----                     --------------
accordance with this Agreement. If not terminated sooner, this Agreement will
automatically renew for successive one (1) year periods unless and until
either party terminates this Agreement. Termination of this Agreement by
either party, for any reason, will in no manner affect the covenants contained
in Sections 6-11 of this Agreement.

         5. TERMINATION.

             A. Employee may terminate this Agreement, for any reason, with
one hundred-twenty (120) calendar days' advance written notice. Employer may
- ------------------------
elect to have the Employee cease work at any time during the notice period for
any reason, including without limitation, the reasons set forth in Paragraph
5C below. In such event, Employer's obligation to provide Employee with
compensation and benefits will end when Employee ceases to work. Employer's
exercise of this option will not be construed as a termination by Employer.

             B. Employer may terminate this Agreement for any reason by giving
the Employee one hundred twenty (120) calendar days' advance written notice.
             ------------------------
Employer may, in its sole, either permit Employee to work during the notice
period, or pay Employee in lieu of having Employee continue to work. If
Employer exercises this right and option, it shall pay Employee, on Employer's
regularly scheduled paydays and in accordance with Employer's regular pay
practices, either: (A) Employee's regular weekly compensation for the notice
period or (B) one-half (1/2) of Employee's regular weekly compensation for a
period of twice the notice period. Employer reserves the right to cease the
payment(s) described above if, in Employer's reasonable determination,
Employee breaches this Agreement during the period of such payments. If
Employer elects to pay Employee in lieu of Employee continuing to work,
Employer will pay Employee's regular wages for the notice period, less
whatever compensation Employee receives from other full-time employment
during the





notice period. Notwithstanding the foregoing, Employer may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in Employer's reasonable determination, Employee
has breached this Agreement or Employee has engaged in dishonesty, disloyalty,
failure to perform his/her duties to Employer or any act which may be harmful
to the reputation of Employer and/or the Companies.

            C. Employee agrees to faithfully, diligently, and to the best of
her/his ability, experience and talents, perform all of the duties required
prior to notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

         6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or suppliers (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

         7. PUBLICATION. It is expressly agreed between Employee and the
Companies that Employee will hold in confidence and not make use of any
Confidential Information at any time except as required in the course and
performance of the Employee's employment with Employer or as otherwise agreed
to in writing by the Corporate Communications Officer of Employer. Employee
agrees not to publish or cause or permit to be published or otherwise disclose
any article, oral presentation or material related to Employer and/or the
Companies, including without limitation the Employer's and/or the Companies'
Confidential Information and information related to any products or proposed
products, without obtaining the prior written consent of the Corporate
Communications Officer.

         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to Employer and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities. Employee agrees to promptly provide
Employer with a copy of any and all agreements listed below, and other
agreements which may prohibit or restrict his/her employment with Employer.
Employee further agrees not to disclose to Employer or the Companies, or to
seek to induce Employer or the Companies to use any confidential information,
material or trade secrets belonging to any other person or entity.

         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his/her employment by
Employer, either solely or jointly with others and in the course of performing
his/her duties for Employer, which are based, in whole or part, upon
Confidential Information, the resources, supplies, facilities or business,
technical or financial information of Employer and/or the Companies, or which
relate to the business, the research or the


                                    - 2 -




anticipated research and development of Employer and/or the Companies
(collectively referred to herein as "Work Product"), will be the sole property
of Employer and available to Employer at all times. Employee agrees to
promptly disclose and assign and hereby assigns to Employer, without royalty
or other additional consideration, any and all of Employee's proprietary
rights to any and all Work Product. Employee further agrees that during
his/her employment by Employer and after that employment ends, regardless of
how, when and why, (s)he will, upon Employer's request: (A) execute any and
all applications for copyright and/or patent of Work Product which may be
prepared for his/her signature, (B) assign to Employer and/or the Companies
any and all such applications, copyrights and patents relating to Work
Product, and (C) assist Employer and/or the Companies, as Employer and/or the
Companies deem necessary, in its application, defense and enforcement of any
copyright or patent relating to Work Product. Employer will pay all expenses
of preparing, filing, prosecuting and defending any such application and of
obtaining such copyrights and patents. In the event Employer does not employ
Employee at the time any request for such assistance is made by Employer,
Employer will pay Employee a reasonable amount for Employee's time and will
schedule any needed assistance so as not to interfere with Employee's then
current employment and obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with Employer, regardless of how, when and why that employment ends, Employee
will immediately deliver to Employer all property of Employer and all property
of the Companies, including, without limitation, all Company equipment,
records, documents and computer disks (including all copies). If Employee
fails to return to Employer all property of Employer and the Companies,
Employee authorizes Employer to deduct from his/her final paycheck such amount
to cover the loss, to the extent permitted by applicable law. Nothing
contained herein shall limit Employer's right to recover the full value of
such property from Employee in any proceeding.

         11. RESTRICTIVE COVENANTS.

             A. The parties agree that at the time this Agreement was entered,
the business of Employer was the development, manufacture, licensing and sale
of pharmaceutical products using drug delivery technologies (hereafter "the
business of Employer"). Employee agrees that during the thirty-six (36)
consecutive months immediately following termination of Employee's employment
with Employer, regardless of how, when or why that employment ends, Employee
will not in any manner or in any capacity, directly or indirectly, for
himself/herself or any other person or entity, actually or attempt to do any
of the following:

         (1) Perform any of the same or similar responsibilities as
             Employee performed for Employer on behalf of a competitor
             that engages in the business of Employer.

         (2) Solicit, contact, divert, interfere with or take away any
             customer of Employer and/or the Companies that has conducted
             business or negotiations with Employer or the Companies
             during the twenty-four (24) months immediately preceding
             termination of employment.

         (3) Interfere with any of the suppliers of Employer and/or the
             Companies, including, without limitation, reducing in any
             material way the willingness or capability of any supplier
             to continue supplying Employer and/or the Companies with
             their present or contemplated requirements.

         (4) Solicit or interfere with the Employer's and/or the
             Companies' relationship with any of their employees or
             agents, or provide the names of any of Employer's and/or the
             Companies' employees or agents, to any third party.

         (5) Acquire any interest in any business that markets or sells
             any product or product line that is competitive with any
             product or product line Employer sold during the twenty-four
             (24)


                                    - 3 -




             months immediately preceding termination of employment, except
             as permitted in Section 12 below.

             B. Employee further agrees that (s)he will not engage in any of
the activities listed above while employed by Employer.

             C. Employee acknowledges and agrees that his/her experience,
knowledge and capabilities are such that (s)he can obtain employment in
unrelated pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

             D. Employee agrees to fully disclose the terms of this Agreement
to any person or entity by which or with whom (s)he may hereafter become
employed or to which (s)he may hereafter render services, and agrees that
Employer may, if desired, send a copy of this Agreement, or otherwise make the
provisions hereof known, to any such entity.

             E. In the event of a breach by Employee of any of the terms of
Section 11, the period of time the obligations hereunder apply will be
automatically extended for a period of time equal to the length of time
Employee is in breach.

         12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the
right of Employee, as an investor, to hold or acquire the stock or other
investment securities of any business entity that is registered on a national
securities exchange or regularly traded on a generally recognized
over-the-counter market, so long as Employee's interest in any such business
entity does not exceed five percent (5%) of its ownership.

         13. MATERIAL BREACH. Any breach of this Agreement by the Employee
will be a material breach.

         14. EMPLOYEE CONSENT. In order to preserve their rights under this
Agreement, Employer and/or the Companies may advise any third party with whom
Employee may consider, establish or contract an employment, consulting or
service relationship of the existence of this Agreement and of its terms.
Employee agrees that Employer and the Companies will have no liability for so
acting.

         15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the State
of Missouri, without regard to conflicts of laws principles. The parties agree
that any controversy arising with respect to this Agreement will fall under
the exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction and venue of that
court.

         16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable injury
to Employer and/or the Companies. Employee further agrees that if Employee
were to violate the covenants in Section 11 of this Agreement, the
unauthorized disclosure of Confidential Information would be inevitable and
result in great damage and irreparable harm. Employee agrees that in the


                                    - 4 -




event of a breach of this Agreement, the Employer and/or the Companies have
the right to seek any and all legal and/or equitable remedies available for
any breach of this Agreement, including, but not limited to, enforcement by
injunction including ex parte temporary restraining order relief, in view of
such irreparable harm. Employee agrees that enforcement by way of Injunction
would not prevent Employee from making a living as described in Paragraph 11C.
Employer is entitled to its attorneys' fees, costs, and any related expenses
incurred in the enforcement of this Agreement in the event of any breach by
Employee.

         17. SEVERABILITY. In the event any provision in this Agreement is
deemed unenforceable, in whole or in part, it will not invalidate either the
balance of the provisions or the remaining provisions of this Agreement. In
addition, the parties have attempted to limit Employee's right to compete only
to the extent necessary to protect Employer from unfair competition.
Consequently, the parties further agree that if any restrictive covenant in
this Agreement is deemed unenforceable, in whole or in part, because overly
broad in geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
will be binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by Employer, and will
inure to the benefit of Employer, its successors and assigns. If Employee
subsequently accepts employment with one of the Companies, this Agreement will
be automatically assigned to the employing Company without additional covenant
or notice to Employee. In the event of this or any other assignment, sale,
merger, or other change in the ownership or structure of Employer, the
resulting entity will step into the place of the Employer under this Agreement
without additional covenant or notice to Employee. If the Agreement is
assigned, the term "Employer" will mean the then-employing Company and the
term "Companies" will mean the then-employing Company's parents, subsidiaries
and affiliates.

         19. NONWAIVER. Failure of Employer and/or the Companies to exercise
any of its/their rights in the event Employee breaches any of the promises in
this Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

         20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands
his/her right to discuss all aspects of this Agreement with the legal or
personal advisors of his/her choice, and warrants that, to the extent (s)he
desired, (s)he has done so, (s)he has carefully read and fully understands
all of the provisions of this Agreement, and (s)he has voluntarily entered
into this Agreement.

         IN WITNESS WHEREOF, Employee and Employer have executed this
Agreement on the day and year first written above.

EMPLOYEE                               EMPLOYER


 /S/ Greg Bentley                      By:    /S/ Gerald R. Mitchell
- --------------------                         -------------------------
                                       Title:
                                             -------------------------



                                    - 5 -

EX-10.(Z)

                                                                  Exhibit 10(z)

               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

         This Agreement ("Agreement") is entered into on September 29, 2006
                                                         ------------------
between David Van Vliet ("Employee") and KV Pharmaceutical Company ("KV"), a
        ---------------
Delaware corporation ("Employer").

         In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

         1. AFFILIATES. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement along with KV as the "Companies"). From time to
time, Employer and the Companies may exchange or use facilities, technology
and/or Confidential Information (as that term is defined in Paragraph 6 below)
of the other. The covenants in this Agreement are for the benefit and
protection of the Employer and the Companies.

         2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in
the position of Chief Administration Officer. Employee acknowledges and agrees
                ----------------------------
that his/her job title and/or responsibilities may change from time to time.
Employee further agrees that, at all times, (s)he shall devote his/her full
time and best efforts to performing all duties reasonably assigned by
Employer.

         3. COMPENSATION. As compensation for Employee's services to Employer,
Employee will receive a base salary at the rate of Three Hundred Fifty
                                                   -------------------
Thousand Dollars per year ($350,000.00), payable at such intervals as Employer
- ----------------           -----------
pays its other employees at comparable employment levels. Employee will be
entitled to participate in the fringe benefits normally provided to other
employees at comparable employment levels. Employee's compensation will be
subject to Employer's normal compensation review.

         4. TERM. The initial term of this Agreement shall begin on
September 29, 2006, and continue until March 31, 2007, unless terminated
- ------------------                     --------------
sooner in accordance with this Agreement. If not terminated sooner, this
Agreement will automatically renew for successive one (1) year periods unless
and until either party terminates this Agreement. Termination of this
Agreement by either party, for any reason, will in no manner affect the
covenants contained in Sections 6-11 of this Agreement.

         5. TERMINATION.

             A. Employee may terminate this Agreement, for any reason, with
one hundred-eighty (180) calendar days' advance written notice. Employer may
- ------------------------
elect to have the Employee cease work at any time during the notice period for
any reason, including without limitation, the reasons set forth in Paragraph
5C below. In such event, Employer's obligation to provide Employee with
compensation and benefits will end when Employee ceases to work. Employer's
exercise of this option will not be construed as a termination by Employer.

             B. Employer may terminate this Agreement for any reason by giving
the Employee one hundred eighty (180) calendar days' advance written notice.
             ------------------------
Employer may, in its






sole, discretion, either permit Employee to work during the notice period, or
pay Employee in lieu of having Employee continue to work. If Employer
exercises this right and option, it shall pay Employee, on Employer's
regularly scheduled paydays and in accordance with Employer's regular pay
practices, either: (A) Employee's regular weekly compensation for the notice
period or (B) one-half (1/2) of Employee's regular weekly compensation for a
period of twice the notice period. Employer reserves the right to cease the
payment(s) described above if, in Employer's reasonable determination,
Employee breaches this Agreement during the period of such payments. If
Employer elects to pay Employee in lieu of Employee continuing to work,
Employer will pay Employee's regular wages for the notice period, less
whatever compensation Employee receives from other full-time employment during
the notice period. Notwithstanding the foregoing, Employer may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in Employer's reasonable determination, Employee
has breached this Agreement or Employee has engaged in dishonesty, disloyalty,
failure to perform his/her duties to Employer or any act which may be harmful
to the reputation of Employer and/or the Companies.

            C. Employee agrees to faithfully, diligently, and to the best of
her/his ability, experience and talents, perform all of the duties required
prior to notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

         6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or suppliers (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

         7. PUBLICATION. It is expressly agreed between Employee and the
Companies that Employee will hold in confidence and not make use of any
Confidential Information at any time except as required in the course and
performance of the Employee's employment with Employer or as otherwise agreed
to in writing by the Corporate Communications Officer of Employer. Employee
agrees not to publish or cause or permit to be published or otherwise disclose
any article, oral presentation or material related to Employer and/or the
Companies, including without limitation the Employer's and/or the Companies'
Confidential Information and information related to


                                    - 2 -




any products or proposed products, without obtaining the prior written consent
of the Corporate Communications Officer.


         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to Employer and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities. Employee agrees to promptly provide
Employer with a copy of any and all agreements listed below, and other
agreements which may prohibit or restrict his/her employment with Employer.
Employee further agrees not to disclose to Employer or the Companies, or to
seek to induce Employer or the Companies to use any confidential information,
material or trade secrets belonging to any other person or entity.

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

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

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

         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his/her employment by
Employer, either solely or jointly with others and in the course of performing
his/her duties for Employer, which are based, in whole or part, upon
Confidential Information, the resources, supplies, facilities or business,
technical or financial information of Employer and/or the Companies, or which
relate to the business, the research or the anticipated research and
development of Employer and/or the Companies (collectively referred to herein
as "Work Product"), will be the sole property of Employer and available to
Employer at all times. Employee agrees to promptly disclose and assign and
hereby assigns to Employer, without royalty or other additional consideration,
any and all of Employee's proprietary rights to any and all Work Product.
Employee further agrees that during his/her employment by Employer and after
that employment ends, regardless of how, when and why, (s)he will, upon
Employer's request: (A) execute any and all applications for copyright and/or
patent of Work Product which may be prepared for his/her signature, (B) assign
to Employer and/or the Companies any and all such applications, copyrights and
patents relating to Work Product, and (C) assist Employer and/or the
Companies, as Employer and/or the Companies deem necessary, in its
application, defense and enforcement of any copyright or patent relating to
Work Product. Employer will pay all expenses of preparing, filing, prosecuting
and defending any such application and of obtaining such copyrights and
patents. In the event Employer does not employ Employee at the time any
request for such assistance is made by Employer, Employer will pay Employee a
reasonable amount for Employee's time and will schedule any needed assistance
so as not to interfere with Employee's then current employment and
obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with Employer, regardless of how, when and why that employment ends, Employee
will immediately deliver to Employer all property of Employer and all property
of the Companies, including, without limitation, all Company equipment,
records, documents and computer disks (including all copies). If Employee
fails to return to Employer all property of Employer and the Companies,
Employee authorizes Employer to deduct from his/her final paycheck such amount
to cover the loss, to the extent


                                    - 3 -




permitted by applicable law. Nothing contained herein shall limit Employer's
right to recover the full value of such property from Employee in any
proceeding.

         11. RESTRICTIVE COVENANTS.

             A. The parties agree that at the time this Agreement was entered,
the business of Employer was the development, manufacture, licensing and sale
of pharmaceutical products using drug delivery technologies (hereafter "the
business of Employer"). Employee agrees that during the thirty-six (36)
consecutive months immediately following termination of Employee's employment
with Employer, regardless of how, when or why that employment ends, Employee
will not in any manner or in any capacity, directly or indirectly, for
himself/herself or any other person or entity, actually or attempt to do any
of the following:

         (1) Perform any of the same or similar responsibilities as
             Employee performed for Employer on behalf of a competitor
             that engages in the business of Employer.

         (2) Solicit, contact, divert, interfere with or take away any
             customer of Employer and/or the Companies that has conducted
             business or negotiations with Employer or the Companies
             during the twenty-four (24) months immediately preceding
             termination of employment.

         (3) Interfere with any of the suppliers of Employer and/or the
             Companies, including, without limitation, reducing in any
             material way the willingness or capability of any supplier
             to continue supplying Employer and/or the Companies with
             their present or contemplated requirements.

         (4) Solicit or interfere with the Employer's and/or the
             Companies' relationship with any of their employees or
             agents, or provide the names of any of Employer's and/or the
             Companies' employees or agents, to any third party.

         (5) Acquire any interest in any business that markets or sells
             any product or product line that is competitive with any
             product or product line Employer sold during the twenty-four
             (24) months immediately preceding termination of employment,
             except as permitted in Section 12 below.

             B. Employee further agrees that (s)he will not engage in any of
the activities listed above while employed by Employer.

             C. Employee acknowledges and agrees that his/her experience,
knowledge and capabilities are such that (s)he can obtain employment in
unrelated pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

                                    - 4 -




             D. Employee agrees to fully disclose the terms of this Agreement
to any person or entity by which or with whom (s)he may hereafter become
employed or to which (s)he may hereafter render services, and agrees that
Employer may, if desired, send a copy of this Agreement, or otherwise make the
provisions hereof known, to any such entity.

             E. In the event of a breach by Employee of any of the terms of
Section 11, the period of time the obligations hereunder apply will be
automatically extended for a period of time equal to the length of time
Employee is in breach.

         12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the
right of Employee, as an investor, to hold or acquire the stock or other
investment securities of any business entity that is registered on a national
securities exchange or regularly traded on a generally recognized
over-the-counter market, so long as Employee's interest in any such business
entity does not exceed five percent (5%) of its ownership.

         13. MATERIAL BREACH. Any breach of this Agreement by the Employee
will be a material breach.

         14. EMPLOYEE CONSENT. In order to preserve their rights under this
Agreement, Employer and/or the Companies may advise any third party with whom
Employee may consider, establish or contract an employment, consulting or
service relationship of the existence of this Agreement and of its terms.
Employee agrees that Employer and the Companies will have no liability for so
acting.

         15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the State
of Missouri, without regard to conflicts of laws principles. The parties agree
that any controversy arising with respect to this Agreement will fall under
the exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction and venue of that
court.

         16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable injury
to Employer and/or the Companies. Employee further agrees that if Employee
were to violate the covenants in Section 11 of this Agreement, the
unauthorized disclosure of Confidential Information would be inevitable and
result in great damage and irreparable harm. Employee agrees that in the event
of a breach of this Agreement, the Employer and/or the Companies have the
right to seek any and all legal and/or equitable remedies available for any
breach of this Agreement, including, but not limited to, enforcement by
injunction including ex parte temporary restraining order relief, in view of
such irreparable harm. Employee agrees that enforcement by way of Injunction
would not prevent Employee from making a living as described in Paragraph 11C.
Employer is entitled to its attorneys' fees, costs, and any related expenses
incurred in the enforcement of this Agreement in the event of any breach by
Employee.

                                    - 5 -




         17. SEVERABILITY. In the event any provision in this Agreement is
deemed unenforceable, in whole or in part, it will not invalidate either the
balance of the provisions or the remaining provisions of this Agreement. In
addition, the parties have attempted to limit Employee's right to compete only
to the extent necessary to protect Employer from unfair competition.
Consequently, the parties further agree that if any restrictive covenant in
this Agreement is deemed unenforceable, in whole or in part, because overly
broad in geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
will be binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by Employer, and will
inure to the benefit of Employer, its successors and assigns. If Employee
subsequently accepts employment with one of the Companies, this Agreement will
be automatically assigned to the employing Company without additional covenant
or notice to Employee. In the event of this or any other assignment, sale,
merger, or other change in the ownership or structure of Employer, the
resulting entity will step into the place of the Employer under this Agreement
without additional covenant or notice to Employee. If the Agreement is
assigned, the term "Employer" will mean the then-employing Company and the
term "Companies" will mean the then-employing Company's parents, subsidiaries
and affiliates.

         19. NONWAIVER. Failure of Employer and/or the Companies to exercise
any of its/their rights in the event Employee breaches any of the promises in
this Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

         20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands
his/her right to discuss all aspects of this Agreement with the legal or
personal advisors of his/her choice, and warrants that, to the extent (s)he
desired, (s)he has done so, (s)he has carefully read and fully understands all
of the provisions of this Agreement, and (s)he has voluntarily entered into
this Agreement.

         IN WITNESS WHEREOF, Employee and Employer have executed this
Agreement on the day and year first written above.

EMPLOYEE                                 EMPLOYER


 /S/ David Van Vliet                     By:    /S/ Gerald R. Mitchell
- ----------------------                         ------------------------
                                         Title:
                                               ------------------------


                                    - 6 -

EX-10.(AA)

                                                                 Exhibit 10(aa)

               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

         This Agreement ("Agreement") is entered into on April 30, 2007
                                                         --------------
between Rita E. Bleser ("Employee") and KV PHARMACEUTICAL COMPANY ("KV"), a
        --------------
Delaware corporation ("Employer").

         In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

         1. AFFILIATES. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement along with KV as the "Companies"). From time to
time, Employer and the Companies may exchange or use facilities, technology
and/or Confidential Information (as that term is defined in Paragraph 6 below)
of the other. The covenants in this Agreement are for the benefit and
protection of the Employer and the Companies.

         2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in
the position of President, Pharmaceutical Division. Employee acknowledges and
                ----------------------------------
agrees that his/her job title and/or responsibilities may change from time to
time. Employee further agrees that, at all times, (s)he shall devote his/her
full time and best efforts to performing all duties reasonably assigned by
Employer.

         3. COMPENSATION. As compensation for Employee's services to Employer,
Employee will receive a base salary at the rate of Two Hundred and Fifty-Eight
                                                   ---------------------------
Thousand Dollars per year ($258,000.00), payable at such intervals as Employer
- --------                   -----------
pays its other employees at comparable employment levels. Employee will be
entitled to participate in the fringe benefits normally provided to other
employees at comparable employment levels. Employee's compensation will be
subject to Employer's normal compensation review.

         4. TERM. The initial term of this Agreement shall begin on April 30,
                                                                    ---------
2007, and continue until March 31, 2007, unless terminated sooner in
- ----                     --------------
accordance with this Agreement. If not terminated sooner, this Agreement will
automatically renew for successive one (1) year periods unless and until
either party terminates this Agreement. Termination of this Agreement by
either party, for any reason, will in no manner affect the covenants contained
in Sections 6-11 of this Agreement.

         5. TERMINATION.

            A. Employee may terminate this Agreement, for any reason, with
one hundred twenty (120) calendar days' advance written notice. Employer may
- ------------------------
elect to have the Employee cease work at any time during the notice period for
any reason, including without limitation, the reasons set forth in Paragraph
5C below. In such event, Employer's obligation to provide Employee with
compensation and benefits will end when Employee ceases to work. Employer's
exercise of this option will not be construed as a termination by Employer.

            B. Employer may terminate this Agreement, for any reason by giving
the Employee one hundred twenty (120) calendar days advance written notice.
             ------------------------
Employer may, in its sole discretion, either permit Employee to work during
the notice period, or pay Employee in lieu of having Employee continue to
work. If Employer exercises this right and option, it shall pay Employee, on
Employer's regularly scheduled paydays and in accordance with Employer's
regular pay practices, either: (A) Employee's regular weekly compensation for
the notice period or (B) one-half (1/2) of Employee's regular weekly
compensation for a period of twice the notice period. Employer reserves the
right to cease the payment(s) described above if, in Employer's reasonable
determination, Employee breaches this Agreement during the period of such
payments. If Employer elects to pay Employee in lieu of Employee continuing to
work, Employer will pay Employee's regular wages for the notice period, less
whatever compensation Employee receives from other full-time employment during
the notice period. Notwithstanding the foregoing, Employer may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in Employer's reasonable determination, Employee
has breached this Agreement or Employee has engaged in dishonesty, disloyalty,





failure to perform his/her duties to Employer or any act which may be harmful
to the reputation of Employer and/or the Companies.

            C. Employee agrees to faithfully, diligently, and to the best of
her/his ability, experience and talents, perform all of the duties required
prior to notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

         6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or suppliers (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

         7. PUBLICATION. It is expressly agreed between Employee and the
Companies that Employee will hold in confidence and not make use of any
Confidential Information at any time except as required in the course and
performance of the Employee's employment with Employer or as otherwise agreed
to in writing by the Corporate Communications Officer of Employer. Employee
agrees not to publish or cause or permit to be published or otherwise disclose
any article, oral presentation or material related to Employer and/or the
Companies, including without limitation the Employer's and/or the Companies'
Confidential Information and information related to any products or proposed
products, without obtaining the prior written consent of the Corporate
Communications Officer.

         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to Employer and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities. Employee agrees to promptly provide
Employer with a copy of any and all agreements listed below, and other
agreements which may prohibit or restrict his/her employment with Employer.
Employee further agrees not to disclose to Employer or the Companies, or to
seek to induce Employer or the Companies to use any confidential information,
material or trade secrets belonging to any other person or entity.

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

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

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

         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his/her employment by
Employer, either solely or jointly with others and in the course of performing
his/her duties for Employer, which are based, in whole or part, upon
Confidential Information, the resources, supplies, facilities or business,
technical


                                    - 2 -




or financial information of Employer and/or the Companies, or which relate to
the business, the research or the anticipated research and development of
Employer and/or the Companies (collectively referred to herein as "Work
Product"), will be the sole property of Employer and available to Employer at
all times. Employee agrees to promptly disclose and assign and hereby assigns
to Employer, without royalty or other additional consideration, any and all of
Employee's proprietary rights to any and all Work Product. Employee further
agrees that during his/her employment by Employer and after that employment
ends, regardless of how, when and why, (s)he will, upon Employer's request:
(A) execute any and all applications for copyright and/or patent of Work
Product which may be prepared for his/her signature, (B) assign to Employer
and/or the Companies any and all such applications, copyrights and patents
relating to Work Product, and (C) assist Employer and/or the Companies, as
Employer and/or the Companies deem necessary, in its application, defense and
enforcement of any copyright or patent relating to Work Product. Employer will
pay all expenses of preparing, filing, prosecuting and defending any such
application and of obtaining such copyrights and patents. In the event
Employer does not employ Employee at the time any request for such assistance
is made by Employer, Employer will pay Employee a reasonable amount for
Employee's time and will schedule any needed assistance so as not to interfere
with Employee's then current employment and obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with Employer, regardless of how, when and why that employment ends, Employee
will immediately deliver to Employer all property of Employer and all property
of the Companies, including, without limitation, all Company equipment,
records, documents and computer disks (including all copies). If Employee
fails to return to Employer all property of Employer and the Companies,
Employee authorizes Employer to deduct from his/her final paycheck such amount
to cover the loss, to the extent permitted by applicable law. Nothing
contained herein shall limit Employer's right to recover the full value of
such property from Employee in any proceeding.

         11. RESTRICTIVE COVENANTS.

             A. The parties agree that at the time this Agreement was entered,
the business of Employer was the development, manufacture, licensing and sale
of pharmaceutical products using drug delivery technologies (hereafter "the
business of Employer"). Employee agrees that during the thirty-six (36)
consecutive months immediately following termination of Employee's employment
with Employer, regardless of how, when or why that employment ends, Employee
will not in any manner or in any capacity, directly or indirectly, for
himself/herself or any other person or entity, actually or attempt to do any
of the following:

         (1) Perform any of the same or similar responsibilities as
             Employee performed for Employer on behalf of a competitor
             that engages in the business of Employer.

         (2) Solicit, contact, divert, interfere with or take away any
             customer of Employer and/or the Companies that has conducted
             business or negotiations with Employer or the Companies
             during the twenty-four (24) months immediately preceding
             termination of employment.

         (3) Interfere with any of the suppliers of Employer and/or the
             Companies, including, without limitation, reducing in any
             material way the willingness or capability of any supplier
             to continue supplying Employer and/or the Companies with
             their present or contemplated requirements.

         (4) Solicit or interfere with the Employer's and/or the
             Companies' relationship with any of their employees or
             agents, or provide the names of any of Employer's and/or the
             Companies' employees or agents, to any third Party.

                                    - 3 -




         (5) Acquire any interest in any business that markets or sells
             any product or product line that is competitive with any
             product or product line Employer sold during the twenty-four
             (24) months immediately preceding termination of employment,
             except as permitted in Section 12 below.

             B. Employee further agrees that (s)he will not engage in any of
the activities listed above while employed by Employer.

             C. Employee acknowledges and agrees that his/her experiences,
knowledge and capabilities are such that (s)he can obtain employment in
unrelated pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

             D. Employee agrees to fully disclose the terms of this Agreement
to any person or entity by which or with whom (s)he may hereafter become
employed or to which (s)he may hereafter render services, and agrees that
Employer may, if desired, send a copy of this Agreement, or otherwise make the
provisions hereof known, to any such entity.

             E. In the event of a breach by Employee of any of the terms of
Section 11, the period of time the obligations hereunder apply will be
automatically extended for a period of time equal to the length of time
Employee is in breach.

         12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the
right of Employee, as an investor, to hold or acquire the stock or other
investment securities of any business entity that is registered on a national
securities exchange or regularly traded on a generally recognized
over-the-counter market, so long as Employee's interest in any such business
entity does not exceed five percent (5%) of its ownership.

         13. MATERIAL BREACH. Any breach of this Agreement by the Employee
will be a material breach.

         14. EMPLOYEE CONSENT. In order to preserve their rights under this
Agreement, Employer and/or the Companies may advise any third party with whom
Employee may consider, establish or contract an employment, consulting or
service relationship of the existence of this Agreement and of its terms.
Employee agrees that Employer and the Companies will have no liability for so
acting.

         15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the State
of Missouri, without regard to conflicts of laws principles. The parties agree
that any controversy arising with respect to this Agreement will fall under
the exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction .and venue of
that court.

         16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable injury
to


                                    - 4 -




Employer and/or the Companies. Employee further agrees that if Employee were
to violate the covenants in Section 11 of this Agreement, the unauthorized
disclosure of Confidential Information would be inevitable and result in great
damage and irreparable harm. Employee agrees that in the event of a breach of
this Agreement, the Employer and/or the Companies have the right to seek any
and all legal and/or equitable remedies available for any breach of this
Agreement, including, but not limited to, enforcement by injunction including
ex parte temporary restraining order relief, in view of such irreparable harm.
Employee agrees that enforcement by way of Injunction would not prevent
Employee from making a living as described in Paragraph 11C. Employer is
entitled to its attorneys' fees, costs, and any related expenses incurred in
the enforcement of this Agreement in the event of any breach by Employee.

         17. SEVERABILITY. In the event any provision in this Agreement is
deemed unenforceable, in whole or in part, it will not invalidate either the
balance of the provisions or the remaining provisions of this Agreement. In
addition, the parties have attempted to limit Employee's right to compete only
to the extent necessary to protect Employer from unfair competition.
Consequently, the parties further agree that if any restrictive covenant in
this Agreement is deemed unenforceable, in whole or in part, because overly
broad in geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
will be binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by Employer, and will
inure to the benefit of Employer, its successors and assigns. If Employee
subsequently accepts employment with one of the Companies, this Agreement will
be automatically assigned to the employing Company without additional covenant
or notice to Employee. In the event of this or any other assignment, sale,
merger, or other change in the ownership or structure of Employer, the
resulting entity will step into the place of the Employer under this Agreement
without additional covenant or notice to Employee. If the Agreement is
assigned, the term "Employer" will mean the then-employing Company and the
term "Companies" will mean the then-employing Company's parents, subsidiaries
and affiliates.

         19. NONWAIVER. Failure of Employer and/or the Companies to exercise
any of its/their rights in the event Employee breaches any of the promises in
this Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

         20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands
his/her right to discuss all aspects of this Agreement with the legal or
personal advisors of his/her choice, and warrants that, to the extent (s)he
desired, (s)he has done so, (s)he has carefully read and fully understands all
of the provisions of this Agreement, and (s)he has voluntarily entered into
this Agreement.

         IN WITNESS WHEREOF, Employee and Employer have executed this
Agreement on the day and year first written above.

EMPLOYEE                            EMPLOYER


 /S/ Rita E. Bleser                 By:    /S/ Gerald R. Mitchell
- --------------------                      -------------------------
                                    Title:
                                          -------------------------


                                    - 5 -

EX-10.(BB)

                                                                 Exhibit 10(bb)

               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

          This Agreement ("Agreement") is entered into on July 20, 2007
                                                          -------------
between Gregory J. Divis ("Employee") and THER-RX CORPORATION ("Ther-Rx"), a
        ----------------
wholly owned subsidiary of KV PHARMACEUTICAL COMPANY ("KV"), a Delaware
corporation ("Employer").

          In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

         1. AFFILIATES. Ther-Rx and/or KV have or may in the future have one
or more parents, subsidiaries and/or affiliated companies (collectively
referred to in the remainder of this Agreement along with Ther-Rx and KV as
the "Companies"). From time to time, Employer and the Companies may exchange
or use facilities, technology and/or Confidential Information (as that term is
defined in Paragraph 6 below) of the other. The covenants in this Agreement
are for the benefit and protection of the Employer and the Companies.

         2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in
the position of President, Ther-Rx Corporation. Employee acknowledges and
                ------------------------------
agrees that his/her job title and/or responsibilities may change from time to
time. Employee further agrees that, at all times, (s)he shall devote his/her
full time and best efforts to performing all duties reasonably assigned by
Employer.

         3. COMPENSATION. As compensation for Employee's services to Employer,
Employee will receive a base salary at the rate of Three Hundred Twenty-Five
                                                   -------------------------
Thousand Dollars per year ($325,000.00), payable at such intervals as
- ----------------           -----------
Employer pays its other employees at comparable employment levels. Employee
will be entitled to participate in the fringe benefits normally provided to
other employees at comparable employment levels. Employee's compensation will
be subject to Employer's normal compensation review for employees in this job
classification.

         4. TERM. The initial term of this Agreement shall begin on July 20,
                                                                    --------
2007, and continue until March 31, 2008, unless terminated sooner in
- ----                     --------------
accordance with this Agreement. If not terminated sooner, this Agreement will
automatically renew for successive one (1) year periods unless and until
either party terminates this Agreement. Termination of this Agreement by
either party, for any reason, will in no manner affect the covenants contained
in Sections 6-11 of this Agreement.

         5. TERMINATION.

            A. Employee may terminate this Agreement, for any reason, with
one hundred twenty (120) calendar days' advance written notice. Employer may
- ------------------------
elect to have the Employee cease work at any time during the notice period for
any reason, including without limitation, the reasons set forth in Paragraph
5C below. In such event, Employer's obligation to provide Employee with
compensation and benefits will end when Employee ceases to work. Employer's
exercise of this option will not be construed as a termination by Employer.

            B. Employer may terminate this Agreement for any reason by giving
the Employee one hundred twenty (120) calendar days' advance written notice.
             ------------------------
Employer may, in its sole discretion, either permit Employee to work during
the notice period, or pay Employee in lieu of having Employee continue to
work. If Employer exercises this right and option, it shall pay Employee, on
Employer's regularly scheduled paydays and in accordance with Employer's
regular pay practices, either: (A) Employee's regular weekly compensation for
the notice period or (B) one-half (1/2) of Employee's regular weekly
compensation for a period of twice the notice period. Employer reserves the
right to cease the






payment(s) described above if, in Employer's reasonable determination,
Employee breaches this Agreement during the period of such payments. If
Employer elects to pay Employee in lieu of Employee continuing to work,
Employer will pay Employee's regular wages for the notice period, less
whatever compensation Employee receives from other full-time employment during
the notice period. Notwithstanding the foregoing, Employer may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in Employer's reasonable determination, Employee
has breached this Agreement or Employee has engaged in dishonesty, disloyalty,
failure to perform his/her duties to Employer or any act which may be harmful
to the reputation of Employer and/or the Companies.

            C. Employee agrees to faithfully, diligently, and to the best of
her/his ability, experience and talents, perform all of the duties required
prior to notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

         6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or suppliers (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

         7. PUBLICATION. It is expressly agreed between Employee and the
Companies that Employee will hold in confidence and not make use of any
Confidential Information at any time except as required in the course and
performance of the Employee's employment with Employer or as otherwise agreed
to in writing by the Corporate Communications Officer of Employer. Employee
agrees not to publish or cause or permit to be published or otherwise disclose
any article, oral presentation or material related to Employer and/or the
Companies, including without limitation the Employer's and/or the Companies'
Confidential Information and information related to any products or proposed
products, without obtaining the prior written consent of the Corporate
Communications Officer.

         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to Employer and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities. Employee agrees to promptly provide
Employer with a copy of any and all agreements listed below and other
agreements which may prohibit or restrict his/her employment with Employer.
Employee further agrees not to disclose to Employer or the Companies, or to
seek to induce Employer or the Companies to use any confidential information,
material or trade secrets belonging to any other person or entity.

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

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

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

                                    - 2 -





         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his/her employment by
Employer, either solely or jointly with others and in the course of performing
his/her duties for Employer, which are based, in whole or part, upon
Confidential Information, the resources, supplies, facilities or business,
technical or financial information of Employer and/or the Companies, or which
relate to the business, the research or the anticipated research and
development of Employer and/or the Companies (collectively referred to herein
as "Work Product"), will be the sole property of Employer and available to
Employer at all times. Employee agrees to promptly disclose and assign and
hereby assigns to Employer, without royalty or other additional consideration,
any and all of Employee's proprietary rights to any and all Work Product.
Employee further agrees that during his/her employment by Employer and after
that employment ends, regardless of how, when and why, (s)he will, upon
Employer's request: (A) execute any and all applications for copyright and/or
patent of Work Product which may be prepared for his/her signature, (B) assign
to Employer and/or the Companies any and all such applications, copyrights and
patents relating to Work Product, and (C) assist Employer and/or the
Companies, as Employer and/or the Companies deem necessary, in its
application, defense and enforcement of any copyright or patent relating to
Work Product. Employer will pay all expenses of preparing, filing, prosecuting
and defending any such application and of obtaining such copyrights and
patents. In the event Employer does not employ Employee at the time any
request for such assistance is made by Employer, Employer will pay Employee a
reasonable amount for Employee's time and will schedule any needed assistance
so as not to interfere with Employee's then current employment and
obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with Employer, regardless of how, when and why that employment ends, Employee
will immediately deliver to Employer all property of Employer and all property
of the Companies, including, without limitation, all Company equipment,
records, documents and computer disks (including all copies). If Employee
fails to return to Employer all property of Employer and the Companies,
Employee authorizes Employer to deduct from his/her final paycheck such amount
to cover the loss, to the extent permitted by applicable law. Nothing
contained herein shall limit Employer's right to recover the full value of
such property from Employee in any proceeding.

         11. RESTRICTIVE COVENANTS.

             A. The parties agree that at the time this Agreement was entered,
the business of Employer was the marketing and sale of brand name prescription
pharmaceutical products (hereafter "the business of Employer"). Employee
agrees that during the thirty-six (36) consecutive months immediately
following termination of Employee's employment with Employer, regardless of
how, when or why that employment ends, Employee will not in any manner or in
any capacity, directly or indirectly, for himself/herself or any other person
or entity, actually or attempt to do any of the following:

         (1) To sell or market, manage or direct the sale or marketing,
             or indirectly or directly assist any other person in the
             sale or marketing of the same or similar brand name products
             as Employee marketed or sold for Employer under this
             Agreement, on behalf of or for any business that markets or
             sells any product or product line which is competitive with
             any product or product line Employer has sold during the
             most recent twenty-four (24) month period anywhere Employer
             conducted business.

                                    - 3 -




         (2) Solicit, contact, divert, interfere with or take away any
             customer of Employer and/or the Companies that has conducted
             business or negotiations with Employer or the Companies
             during the twenty-four (24) months immediately preceding
             termination of employment.

         (3) Interfere with any of the suppliers of Employer and/or the
             Companies, including, without limitation, reducing in any
             material way the willingness or capability of any supplier
             to continue supplying Employer and/or the Companies with
             their present or contemplated requirements.

         (4) Solicit or interfere with the Employer's and/or the
             Companies' relationship with any of their employees or
             agents, or provide the names of any of Employer's and/or the
             Companies' employees or agents, to any third party.

         (5) Acquire any interest in any business that markets or sells
             any product or product line that is competitive with any
             product or product line Employer sold during the twenty-four
             (24) months immediately preceding termination of employment,
             except as permitted in Section 12 below.

             B. Employee further agrees that (s)he will not engage in any of
the activities listed above while employed by Employer.

             C. Employee acknowledges and agrees that his/her experience,
knowledge and capabilities are such that (s)he can obtain employment in
unrelated pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

             D. Employee agrees to fully disclose the terms of this Agreement
to any person or entity by which or with whom (s)he may hereafter become
employed or to which (s)he may hereafter render services, and agrees that
Employer may, if desired, send a copy of this Agreement, or otherwise make the
provisions hereof known, to any such entity.

             E. In the event of a breach by Employee of any of the twins of
Section 11, the period of time the obligations hereunder apply will be
automatically extended for a period of time equal to the length of time
Employee is in breach.

         12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the
right of Employee, as an investor, to hold or acquire the stock or other
investment securities of any business entity that is registered on a national
securities exchange or regularly traded on a generally recognized
over-the-counter market, so long as Employee's interest in any such business
entity does not exceed five percent (5%) of its ownership.

         13. MATERIAL BREACH. Any breach of this Agreement by the Employee
will be a material breach.

                                    - 4 -




         14. EMPLOYEE CONSENT. In order to preserve their rights under this
Agreement, Employer and/or the Companies may advise any third party with whom
Employee may consider, establish or contract an employment, consulting or
service relationship of the existence of this Agreement and of its terms.
Employee agrees that Employer and the Companies will have no liability for so
acting.

         15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the State
of Missouri, without regard to conflicts of laws principles. The parties agree
that any controversy arising with respect to this Agreement will fall under
the exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction and venue of that
court.

         16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable injury
to Employer and/or the Companies. Employee further agrees that if Employee
were to violate the covenants in Section 11 of this Agreement, the
unauthorized disclosure of Confidential Information would be inevitable and
result in great damage and irreparable harm. Employee agrees that in the event
of a breach of this Agreement, the Employer and/or the Companies have the
right to seek any and all legal and/or equitable remedies available for any
breach of this Agreement, including, but not limited to, enforcement by
injunction including ex parte temporary restraining order relief, in view of
such irreparable harm. Employee agrees that enforcement by way of Injunction
would not prevent Employee from making a living as described in Paragraph 11C.
Employer is entitled to its attorneys' fees, costs, and any related expenses
incurred in the enforcement of this Agreement in the event of any breach by
Employee.

         17. SEVERABILITY. In the event any provision in this Agreement is
deemed unenforceable, in whole or in part, it will not invalidate either the
balance of the provisions or the remaining provisions of this Agreement. In
addition, the parties have attempted to limit Employee's right to compete only
to the extent necessary to protect Employer from unfair competition.
Consequently, the parties further agree that if any restrictive covenant in
this Agreement is deemed unenforceable, in whole or in part, because overly
broad in geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
will be binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by Employer, and will
inure to the benefit of Employer, its successors and assigns. If Employee
subsequently accepts employment with one of the Companies, this Agreement will
be automatically assigned to the employing Company without additional covenant
or notice to Employee. In the event of this or any other assignment, sale,
merger, or other change in the ownership or structure of Employer, the
resulting entity will step into the place of the Employer under this Agreement
without additional covenant or notice to Employee. If the Agreement is
assigned, the term "Employer" will mean the then-employing Company and the
term "Companies" will mean the then-employing Company's parents, subsidiaries
and affiliates.

         19. NONWAIVER. Failure of Employer and/or the Companies to exercise
any of its/their rights in the event Employee breaches any of the promises in
this Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

                                    - 5 -




         20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands
his/her right to discuss all aspects of this Agreement with the legal or
personal advisors of his/her choice, and warrants that, to the extent (s)he
desired, (s)he has done so, (s)he has carefully read and fully understands all
of the provisions of this Agreement, and (s)he has voluntarily entered into
this Agreement.

         IN WITNESS WHEREOF, Employee and Employer have executed this
Agreement on the day and year first written above.

EMPLOYEE                                 EMPLOYER


 /S/ Gregory J. Divis                    By:    /S/ Gerald R. Mitchell
- ------------------------                       -------------------------
                                         Title:
                                               -------------------------


                                    - 6 -

EX-10.(CC)

                                                                Exhibit 10(cc)

                                  [KV logo]
                          K-V PHARMACEUTICAL COMPANY
              EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

     This Agreement ("Agreement") is entered into on December 22, 1995,
between Richard H. Chibnall ("Employee") and K-V PHARMACEUTICAL COMPANY, a
Delaware corporation ("KV").

     In consideration of Employee's employment or continued employment by KV
and other valuable consideration, the receipt and sufficiency of which are
acknowledged, Employee agrees as follows:

     1. AFFILIATES. KV has or may in the future have one or more subsidiaries
and/or affiliated companies (collectively referred to in the remainder of this
Agreement as the "Companies"). From time to time, KV and the Companies may
exchange or use facilities, technology and/or Confidential Information (as
that term is defined below) of the other. The covenants in this Agreement are
for the benefit and protection of KV and the Companies.

     2. NATURE OF EMPLOYMENT. Employee is hereby employed by KV in the
position of Corporate Controller. Employee acknowledges and agrees that
his/her job title and/or responsibilities may change from time to time.
Employee further agrees that, at all times, (s)he shall devote his/her full
time and best efforts to performing all duties reasonably assigned by KV.

     3. COMPENSATION. As compensation for Employee's services to KV, Employee
shall receive a base salary at the rate of One Hundred Thousand Dollars
($100,000.00) per year, payable at such intervals as KV pays its other
employees. In addition, Employee shall be entitled to participate in the
fringe benefits normally provided to other KV employees at comparable
employment levels. Employee's compensation shall be subject to KV's normal
compensation review.

     4. TERM. The initial term of this Agreement shall begin on December 22,
1995, and continue until March 31, 1996, unless terminated sooner in
accordance with paragraph 5 of this Agreement. If not terminated sooner under
paragraph 5 hereof, this Agreement shall automatically renew for successive
one (1) year periods unless and until either party terminates this Agreement
pursuant to the provisions of paragraph 5. Termination of this Agreement by
either party, for any reason, shall in no manner affect the covenants
contained in paragraphs 6-11 of this Agreement.

     5. TERMINATION. Either party may terminate this Agreement, for any
reason, by giving the other party thirty (30) calendar day's advance written
notice. KV may, at its sole discretion, elect to pay Employee in lieu of
having Employee continue to work during the notice period. If KV exercises
this right and option, it shall pay Employee, on KV's regularly scheduled
paydays and in accordance with KV's regular pay practices, either: (A)
Employee's regular wages for a period of thirty (30) calendar days or (B)
one-half (1/2) of Employee's regular wages for a period of sixty (60) calendar
days. KV reserves the right to cease the payment(s) described above if, in
KV's reasonable determination, Employee breaches this Agreement during the
period of such payments. Notwithstanding the foregoing, KV may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in KV's reasonable determination, Employee has
breached this Agreement or Employee's continued employment is detrimental to
KV's best interests. By way of example, but not limitation, Employee's
continued employment will be deemed detrimental to KV's best interests if
Employee has engaged in dishonesty, disloyalty, failure to perform his/her
duties to KV or any act which may be harmful to the reputation of KV and/or
the Companies.

     6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities as an employee of KV, Employee has or may come into
possession of technical, financial or business information pertaining to KV
and/or the Companies which is not published or readily available to the
public, including, but not limited to, trade secrets, techniques, designs,
formulae, methods, processes, devices, machinery, equipment, inventions,
research and development projects, programs, plans and data, clinical projects
and data, plans for future developments, marketing concepts and plans, pricing
information, licensing agreements, and lists of or other information
pertaining to and/or received from employees, customers and/or suppliers
("Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of KV and the
Companies in a competitive, worldwide marketplace. Employee further agrees
that while employed by KV and at all times thereafter, regardless of how, when
and why that employment ends, Employee shall hold in the strictest confidence,
and shall not disclose, duplicate and/or use for himself/herself or any other
person or entity any Confidential Information without: (A) the prior written
consent of an officer of KV, or (B) unless required to do so in order to
perform his/her responsibilities while employed by KV.

     7. PUBLICATION. Employee agrees not to publish or cause or permit to be
published any article, oral presentation or material related to KV and/or the
Companies, including any information related to any products or proposed
products, without obtaining the prior written consent of an officer of KV.





     8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to KV and/or the Companies any
idea, invention, discovery or other information pertaining or related to
Employee's responsibilities as an employee of KV. Employee agrees to promptly
provide KV with a copy of any and all agreements listed below. Employee
further agrees not to disclose to KV or the Companies, or to seek to induce KV
or the Companies to use any confidential information, material or trade
secrets belonging to any other person or entity.______________________________
______________________________________________________________________________
______________________________________________________________________________

     9. RIGHT TO WORK PRODUCT. Any and all designs, inventions, discoveries,
improvements, specifications, technical data, reports, business plans and
other embodiments of Employee's work conceived, made, discovered and/or
produced by Employee during the period of his/her employment by KV, either
solely or jointly with others: (A) in the course of performing his/her duties
for KV, (B) which are based, in whole or part, upon Confidential Information,
the resources, supplies, facilities or business, technical or financial
information of KV and/or the Companies, or (C) which relate to the business or
the anticipated research and development of KV, the Companies or both ("Work
Product"), shall be the sole property of KV and available to KV at all times.
Employee agrees to promptly disclose and assign and hereby assigns to KV,
without royalty or other additional consideration, any and all of Employee's
proprietary rights to any and all Work Product. Employee further agrees that
during his/her employment by KV and after that employment ends, regardless of
how, when and why, (s)he shall, upon KV's request: (A) execute any and all
applications for copyright and/or patent of Work Product which may be prepared
for his/her signature, (B) assign to KV any and all such applications,
copyrights and patents relating thereto, and (C) assist KV, as KV deems
necessary, in order for KV to apply for, defend or enforce any copyright or
patent. KV shall pay all expenses of preparing, filing and prosecuting any
such application and of obtaining such copyrights and patents. In the event
Employee is not employed by KV at the time any request for assistance is made
by KV, KV shall pay Employee a reasonable payment for Employee's time and
shall schedule any needed assistance so as to not to interfere with Employee's
then current employment and obligations.

     10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with KV, regardless of how, when and why that employment ends, Employee shall
immediately deliver to KV all property of KV and all property of the
Companies, including, but not limited to, all records and documents (including
all copies) containing or relating to Confidential Information.

     11. RESTRICTIVE COVENANTS. The parties acknowledge and agree that at the
time this Agreement was entered, the business of KV and the Companies
included, but was not limited to, the contract or private label manufacture
for other marketers or distributors of pharmaceutical preparations or
specialty chemicals, and the research, development, manufacture, sale and
distribution of drug delivery products and technology. Employee agrees that
during the thirty-six (36) consecutive months immediately following
termination of Employee's employment with KV, regardless of how, when or why
that employment ends, Employee shall not in any manner or in any capacity,
directly or indirectly, for himself/herself or any other person or entity,
actually or attempt:

     (A) to perform any of the same or similar responsibilities as Employee
         performed for KV under this Agreement, on behalf of or for any
         business that engages in the same or similar business as:
               (i)  KV anywhere KV has conducted business, or
               (ii) the Companies anywhere the Companies have conducted
                    business during the twenty-four (24) months immediately
                    preceding termination of employment; or

     (B) to interfere with or take away:
               (i)  any customer of KV that has conducted business with KV, or
               (ii) any customer of the Companies that has conducted business
                    with the Companies during the twenty-four (24) months
                    immediately preceding termination of employment; or

     (C) to interfere with any of the suppliers of KV and/or the Companies,
         including, without limitation, reducing in any material way the
         willingness or capability of any supplier to continue supplying KV
         with its and/or the Companies with their present or contemplated
         requirements; or

     (D) to solicit or interfere with the relationship between KV and any of
         its employees or agents, and/or the Companies and any of their
         employees or agents; or

     (E) to acquire any interest in any business that engages in the same or
         similar business as:
               (i)  KV anywhere KV has conducted business, or
               (ii) the Companies anywhere the Companies have conducted
                    business during the twenty-four (24) months immediately
                    preceding termination of employment.

Employee further agrees that (s)he shall not engage in any of the activities
listed above while (s)he is employed by KV.





     Employee acknowledges and agrees that his/her experience, knowledge and
capabilities are such that (s)he can obtain employment in unrelated
pharmaceutical, chemical, food, industrial, household, confectionery or other
businesses, and that the enforcement of this paragraph 11 by way of
injunction would not prevent Employee from earning a livelihood. Employee
further agrees that if (s)he has any question(s) regarding the scope of
activities restricted by this paragraph 11, (s)he shall, to avoid confusion or
misunderstanding, submit the question(s) in writing to an officer of KV for a
written response by KV. Employee additionally agrees to keep KV advised of the
identity of his/her employer and his/her work location during the period
covered by this paragraph 11.

     12. INVESTMENT SECURITIES. Anything to the contrary notwithstanding,
nothing in this Agreement shall limit the right of Employee as an investor to
hold or to acquire the stock or other investment securities of any business
entity that is registered on a national securities exchange or regularly
traded on a generally recognized over-the-counter market, so long as
Employee's interest of any such business entity does not exceed five percent
(5%) of the ownership of that business entity.

     13. MATERIAL BREACH. Any breach of this Agreement shall be a material
breach of this Agreement.

     14. EMPLOYEE CONSENT. In order to preserve the rights under this
Agreement of KV and the Companies, KV and/or the Companies may advise any
third party with whom Employee may consider, establish or contract a
relationship of the existence of this Agreement and of its terms. KV and the
Companies shall have no liability for so acting.

     15. CONTROLLING LAW. This Agreement shall be construed in accordance with
the laws of the State of Missouri. The parties agree that any controversy
arising with respect to this Agreement shall fall under the exclusive
jurisdiction of the Circuit Court of the County of St. Louis, Missouri, and
each party hereby consents to the jurisdiction of that court.

     16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of KV
and the Companies, that any violation by Employee of any of the promises in
this Agreement would result in great damage and irreparable injury to KV
and/or the Companies, and that KV and/or the Companies have the right to any
and all legal and/or equitable remedies available for breach of this
Agreement. Employee further agrees that enforcement by KV and/or the Companies
of the promises contained in this Agreement by way of injunction would not
prevent Employee from making a living.

     17. SEVERABILITY. In the event any whole or partial provision in this
Agreement is deemed unenforceable, it shall not invalidate the remaining whole
or partial provisions of this Agreement. In addition, the parties have
attempted to limit Employee's right to compete only to the extent necessary to
protect KV from unfair competition. Consequently, the parties further agree
that if any whole or partial restrictive covenant in this Agreement is deemed
unenforceable because overly broad in geographic scope, activity or time
duration, that provision shall be automatically modified so as to be
enforceable to the maximum extent reasonable.

     18. ASSIGNMENT. This Agreement is not assignable by Employee, and shall
be binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by KV, and shall inure
to the benefit of KV, its successors and assigns.

     19. NONWAIVER. Failure of KV and/or the Companies to exercise any of
its/their rights in the event Employee breaches any of the promises in this
Agreement shall not be construed as a waiver of such a breach or prevent KV
and/or the Companies from later enforcing strict compliance with the promises
in this Agreement.

     20. MODIFICATION. This Agreement contains the parties' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

     21. ACKNOWLEDGMENT. Employee agrees that: (A) (s)he fully understands
his/her right to discuss all aspects of this Agreement with legal or personal
advisors of his/her choice, (B) to the extent (s)he desired, (s)he has done
so, (C) (s)he has carefully read and fully understands all of the provisions
of this Agreement, and (D) (s)he has voluntarily entered into this Agreement.

     IN WITNESS WHEREOF, Employee and KV have executed this Agreement on the
day and year first written above.

EMPLOYEE                                COMPANY



/s/ Richard H. Chibnall                 By /s/ Gerald R. Mitchell
- -----------------------------------       ---------------------------------

                                        Title VP, Finance
                                             ------------------------------
                                               KV Pharmaceutical Company







                          KV PHARMACEUTICAL COMPANY
                      AMENDMENT TO EMPLOYMENT AGREEMENT

     THIS AMENDMENT ("Amendment") is entered into effective April 1, 2005,
between RICHARD H. CHIBNALL ("Employee") and KV PHARMACEUTICAL COMPANY, a
Delaware corporation ("KV").

     WHEREAS KV and Employee have entered into that certain KV Pharmaceutical
Company Employment and Confidential Information Agreement dated December 22,
1995 (the "Employment Agreement"), and an Amendment dated February 1, 2000;

     WHEREAS KV and Employee desire to make certain changes and additions to
Employment Agreement and to modify and supercede the Amendment dated February
1, 2000 as provided herein;

     NOW THEREFORE, in consideration of Employee's employment or continued
employment by KV and other valuable consideration, the receipt and sufficiency
of which are acknowledged, KV and Employee agrees as follows:

          1. Paragraph 3 of the Employment Agreement regarding "Compensation"
is hereby amended to specify a base salary of Two Hundred Twenty Thousand
Dollars ($220,000) effective April 1, 2005.

          2. Paragraph 4 of the Employment Agreement regarding "Term" is
hereby amended in its entirety to read as follows:

               4. TERM. This Agreement shall be effective as of the date first
     set forth above and continue until March 31, 2010, unless terminated
     sooner in accordance with Paragraph 5 of this Agreement. If not
     terminated sooner under Paragraph 5 hereof, this Agreement shall
     automatically renew for successive twelve (12) month periods unless and
     until either party terminates this Agreement pursuant to the provisions
     of Paragraph 5. Termination of this Agreement by either party, for any
     reason, shall in no manner affect the covenants contained in Paragraphs
     6-11 of this Agreement.

          3. Paragraph 5 of the Employment Agreement regarding "Termination"
is hereby amended in its entirety to read as follows:

               5. TERMINATION.

          (A) VOLUNTARY. Employee may terminate this Agreement (a) at the end
     of the initial term or, after completion of the initial term, (b) at the
     end of each successive term, for any reason, by notifying KV in writing
     three (3) calendar months prior to the end of the term, or (c) within one
     (1) calendar month following a substantial reduction in Employee's
     position and responsibilities by notifying KV in writing of Employee's
     voluntary termination effective six (6) calendar months after the date of
     such notice. In all three cases, such advance written notice shall be
     directed to KV's Vice President, Staffing.


                                    1 of 6




          In the event of such voluntary termination, Employee agrees,
     pursuant to (a) or (b) above, to remain on the job for the balance of the
     term and for three (3) additional months after the end of the term.
     Employee agrees in the event of termination under any of the foregoing
     subparagraphs (a), (b) or (c) to at all times faithfully, industriously
     and to the best of his ability, experience and talents, perform all of
     the duties that have been required of him prior to Employee's notice of
     termination for the balance of his employment, all to the reasonable
     satisfaction of KV. Employee agrees that he will remain actively at work,
     as described above, and will continue to be compensated at his normal
     rate, during the entire six (6) month notice period, unless he is
     released from all responsibilities prior to the end of the notice by the
     Board of Directors or the Chief Executive Officer of KV, in which case,
     his compensation shall be discontinued. Because of the nature of the
     position and the business, Employee agrees that if he should fail to
     fully comply with the notice required by this subsection, and if he
     should fail to fully comply with the requirement to remain on the job and
     faithfully and to the best of his ability perform all of his duties, KV
     will incur damages as a direct result and that the amount of said damages
     will be difficult to ascertain. Accordingly, specific performance will be
     required unless KV releases Employee from these obligations.

          If Employee decides to terminate his employment with KV, Employee
     shall disclose Employee's decision to terminate to the Vice President,
     Staffing of KV and shall not disclose such information to any other party
     (except for a subsequent employer of Employee which has agreed to keep
     such information confidential until KV has announced Employee's
     termination) until such time as the Vice President, Staffing of KV
     determines how and when to announce Employee's termination.

          (B) INVOLUNTARY. In the event of involuntary termination by KV,
     except termination for cause, KV shall provide Employee with severance
     pay of no less than one-half of the Employee's annual base salary, then
     in effect under Paragraph 3 of this Agreement, less usual withholdings.
     This severance package shall be paid in six (6) equal monthly
     installments, each payment to be made on the last day of each of the six
     (6) calendar months following the last day worked. In addition, KV shall
     provide Employee, at KV's expense, with medical, disability and life
     insurance coverage and all other insurance coverage of the same or
     similar types, and in the same or similar amounts as KV is providing to
     Employee immediately prior to the last day worked. This continuation of
     insurance coverage shall cease the earlier of six (6) months after the
     last date worked or at such time as Employee obtains other full-time,
     non-temporary employment which provides comparable coverage. In addition,
     as of the last date worked unless Employee is involuntarily terminated
     for cause, all stock options shall become immediately exercisable and
     shall remain exercisable until the earlier of six (6) months following
     the last date worked or at such time as Employee obtains other full-time,
     non-temporary employment.

          In consideration of the severance pay provided under this paragraph,
     in the event of the cancellation, termination or expiration of the
     Employment Agreement for any reason, Employee agrees to provide
     reasonable and necessary services to assist KV in transition of
     responsibilities and ongoing continuity of his job function unless KV
     does not request such services.


                                    2 of 6




          KV may terminate this Agreement for cause and in such event Employee
     shall not be entitled to any severance pay. The term "for cause" as used
     herein shall mean (i) commission of a dishonest or criminal act in
     respect of Employee's employment or conviction of a felony, or (ii)
     breach of trust or gross negligence, or (iii) willful refusal to perform
     duties imposed by this Agreement which are legal and not improper, or
     (iv) Employee's violation of Paragraph 6, 8, 9 or 10 of this Agreement,
     or (v) the continuing neglect or failure of Employee to perform the
     duties reasonably assigned to Employee by KV and after notice from KV of
     such neglect or failure, Employee's failure to cure such neglect or
     failure. Any termination of this agreement by KV shall be effective only
     upon providing Employee with written notice and advising Employee as to
     whether his termination is for cause.

          Employee acknowledges that the duties and obligations of Paragraphs
     7, 9, 10, 11 and 12 shall survive the termination of his employment.

          4. The following new Sections 22, 23 and 24 are hereby added to the
end of the Employment Agreement:

               22. CHANGE OF CONTROL.

               (A) DEFINITION. For purposes of this Agreement, a "Change of
     Control" of KV shall mean the occurrence of any one of the following
     events:

                    (i) any "person," as such term is used in Section 13(d) of
     the Securities Exchange Act of 1934, becomes a "beneficial owner," as
     such term is used in Rule 13d-3 promulgated under that Act, of twenty
     percent (20%) or more of the voting stock of KV;

                    (ii) the majority of the Board consists of individuals
     other than Incumbent Directors, which term means the members of the Board
     on the date of this Agreement; provided that any person becoming a
     director subsequent to such date whose election or nomination for
     election was supported by two-thirds (2/3) of the directors who then
     comprised the Incumbent Directors shall be considered to be an Incumbent
     Director;

                    (iii) KV adopts any plan of liquidation providing for the
     distribution of all or substantially all of its assets;

                    (iv) all or substantially all of the assets or business of
     KV is disposed of pursuant to a merger, consolidation or other
     transaction (unless the shareholders of KV immediately prior to such
     merger, consolidation or other transaction beneficially own, directly or
     indirectly, in substantially the same proportion as they owned the voting
     stock of the company, all of the voting stock or other ownership
     interests of the entity or entities, if any, that succeed to the business
     of KV); or

                    (v) KV combines with another company and is the surviving
     corporation but, immediately after the combination, the shareholders of
     KV, immediately prior to the combination hold, direct or indirectly,
     fifty percent (50%) or less of the voting stock of the combined company
     (there being excluded from the number of shares held by

                                    3 of 6




     such shareholders, but not from the voting stock of the combined company,
     any shares received by affiliates of such other company in exchange for
     stock of such other company).

               (B) TERMINATION AFTER CHANGE IN CONTROL. In the event of a
     Change of Control of KV, if (i) immediately preceding such Change of
     Control, Employee was providing services under Paragraph 2 or 5, and (ii)
     Employee's employment in such capacity terminates within a two-year
     period following such Change of Control ("Termination"), involuntarily,
     with or without cause, for any reason whatsoever, except for the death or
     disability of Employee, Employee shall be entitled to the benefits
     provided in Paragraph 22(C). For purposes of this Paragraph 22, "Date of
     Termination" shall mean the date on which a Notice of Termination is
     given, unless the parties agree to another date, and "Notice of
     Termination" shall mean a written notice communicated by either party to
     the other party which indicates that Employee's employment with KV is
     being terminated.

               (C) PAYMENTS ON TERMINATION AFTER CHANGE IN CONTROL.

                    (i) Employee's annual base salary through the Date of
     Termination at the rate in effect on the date Notice of Termination is
     given, including vacation pay, allowances and other compensation and
     benefits, and (ii) the amount, if any, of any bonus for the past fiscal
     year (and pro rata for any portion of the then current fiscal year
     through the Date of Termination) which has not been awarded or paid under
     any bonus plans in which Employee is entitled to participate at the time
     of the Change of Control or under other bonus plans at least as
     beneficial to Employee. In addition, KV shall continue in full force and
     effect for the benefit of Employee through the Date of Termination all
     stock ownership, purchase or option plans, employee benefit or
     compensation plans, and insurance or disability plans in effect
     immediately preceding the Change of Control or plans substantially
     similar thereto.

                    (ii) In lieu of any further payments or benefits to be
     paid or otherwise provided under Paragraph 5 (excluding any stock option
     or restricted stock grants, and any deferred compensation benefits for
     any period subsequent to the Date of Termination), KV shall pay as
     severance pay ("Severance Pay") to Employee a lump sum payment equal to
     the sum of: (a) one and one-half (1 1/2) times the greater of: (x)
     Employee's base salary immediately prior to the Date of Termination, or
     (y) Employee's base salary in effect immediately prior to the date on
     which the Change of Control occurred, and (b) Employee's bonus, which
     would be payable in respect of the eighteen (18) month period beginning
     on the Date of Termination as if Employee had continued his position
     assuming an annual bonus equal to the average of the three (3) complete
     bonus years immediately preceding the Date of Termination. Such Severance
     Pay shall be subject to all applicable federal and state income taxes.
     The Severance Pay based upon Employee's base salary and bonus shall be
     paid on or before the fifth (5th) day following the Date of Termination.
     Employee, by written notice to KV at any time prior to a Change of
     Control of KV or the Date of Termination, may elect, in his sole
     discretion, to receive said Severance Pay interest-free at a future time,
     but in no event any later than eighteen (18) months after the Date of
     Termination.

                                    4 of 6




                    (iii) To the extent not otherwise provided for under the
     terms of any of KV's stock option agreements, all stock options granted
     by KV or any predecessor of KV to Employee shall vest and be exercisable
     or transferable as of the Date of Termination and shall remain fully
     exercisable for ninety (90) days following the Date of Termination.

                    (iv) With respect to welfare benefits (health, life,
     dental, AD&D), KV shall maintain in full force and effect, for the
     continued benefit of Employee and members of Employee's family, for a
     period of eighteen (18) months after the Date of Termination; all
     employee benefit plans and programs, which KV otherwise provides for its
     employees.

               (D) APPLICATION OF SECTION 280G AND SECTION 4999. If it shall
     be determined that any payment or distribution by KV to or for the
     benefit of Employee (whether paid or payable or distributable pursuant to
     the terms of this Paragraph 22, would be considered to be a parachute
     payment as defined in Section 280G of the Internal Revenue Code such that
     it would be subject to the payment by Employee of the excise tax imposed
     by Section 4999 of the Internal Revenue Code of 1987, as amended, or any
     interest or penalties is alleged to be due from Employee with respect to
     such excise tax (such excise tax, together with any interest and
     penalties, are hereinafter collectively referred to as the "Excise Tax"),
     then Employee's Severance Pay shall be limited, as determined by Employer
     in its discretion, so as to avoid any Excise Tax.

               (23) NOTICE. Any notice given by either party hereunder shall
     be in writing and shall be personally delivered or shall be mailed,
     Express, certified or registered mail, or sent by a generally recognized
     next business day courier, postage or other charges prepaid, as follows:

               To KV:

                    KV Pharmaceutical Company
                    2503 South Hanley Road
                    St. Louis, Missouri 63144
                    Attention: Vice President, Staffing

               To Employee:

                    At his address as set forth on the payroll
                    records of KV,

     or to such other address as may have been furnished to the other party by
     written notice. Notice shall be deemed given on the date personally
     delivered, or if sent by Express Mail or next business day courier on the
     business day following the date sent, or if otherwise mailed, two (2)
     calendar days after the date postmarked.

               (24) Continuation of Other Provisions of Employment Agreement.
     The paragraphs of the Employment Agreement which have not been amended by
     this Amendment shall remain in full force and effect.

                                    5 of 6





          IN WITNESS WHEREOF, Employee and KV have executed this Amendment on
the day and year first written above.


                                            "EMPLOYEE"



                                            /s/ Richard H. Chibnall
                                            -----------------------------------
                                            RICHARD H. CHIBNALL


                                            "KV"

                                            KV PHARMACEUTICAL COMPANY



                                            By: /s/ Gerald R. Mitchell
                                               --------------------------------
                                               GERALD R. MITCHELL
                                               VP, Treasurer & CFO


Witness: /s/ Judith M. Erker
        ----------------------------

Date:     June 13, 2005
       -----------------------------







                                    6 of 6

EX-10.(DD)

                                                                Exhibit 10(dd)

[PARTICLE DYNAMICS logo]     EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

     This Agreement ("Agreement") is entered into on May 5, 2003 between PAUL
T. BRADY ("Employee") and PARTICLE DYNAMICS, INCORPORATED, a wholly owned
subsidiary of KV PHARMACEUTICAL COMPANY ("KV"), a Delaware corporation
("Employer").

     In consideration of Employee's employment or continued employment by
Employer and other valuable consideration, the receipt and sufficiency of
which are acknowledged, Employee agrees as follows:

1. AFFILIATES. Particle Dynamics, Inc. and/or KV have or may in the future
have one or more parents, subsidiaries and/or affiliated companies
(collectively referred to in the remainder of this Agreement along with
Particle Dynamics, Inc. and KV as the "Companies"). From time to time,
Employer and the Companies may exchange or use facilities, technology and/or
Confidential Information (as that term is defined in Paragraph 6 below) of
the other. The covenants in this Agreement are for the benefit and protection
of the Employer and the Companies.

2. NATURE OF EMPLOYMENT. Employee is hereby employed by Employer in the
position of PRESIDENT, PARTICLE DYNAMICS, INC. Employee acknowledges and agrees
that his/her job title and/or responsibilities may change from time to time.
Employee further agrees that, at all times, (s)he shall devote his/her full
time and best efforts to performing all duties reasonably assigned by
Employer.

3. COMPENSATION. As compensation for Employee's services to Employer, Employee
will receive a base salary at the rate of TWO HUNDRED TWENTY FIVE THOUSAND
dollars per year ($225,000.00), payable at such intervals as Employer pays its
other employees at comparable employment levels. Employee will be entitled to
participate in the fringe benefits normally provided to other employees at
comparable employment levels. Employee's compensation will be subject to
Employer's normal compensation review.

4. TERM. The initial term of this Agreement shall begin on MAY 5, 2003, and
continue until MARCH 31, 2004, unless terminated sooner in accordance with
this Agreement. If not terminated sooner, this Agreement will automatically
renew for successive one (1) year periods unless and until either party
terminates this Agreement. Termination of this Agreement by either party, for
any reason, will in no manner affect the covenants contained in Sections 6-11
of this Agreement.

5. TERMINATION.

     A. Employee may terminate this Agreement, for any reason, with one
hundred twenty (120) calendar days advance written notice. Employer may elect
to have the Employee cease work at any time during the notice period for any
reason, including without limitation, the reasons set forth in Paragraph 5C
below. In such event, Employer's obligation to provide Employee with
compensation and benefits will end when Employee ceases to work. Employer's
exercise of this option will not be construed as a termination by Employer.

     B. Employer may terminate this Agreement for any reason by giving the
Employee sixty (60) calendar days advance written notice. Employer may, in its
sole discretion, either permit Employee to work during the notice period, or
pay Employee in lieu of having Employee continue to work. If Employer
exercises this right and option, it shall pay Employee, on Employer's
regularly scheduled paydays and in accordance with Employer's regular pay
practices, either: (A) Employee's regular weekly compensation for the notice
period or (B) one-half (1/2) of Employee's regular weekly compensation for a
period of twice the notice period. Employer reserves the right to cease the
payment(s) described above if, in Employer's reasonable determination,
Employee breaches this Agreement during the period of such payments. If
Employer elects to pay Employee in lieu of Employee continuing to work,
Employer will pay Employee's regular wages for the notice period, less
whatever compensation Employee receives from other full-time employment during
the notice period. Notwithstanding the foregoing, Employer may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in Employer's reasonable determination, Employee
has breached this Agreement or Employee has engaged in dishonesty, disloyalty,
failure to perform his/her duties to Employer or any act which may be harmful
to the reputation of Employer and/or the Companies.

     C. Employee agrees to faithfully, diligently, and to the best of her/his
ability, experience and talents, perform all of the duties required prior to
notice if Employee continues to work during the notice period. In all
situations, Employee will comply with the terms of this Agreement and will
engage in honest, faithful and loyal conduct during the notice period.

                                                         Form PDI-1   Rev 3/03




6. CONFIDENTIAL INFORMATION. In the course of performing his/her
responsibilities, as well as through training pertaining to the business of
the Companies, Employee has or may come into possession of technical,
financial, sales and/or other business information pertaining to Employer
and/or the Companies which is not published or readily available to the
public, and from which the Employer and/or the Companies may derive economic
value, actual or potential, including, but not limited to, trade secrets,
techniques, designs, formulae, methods, processes, devices, machinery,
equipment, inventions, research and development projects, programs, plans and
data, clinical projects and data, plans for future developments, marketing
concepts and plans, pricing information, licensing agreements, and lists of or
other information pertaining to and/or received from Employer, employees of
the Companies, customers and/or supplies (collectively referred to as
"Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of the Employer
and the Companies in a competitive marketplace. Employee further agrees that
while employed by Employer or any of the Companies, and at all times
thereafter, regardless of how, when and why that employment ends, Employee
will hold in the strictest confidence, and will not directly or indirectly
disclose, duplicate and/or use for himself/herself or any other person or
entity any Confidential Information without the prior written consent of an
officer of Employer, or unless required to do so in order to perform his/her
responsibilities while employed by Employer.

7. PUBLICATION. It is expressly agreed between Employee and the Companies that
Employee will hold in confidence and not make use of any Confidential
Information at any time except as required in the course and performance of
the Employee's employment with Employer or as otherwise agreed to in writing
by the Corporate Communications Officer of Employer. Employee agrees not to
publish or cause or permit to be published or otherwise disclose any article,
oral presentation or material related to Employer and/or the Companies,
including without limitation the Employer's and/or the Companies' Confidential
Information and information related to any products or proposed products,
without obtaining the prior written consent of the Corporate Communications
Officer.

8. NO OTHER CONTRACT. Except as listed below, Employee warrants that (s)he is
not bound by the terms of any other agreement, oral or written, which would
limit or preclude him/her from disclosing to Employer and/or the Companies any
idea, invention, discovery or other information pertaining or related to
Employee's responsibilities. Employee agrees to promptly provide Employer with
a copy of any and all agreements listed below, and other agreements which may
prohibit or restrict his/her employment with Employer. Employee further agrees
not to disclose to Employer or the Companies, or to seek to induce Employer or
the Companies to use any confidential information, material or trade secrets
belonging to any other person or entity.______________________________________
______________________________________________________________________________
______________________________________________________________________________

9. RIGHT TO WORK PRODUCT. Any and all designs, inventions, discoveries,
Improvements, specifications, technical data, reports, business plans and
other embodiments of Employee's work conceived, made, discovered and/or
produced by Employee during the period of his/her employment by Employer,
either solely or jointly with others and in the course of performing his/her
duties for Employer, which are based, in whole or part, upon Confidential
Information, the resources, supplies, facilities or business, technical or
financial information of Employer and/or the Companies, or which relate to the
business, the research or the anticipated research and development of Employer
and/or the Companies (collectively referred to herein as "Work Product"), will
be the sole property of Employer and available to Employer at all times.
Employee agrees to promptly disclose and assign and hereby assigns to
Employer, without royalty or other additional consideration, any and all of
Employee's proprietary rights to any and all Work Product. Employee further
agrees that during his/her employment by Employer and after that employment
ends, regardless of how, when and why, (s)he will, upon Employer's request:
(A) execute any and all applications for copyright and/or patent of Work
Product which may be prepared for his/her signature, (B) assign to Employer
and/or the Companies any and all such applications, copyrights and patents
relating to Work Product, and (C) assist Employer and/or the Companies, as
Employer and/or the Companies deem necessary, in its application, defense and
enforcement of any copyright or patent relating to Work Product. Employer will
pay all expenses of preparing, filing, prosecuting and defending any such
application and of obtaining such copyrights and patents. In the event
Employer does not employ Employee at the time any request for such assistance
is made by Employer, Employer will pay Employee a reasonable amount for
Employee's time and will schedule any needed assistance so as not to interfere
with Employee's then current employment and obligations.

10. RETURN OF PROPERTY. Upon the termination of Employee's employment with
Employer, regardless of how, when and why that employment ends, Employee will
immediately deliver to Employer all property of Employer and all property of
the Companies, including, without limitation, all Company equipment, records,
documents and computer disks (including all copies). If Employee fails to
return to Employer all property of Employer and the Companies, Employee
authorizes Employer to deduct from his/her final paycheck such amount to cover
the loss, to the extent permitted by applicable law.

                                                         Form PDI-1   Rev 3/03




Nothing contained herein shall limit Employer's right to recover the full
value of such property from Employee in any proceeding.

11. RESTRICTIVE COVENANTS.

     A. The parties agree that at the time this Agreement was entered, the
business of Employer was the development, manufacture, marketing and/or sale
of directly compressible and/or microencapsulated raw materials used in the
processing of nutritional, pharmaceutical, personal care and/or food products
(hereafter "the business of Employer"). Employee agrees that during the
thirty-six (36) consecutive months immediately following termination of
Employee's employment with Employer, regardless of how, when or why that
employment ends, Employee will not in any manner or in any capacity, directly
or indirectly, for himself/herself or any other person or entity, actually or
attempt to do any of the following:

        1.  Perform any of the same or similar responsibilities as Employee
            performed for Employer on behalf of a competitor that engages in
            the business of Employer.

        2.  Solicit, contact, divert, interfere with or take away any customer
            of Employer and/or the Companies that has conducted business or
            negotiations with Employer or the Companies during the twenty-four
            (24) months immediately preceding termination of employment.

        3.  Interfere with any of the suppliers of Employer and/or the
            Companies, including, without limitation, reducing in any material
            way the willingness or capability of any supplier to continue
            supplying Employer and/or the Companies with their present or
            contemplated requirements.

        4.  Solicit or interfere with the Employer's and/or the Companies'
            relationship with any of their employees or agents, or provide the
            names of any of Employer's and/or the Companies' employees or
            agents, to any third party.

        5.  Acquire any interest in any business that markets or sells any
            product or product line that is competitive with any product or
            product line Employer sold during the twenty-four (24) months
            immediately preceding termination of employment, except as
            permitted in Section 12 below.

     B. Employee further agrees that (s)he will not engage in any of the
activities listed above while employed by Employer.

     C. Employee acknowledges and agrees that his/her experience, knowledge
and capabilities are such that (s)he can obtain employment in unrelated
pharmaceutical, chemical, nutritional, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this Section 11, (s)he will, to avoid confusion or
misunderstanding, submit the question(s) in writing to the Director, Human
Resources of the Employer for a written response. Employee additionally agrees
to promptly inform and keep the Employer advised of the identity of his/her
employer (including any unit or division to which Employee is assigned),
his/her work location, and his/her title and work responsibilities during the
period covered by this Section 11.

     D. Employee agrees to fully disclose the terms of this Agreement to any
person or entity by which or with whom (s)he may hereafter become employed or
to which (s)he may hereafter render services, and agrees that Employer may, if
desired, send a copy of this Agreement, or otherwise make the provisions
hereof known, to any such entity.

     E. In the event of a breach by Employee of any of the terms of Section
11, the period of time the obligations hereunder apply will be automatically
extended for a period of time equal to the length of time Employee is in
breach.

12. INVESTMENT SECURITIES. Nothing in this Agreement will limit the right of
Employee, as an investor, to hold or acquire the stock or other investment
securities of any business entity that is registered on a national securities
exchange or regularly traded on a generally recognized over-the-counter
market, so long as Employee's interest in any such business entity does not
exceed five percent (5%) of its ownership.

13. MATERIAL BREACH. Any breach of this Agreement by the Employee will be a
material breach.

14. EMPLOYEE CONSENT. In order to preserve their rights under this Agreement,
Employer and/or the Companies may advise any third party with whom Employee
may consider, establish or contract an employment, consulting or service
relationship of the existence of this Agreement and of its terms. Employee
agrees that Employer and the Companies will have no liability for so acting.

                                                         Form PDI-1   Rev 3/03





15. CONTROLLING LAW. This Agreement will be governed and construed in
accordance with the laws of the State of Missouri and the rights and duties of
the parties pursuant to this Agreement or by operation of law by reason of any
matter relating to this Agreement, will be governed by the laws of the State
of Missouri, without regard to conflicts of laws principles. The parties agree
that any controversy arising with respect to this Agreement will fall under
the exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction and venue of that
court.

16. REMEDIES. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of
Employer and the Companies, and that any violation by Employee of any of the
promises in this Agreement would result in great damage and irreparable
injury to Employer and/or the Companies. Employee further agrees that if
Employee were to violate the covenants in Section 11 of this Agreement, the
unauthorized disclosure of Confidential Information would be inevitable and
result in great damage and irreparable harm. Employee agrees that in the event
of a breach of this Agreement, the Employer and/or the Companies have the
right to seek any and all legal and/or equitable remedies available for any
breach of this Agreement, including, but not limited to, enforcement by
injunction including ex parte temporary restraining order relief, in view of
such irreparable harm. Employee agrees that enforcement by way of Injunction
would not prevent Employee from making a living as described in Paragraph 11C.
Employer is entitled to its attorneys' fees, costs, and any related expenses
incurred in the enforcement of this Agreement in the event of any breach by
Employee.

17. SEVERABILITY. In the event any provision in this Agreement is deemed
unenforceable, in whole or in part, it will not invalidate either the balance
of the provisions or the remaining provisions of this Agreement. In addition,
the parties have attempted to limit Employee's right to compete only to the
extent necessary to protect Employer from unfair competition. Consequently,
the parties further agree that if any restrictive covenant in this Agreement
is deemed unenforceable, in whole or in part, because overly broad in
geographic scope, activity or time duration, that provision shall be
automatically modified so as to be enforceable to the maximum extent
reasonable.

18. ASSIGNMENT. This Agreement is not assignable by Employee, and will be
binding upon Employee and Employee's heirs, executors and legal and/or
personal representatives. This Agreement is assignable by Employer, and will
inure to the benefit of Employer, its successors and assigns. If Employee
subsequently accepts employment with one of the Companies, this Agreement will
be automatically assigned to the employing Company without additional covenant
or notice to Employee. In the event of this or any other assignment, sale,
merger, or other change in the ownership or structure of Employer, the
resulting entity will step into the place of the Employer under this Agreement
without additional covenant or notice to Employee. If the Agreement is
assigned, the term "Employer" will mean the then-employing Company and the term
"Companies" will mean the then-employing Company's parents, subsidiaries and
affiliates.

19. NONWAIVER. Failure of Employer and/or the Companies to exercise any of
its/their rights in the event Employee breaches any of the promises in this
Agreement shall not be construed as a waiver of such a breach or prevent
Employer and/or the Companies from later enforcing strict compliance with the
promises in this Agreement.

20. MODIFICATION. This Agreement contains the parties' complete agreement, and
supersedes any other agreement, oral or written, pertaining to the subject
matter of this Agreement. This Agreement may be altered, amended or revoked at
any time only by a writing signed by both parties.

21. ACKNOWLEDGMENT. Employee agrees that (s)he fully understands his/her right
to discuss all aspects of this Agreement with the legal or personal advisors
of his/her choice, and warrants that, to the extent (s)he desired, (s)he has
done so, (s)he has carefully read and fully understands all of the provisions
of this Agreement, and (s)he has voluntarily entered into this Agreement.

IN WITNESS WHEREOF, Employee and Employer have executed this Agreement on the
day and year first written above.


EMPLOYEE                                EMPLOYER



/s/ Paul T. Brady                       By /s/ Gerald R. Mitchell
- -----------------------------------       ---------------------------------

                                        Title
                                             ------------------------------

                                                         Form PDI-1   Rev 3/03

EX-10.(EE)

                                                                Exhibit 10(ee)


                                      KV


                          K-V PHARMACEUTICAL COMPANY
               EMPLOYMENT AND CONFIDENTIAL INFORMATION AGREEMENT

         This Agreement ("Agreement") is entered into on May 2,1990, between
 David Hermelin ("Employee") and K-V PHARMACEUTICAL COMPANY, a Delaware
 corporation ("KV").

         In consideration of Employee's employment or continued employment by
 KV and other valuable consideration, the receipt and sufficiency of which are
 acknowledged, Employee agrees as follows:

         1. Affiliates. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement as the "Companies"). From time to time, KV and the
Companies may exchange or use facilities, technology and/or Confidential
Information (as that term is defined below) of the other. The covenants in
this Agreement are for the benefit and protection of KV and the Companies.

         2. Nature of Employment. Employee is hereby employed by KV in the
position of Manager, Business Development. Employee acknowledges and agrees
that his/her job title and/or responsibilities may change from time to time.
Employee further agrees that, at all times, (s)he shall devote his/her full
time and best efforts to performing all duties reasonably assigned by KV.

         3. Compensation. As compensation for Employee's services to KV,
Employee shall receive a base salary at the rate of Fifty-five Thousand
Dollars ($55,000) per year, payable at such intervals as KV pays its other
employees. In addition, Employee shall be entitled to participate in the
fringe benefits normally provided to other KV employees at comparable
employment levels. Employee's compensation shall be subject to KV's normal
compensation review.

         4. Term. The initial term of this Agreement shall begin on May 2,
1990 , and continue until March 31, 1991, unless terminated sooner in
accordance with paragraph 5 of this Agreement. If not terminated sooner under
paragraph 5 hereof, this Agreement shall automatically renew for successive
one (1) year periods unless and until either party terminates this Agreement
pursuant to the provisions of paragraph 5. Termination of this Agreement by
either party, for any reason, shall in no manner affect the covenants
contained in paragraphs 6-11 of this Agreement.

         5. TERMINATION. Either party may terminate this Agreement, for any
reason, by giving the other party thirty (30) calendar day's advance written
notice. KV may, at its sole discretion, elect to pay Employee in lieu of
having Employee continue to work during the notice period. If KV exercises
this right and option, it shall pay Employee, on KV's regularly scheduled
paydays and in accordance with KV's regular pay practices, either: (A)
Employee's regular wages for a period of thirty (30) calendar days or (B)
one-half (1/2) of Employee's regular wages for a period of sixty (60) calendar
days. KV reserves the right to cease the payment(s) described above if, in
KV's reasonable determination, Employee breaches this Agreement during the
period of such payments. Notwithstanding the foregoing, KV may terminate this
Agreement without prior written notice to Employee or any continuing
compensation obligations if, in KV's reasonable determination, Employee has
breached this Agreement or Employee's continued employment is detrimental to
KV's best interests. By way of example, but not limitation, Employee's
continued employment will be deemed detrimental to KV's best interests if
Employee has engaged in dishonesty, disloyalty, failure to perform his/her
duties to KV or any act which may be harmful to the reputation of KV and/or
the Companies.

         6. Confidential Information. In the course of performing his/her
responsibilities as an employee of KV, Employee has or may come into
possession of technical, financial or business information pertaining to KV
and/or the Companies which is not published or readily available to the
public, including, but not limited to, trade secrets, techniques, designs,
formulae, methods, processes, devices, machinery, equipment, inventions,
research and development projects, programs, plans and data, clinical projects
and data, plans for future developments, marketing concepts and plans, pricing
information, licensing agreements, and lists of or other information
pertaining to and/or received from employees, customers and/or suppliers
("Confidential Information"). Employee acknowledges that the Confidential
Information is important to and greatly affects the success of KV and the
Companies in a competitive, worldwide marketplace. Employee further agrees
that while employed by KV and at all times thereafter, regardless of how, when
and why that employment ends, Employee shall hold in the strictest confidence,
and shall not disclose, duplicate and/or use for himself/herself or any other
person or entity any Confidential Information without: (A) the prior written
consent of an officer of KV, or (B) unless required to do so in order to
perform his/her responsibilities while employed by KV.

         7. PUBLICATION. Employee agrees not to publish or cause or permit to
be published any article, oral presentation or






material related to KV and/or the Companies, including any information related
to any products or proposed products, without obtaining the prior written
consent of an officer of KV.

         8. NO OTHER CONTRACT. Except as listed below, Employee warrants that
(s)he is not bound by the terms of any other agreement, oral or written, which
would limit or preclude him/her from disclosing to KV and/or the Companies any
idea, invention, discovery or other information pertaining or related to
Employee's responsibilities as an employee of KV. Employee agrees to promptly
provide KV with a copy of any and all agreements listed below. Employee
further agrees not to disclose to KV or the Companies, or to seek to induce KV
or the Companies to use any confidential information, material or trade
secrets belonging to any other person or entity. _____________________________
______________________________________________________________________________


         9. RIGHT TO WORK PRODUCT. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his/her employment by KV,
either solely or jointly with others: (A) in the course of performing his/her
duties for KV, (B) which are based, in whole or part, upon Confidential
Information, the resources, supplies, facilities or business, technical or
financial information of KV and/or the Companies, or (C) which relate to the
business or the anticipated research and development of KV, the Companies or
both ("Work Product"), shall be the sole property of KV and available to KV at
all times. Employee agrees to promptly disclose and assign and hereby assigns
to KV, without royalty or other additional consideration, any and all of
Employee's proprietary rights to any and all Work Product. Employee further
agrees that during his/her employment by KV and after that employment ends,
regardless of how, when and why, (s)he shall, upon KV's request: (A) execute
any and all applications for copyright and/or patent of Work Product which may
be prepared for his/her signature, (B) assign to KV any and all such
applications, copyrights and patents relating thereto, and (C) assist KV, as
KV deems necessary, in order for KV to apply for, defend or enforce any
copyright or patent. KV shall pay all expenses of preparing, filing and
prosecuting any such application and of obtaining such copyrights and patents.
In the event Employee is not employed by KV at the time any request for
assistance is made by KV, KV shall pay Employee a reasonable payment for
Employee's time and shall schedule any needed assistance so as to not to
interfere with Employee's then current employment and obligations.

         10. RETURN OF PROPERTY. Upon the termination of Employee's employment
with KV, regardless of how, when and why that employment ends, Employee shall
immediately deliver to KV all property of KV and all property of the
Companies, including, but not limited to, all records and documents (including
all copies) containing or relating to Confidential Information.

         11. RESTRICTIVE COVENANTS. The parties acknowledge and agree that at
the time this Agreement was entered, the business of KV and the Companies
included, but was not limited to, the contract or private label manufacture
for other marketers or distributors of pharmaceutical preparations or
specialty chemicals, and the research, development, manufacture, sale and
distribution of drug delivery products and technology. Employee agrees that
during the thirty-six (36) consecutive months immediately following
termination of Employee's employment with KV, regardless of how, when or why
that employment ends, Employee shall not in any manner or in any capacity,
directly or indirectly, for himself/herself or any other person or entity,
actually or attempt:

         (A)  to perform any of the same or similar responsibilities as
              Employee performed for KV under this Agreement, on behalf of or
              for any business that engages in the same or similar business
              as:
                  (i)  KV anywhere KV has conducted business, or
                  (ii) the Companies anywhere the Companies have conducted
                       business during the twenty-four (24) months immediately
                       preceding termination of employment; or

         (B)  to interfere with or take away:
                  (i)  any customer of KV that has conducted business with KV,
                       or
                  (ii) any customer of the Companies that has conducted
                       business with the Companies during the twenty-four (24)
                       months immediately preceding termination of employment;
                       or

         (C)  to interfere with any of the suppliers of KV and/or the
              Companies, including, without limitation, reducing in any
              material way the willingness or capability of any supplier to
              continue supplying KV with its and/or the Companies with their
              present or contemplated requirements; or

         (D)  to solicit or interfere with the relationship between KV and any
              of its employees or agents, and/or the Companies and any of
              their employees or agents; or

         (E)  to acquire any interest in any business that engages in the same
              or similar business as:
                  (i)  KV anywhere KV has conducted business, or
                  (ii) the Companies anywhere the Companies have conducted
                       business during the twenty-four (24) months immediately
                       preceding termination of employment. Employee further
                       agrees that (s)he shall not engage in any of the
                       activities listed above while (s)he is employed by KV.

Employee acknowledges and agrees that his/her experience, knowledge and
capabilities are such that (s)he can obtain





employment in unrelated pharmaceutical, chemical, food, industrial, household,
confectionery or other businesses, and that the enforcement of this paragraph
11 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if (s)he has any question(s) regarding the scope
of activities restricted by this paragraph 11, (s)he shall, to avoid confusion
or misunderstanding, submit the question(s) in writing to an officer of KV for
a written response by KV. Employee additionally agrees to keep KV advised of
the identity of his/her employer and his/her work location during the period
covered by this paragraph 11.

         12. INVESTMENT SECURITIES. Anything to the contrary notwithstanding,
nothing in this Agreement shall limit the right of Employee as an investor to
hold or to acquire the stock or other investment securities of any business
entity that is registered on a national securities exchange or regularly
traded on a generally recognized over-the-counter market, so long as
Employee's interest of any such business entity does not exceed five percent
(5%) of the ownership of that business entity.

         13. Material Breach. Any breach of this Agreement shall be a material
breach of this Agreement.

         14. EMPLOYEE CONSENT. In order to preserve the rights under this
Agreement of KV and the Companies, KV and/or the Companies may advise any
third party with whom Employee may consider, establish or contract a
relationship of the existence of this Agreement and of its terms. KV and the
Companies shall have no liability for so acting.

         15. CONTROLLING Law. This Agreement shall be construed in accordance
with the laws of the State of Missouri. The parties agree that any controversy
arising with respect to this Agreement shall fall under the exclusive
jurisdiction of the Circuit Court of the County of St. Louis, Missouri, and
each party hereby consents to the jurisdiction of that court.

         16. Remedies. Employee agrees that the promises in this Agreement are
reasonable and necessary to protect the legitimate business interests of KV
and the Companies, that any violation by Employee of any of the promises in
this Agreement would result in great damage and irreparable injury to KV
and/or the Companies, and that KV and/or the Companies have the right to any
and all legal and/or equitable remedies available for breach of this
Agreement. Employee further agrees that enforcement by KV and/or the Companies
of the promises contained in this Agreement by way of injunction would not
prevent Employee from making a living.

         17. SEVERABILLTY. In the event any whole or partial provision in this
Agreement is deemed unenforceable, it shall not invalidate the remaining whole
or partial provisions of this Agreement. In addition, the parties have
attempted to limit Employee's right to compete only to the extent necessary to
protect KV from unfair competition. Consequently, the parties further agree
that if any whole or partial restrictive covenant in this Agreement is deemed
unenforceable because overly broad in geographic scope, activity or time
duration, that provision shall be automatically modified so as to be
enforceable to the maximum extent reasonable.

         18. ASSIGNMENT. This Agreement is not assignable by Employee, and
shall be binding upon Employee and Employee's heirs, executors and legal
and/or personal representatives. This Agreement is assignable by KV, and shall
inure to the benefit of KV, its successors and assigns.

         19. NONWAIVER. Failure of KV and/or the Companies to exercise any of
its/their rights in the event Employee breaches any of the promises in this
Agreement shall not be construed as a waiver of such a breach or prevent KV
and/or the Companies from later enforcing strict compliance with the promises
in this Agreement.

         20. MODIFICATION. This Agreement contains the parries' complete
agreement, and supersedes any other agreement, oral or written, pertaining to
the subject matter of this Agreement. This Agreement may be altered, amended
or revoked at any time only by a writing signed by both parties.

         21. ACKNOWLEDGMENT. Employee agrees that: (A) (s)he fully understands
his/her right to discuss all aspects of this Agreement with legal or personal
advisors of his/her choice, (B) to the extent (s)he desired, (s)he has done
so, (C) (s)he has carefully read and fully understands all of the provisions
of this Agreement, and (D) (s)he has voluntarily entered into this Agreement.

         IN WITNESS WHEREOF, Employee and KV have executed this Agreement on
the day and year first written above.

EMPLOYEE                               COMPANY





/s/ David S. Hermelin                  By /s/ Gerald R. Mitchell
- ----------------------------------        --------------------------------
                                       Title VP, Finance
                                             -----------------------------









                           KV PHARMACEUTICAL COMPANY
                             EMPLOYMENT AGREEMENT

         THIS AGREEMENT ("Agreement") is entered into effective November 18,
1996, between David S. Hermelin ("Employee") and KV PHARMACEUTICAL COMPANY, a
Delaware corporation ("KV").

                  In consideration of employee's employment or continued
employment by KV and other valuable consideration, the receipt and sufficiency
of which are acknowledged, Employee agrees as follows:

                  1. Affiliates. KV has or may in the future have one or more
subsidiaries and/or affiliated companies (collectively referred to in the
remainder of this Agreement as the "Companies"). From time to time, KV and the
Companies may exchange or use facilities, technology and/or Confidential
Information (as that term is defined below) of the other. The covenants in
this Agreement are for the benefit and protection of KV and the Companies.

                  2. Nature of Employment. Employee is hereby employed by KV
in the position of Vice President, Corporate Planning and Administration.
Employee shall be employed at KV's offices in St. Louis, Missouri or such
other location as shall be agreeable to KV and Employee. Employee acknowledges
and agrees that his job title and/or responsibilities may change from time to
time. Employee further agrees that, at all times, he shall devote his full
time and best efforts to performing all duties reasonably assigned by KV.

                  3. COMPENSATION. As compensation for Employee's services to
KV, Employee shall receive a base salary at the rate per year being paid to
Employee as of the effective date of the Agreement, payable at such intervals
as KV pays its other employees. In addition, Employee shall be entitled to
participate in the fringe benefits normally provided to the other KV employees
at comparable employment levels. Employee's compensation shall be subject to
annual review.

                  4. Term. This Agreement shall be effective as of the date
first set forth above and continue until March 31, 2002, unless terminated
sooner in accordance with Paragraph 5 of this Agreement. If not terminated
sooner under Paragraph 5 hereof, this Agreement shall automatically renew for
successive twelve (12) month periods unless and until either party terminates
this Agreement pursuant to the provisions of Paragraph 5. Termination of this
Agreement by either party, for any reason, shall in no manner affect the
covenants contained in Paragraphs 6-11 of this Agreement.

                  5. TERMINATION.

                  (A) Voluntary. Employee may terminate this Agreement, for
any reason, by giving KV ninety (90) calendar days' advance written notice to
KV's Director, Human Resources. Employee agrees to remain on the job and at
all times faithfully, industriously and to the best of his ability, experience
and talents, perform all of the duties that have been required of him prior to
Employee's notice of termination, all to the reasonable satisfaction of KV.
Employee agrees that he will remain actively at work, as described above,
during the entire notice period unless he is released from all
responsibilities prior to the end of the notice period by the Board of
Directors or the Chief Executive Officer of KV. Employee agrees that if he
should fail to fully comply with the notice required by this subsection, and
if he should fail to fully comply with the requirement to remain on the job
and faithfully and to the best of his ability perform all of his duties, KV
will incur substantial damages as a direct result and that the amount of said
damages will be difficult to ascertain.

                  If Employee decides to terminate his employment with KV,
Employee shall disclose






Employee's decision to terminate to the Director, Human
Resources, of KV and shall not disclose such information to any other party
(except for a subsequent employer of Employee which has agreed to keep such
information confidential until KV has announced Employee's termination) until
such time as the Director, Human Resources of KV determines how and when to
announce Employee's termination.

                           (B) INVOLUNTARY. KV may terminate this Agreement at
any time and for any reason.

                  In the event of either voluntary or involuntary termination,
except termination for cause, KV shall provide Employee with twelve (12)
months of severance pay equal to no less than Employee's annual base salary,
then in effect under Paragraph 3 of this Agreement, less usual withholdings
and offset by compensation Employee receives from other full-time,
non-temporary employment. This severance package shall be paid in twelve (12)
equal monthly installments, each payment to be made on the last day of each of
the twelve (12) calendar months following the last date worked. Such monthly
payments shall be reduced dollar for dollar by Employee's monthly compensation
payable from another employer for full-time, non-temporary employment. In
addition, KV shall provide Employee at KV's expense, with medical, disability
and life insurance coverage and all other insurance coverage of the same or
similar types, and in the same or similar amounts as KV is providing to
Employee immediately prior to the last date worked. This continuation of
insurance coverage shall cease the earlier of eighteen (18) months after the
last date worked or at such time as Employee obtains other full-time,
non-temporary employment. In addition, as of the last date worked, all stock
options shall become immediately exercisable and shall remain exercisable
until the earlier of eighteen (18) months after the last date worked or at
such time as Employee obtains other full-time, non-temporary employment.
Further, any holding period of such options shall automatically be waived by
KV.

                  In consideration of the severance pay provided under this
paragraph, in the event of the cancellation, termination or expiration of the
Employment Agreement for any reason, Employee agrees to provide reasonable and
necessary services to assist KV in transition of responsibilities and ongoing
continuity of his job function unless both KV and Employee agree otherwise.

                  KV may terminate this Agreement for cause and in such event
Employee shall not be entitled to any severance pay. The term "for cause" as
used herein shall mean (i) commission of a dishonest or criminal act in
respect of Employee's employment or conviction of a felony, or (ii) breach of
trust or gross negligence, or (iii) willful refusal to perform duties imposed
by this Agreement which are legal and not improper, or (iv) Employee's
violation of Paragraph 7, 9, 10 or 11 of this Agreement, or (v) the continuing
neglect or failure of Employee to perform the duties reasonably assigned to
Employee by KV and after notice from KV of such neglect or failure, Employee's
failure to cure such neglect or failure. Any termination of this Agreement by
KV shall be effective only upon providing Employee with written notice and
advising Employee as to whether his termination is for cause.

                  Employee acknowledges that the duties and obligations of
Paragraphs 7, 9, 10, 11 and 12 shall survive the termination of his
employment.

                  6. Off-Site EMPLOYMENT. Employee may elect to take a reduced
annual rate of pay of Fifty Thousand Dollars ($50,000) for up to a one (1)
year period to be agreed upon by KV and Employee so long as Employee provides
continuity in all areas of responsibility or in other areas requested by KV.
During this one (1) year period, KV shall keep in full force all benefits,
including, but not limited to, insurance coverage, pension plans, and stock
option plans provided to other employees. In the event of employee's
termination during this one (1) year period, employee shall continue to be





entitled to the severance pay provided under paragraphs 5 and 14 based on
employee's unreduced annual rate of pay under paragraph 3 as of the date
employee elected to take a reduced rate of pay under this paragraph. This one
(1) year term may be extended on an annual basis with the mutual agreement of
KV and Employee.

                  7. CONFIDENTIAL INFORMATION. In the course of performing
responsibilities as an employee of KV, Employee has or may come into
possession of technical, financial or business information pertaining to KV
and/or the Companies which is not published or readily available to the
public, including, but not limited to, trade secrets, techniques, designs,
formulae, methods, processes, devices, machinery, equipment, inventions,
research and development projects, programs, plans and data, clinical projects
and data, plans for future developments, marketing concepts and plans, pricing
information, licensing agreements and lists or other information pertaining to
and/or received from employees, customers and/or suppliers ("Confidential
Information"). Employee acknowledges that the Confidential Information is
important to and greatly affects the success of KV and the Companies in a
competitive, worldwide marketplace. Employee further agrees that while
employed by KV and at all times thereafter, regardless of how, when and why
that employment ends, Employee shall hold in the strictest confidence, and
shall not disclose, duplicate and/or use for himself or any other person or
entity any Confidential Information without: (A) the prior written consent of
an officer of KV, or (B) unless required to do so in order to perform his
responsibilities while employed by KV.

                  8. Publication. Employee agrees not to publish or cause or
permit to be published any article, oral presentation or material related to
KV and/or the Companies, including any information related to any products or
proposed products, without obtaining the prior written consent of an officer
of KV.

                  9. No Other Contract. Except as listed below, Employee
warrants that he is not bound by the terms of any other agreement, oral or
written, which would limit or preclude his from disclosing to KV and/or the
Companies any idea, invention, discovery or other information pertaining or
related to Employee's responsibilities as an employee of KV. Employee agrees
to promptly provide KV with a copy of any and all agreements listed below.
Employee further agrees not to disclose to KV or the Companies, or to seek to
induce KV or the Companies to use any confidential information, material or
trade secrets belonging to any other person or entity.

                  10. Right to Work Product. Any and all designs, inventions,
discoveries, improvements, specifications, technical data, reports, business
plans and other embodiments of Employee's work conceived, made, discovered
and/or produced by Employee during the period of his employment by KV, either
solely or jointly with others: (A) in the course of performing his duties for
KV, (B) which are based, in whole or part, upon Confidential Information, the
resources, supplies, facilities or business, technical or financial
information of KV and/or the Companies, or (C) which relate to the business or
the anticipated research and development of KV, the Companies or both ("Work
Product"), shall be the sole property of KV and available to KV at all times.
Employee agrees to promptly disclose and assign and hereby assigns to KV,
without royalty or other additional consideration, any and all of Employee's
proprietary rights to any and all Work Product. Employee further agrees that
during his employment by KV and after that employment ends, regardless of how,
when and why, he shall, upon KV's request: (A) execute any and all
applications for copyright and/or patent of Work Product which may be prepared
for his signature, (B) assign to KV any and all such applications, copyrights
and patents relating thereto, and (C) assist KV, as KV deems necessary, in
order for KV to apply for, defend or enforce any copyright or patent. KV shall
pay all expenses of preparing, filing and prosecuting any such application and
of obtaining such copyrights and patents. In the event Employee is






not employed by KV at the time any request for assistance is made by KV, KV
shall pay Employee a reasonable payment for Employee's time and shall schedule
any needed assistance so as to not interfere with Employee's then current
employment and obligations.

                  11. RETURN OF PROPERTY. Upon the termination of Employee's
employment with KV, regardless of how, when and why that employment ends,
Employee shall immediately deliver to KV all property of KV and all property
of the Companies, including, but not limited to, all records and documents
(including all copies) containing or relating to Confidential Information.

                  12. RESTRICTIVE COVENANTS. The parties acknowledge and agree
that at the time this Agreement was entered, the business of KV and the
Companies included, but was not limited to, the contract or private label
manufacture for other marketers or distributors of pharmaceutical preparations
or specialty chemicals, and the research, development, manufacture, sale and
distribution of drug delivery products and technology. Employee agrees that
during the thirty-six {36) consecutive months immediately following
termination of Employee's employment with KV, regardless of how, when or why
that employment ends, Employee shall not, without prior authorization of KV,
in any manner or in any capacity, directly or indirectly, for himself or any
other person or entity, actually or attempt:

                  (A) to perform any of the same or similar responsibilities
as Employee performed for KV under this Agreement, on behalf of or for any
business that engages in the same business as KV:

                           (i) anywhere KV has conducted business; or

                           (ii) anywhere the Companies have conducted business
         during the twenty-four (24) months immediately preceding termination
         of employment; or

                  (B) to interfere with or take away:

                           (i) any customer of KV that has conducted business
         with KV;

                           (ii) any customer of the Companies that has
         conducted business with the Companies during the twenty-four (24)
         months immediately preceding termination of employment; or

                  (C) to interfere with any of the suppliers of KV and/or the
Companies, including, without limitation, reducing in any material way the
willingness or capability of any supplier to continue supplying KV with its
and/or the Companies with their present or contemplated requirements; or

                  (D) to solicit or interfere with the relationship between KV
and any of its employees or agents, and/or the Companies and any of their
employees or agents; or

                  (E) to acquire business that engages in the same business as
KV:

                           (i) anywhere KV has conducted business; or

                           (ii) anywhere the Companies have conducted business
         during the twenty-four (24) months immediately preceding termination
         of employment.

                  Employee further agrees that he shall not engage in any of
the activities listed above while he is employed by KV.

                  This non-compete is not intended to prevent Employee from
using his general skills, knowledge and experience in strategic planning, the
administration, management and control of a company or in leveraging or
building a company through acquisitions, mergers, divestitures, etc.






unless such conduct has an actual, demonstrable and substantial detrimental
effect on KV or the Companies. Employee acknowledges and agrees that his
experience, knowledge and capabilities are such that he can obtain employment
in unrelated pharmaceutical, chemical, food, industrial, household,
confectionery or other businesses, and that the enforcement of this Paragraph
12 by way of injunction would not prevent Employee from earning a livelihood.
Employee further agrees that if he has any questions regarding the scope of
activities restricted by this Paragraph 12, he shall, to avoid confusion or
misunderstanding, submit the question(s) in writing to an officer of KV for a
written response by KV. Employee additionally agrees to keep KV advised of the
identity of his employer and his work location during the period covered by
this paragraph.

                  13. INVESTMENT SECURITIES. Anything to the contrary
notwithstanding, nothing in this Agreement shall limit the right of Employee
as an investor to hold or to acquire the stock or other investment securities
of any business entity that is registered on a national securities exchange or
regularly traded on a generally recognized over-the-counter market, so long as
Employee's interest of any such business entity does not exceed five percent
(5%) of the ownership of that business entity, unless KV has given prior
consent.

                  14. CHANGE OF CONTROL.

                  (A) DEFINITION. For purposes of this Agreement, a "Change of
Control" of KV shall mean the occurrence of any one of the following events:

                           (i) any "person," as such term is used in Sections
         3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes a
         "beneficial owner," as such term is used in Rule 13d-3 promulgated
         under that Act, of twenty percent (20%) or more of the voting stock
         of KV;

                           (ii) the majority of the Board consists of
         individuals other than Incumbent Directors, which term means the
         members of the Board on the date of this Agreement; provided that any
         person becoming a director subsequent to such date whose election or
         nomination for election was supported by two-thirds (2/3) of the
         directors who then comprised the Incumbent Directors shall be
         considered to be an Incumbent Director;

                           (iii) KV adopts any plan of liquidation providing
         for the distribution of all or substantially all of its assets;

                           (iv) all or substantially all of the assets or
         business of KV is disposed of pursuant to a merger, consolidation or
         other transaction (unless the shareholders of KV immediately prior to
         such merger, consolidation or other transaction beneficially own,
         directly or indirectly, in substantially the same proportion as they
         owned the voting stock of the company, all of the voting stock or
         other ownership interests of the entity or entities, if any, that
         succeed to the business of KV); or

                           (v) KV combines with another company and is the
         surviving corporation but, immediately after the combination, the
         shareholders of KV, immediately prior to the combination hold, direct
         or indirectly, fifty percent (50%) or less of the voting stock of the
         combined company (there being excluded from the number of shares held
         by such shareholders, but not from the voting stock of the combined
         company, any shares received by affiliates of such other company in
         exchange for stock of such other company).

                  (B) TERMINATION AFTER CHANGE IN CONTROL. IN the event of a
Change of Control of KV, if (i) immediately preceding such Change of Control,
Employee was providing services under






Paragraph 2, 5 or 6, and (ii) Employee's employment in such capacity
terminates within three (3) years after such Change of Control
("Termination"), voluntarily or involuntarily, with or without cause, for any
reason whatsoever, except for the death or disability of Employee, Employee
shall be entitled to the benefits provided in Paragraph 14(C). For purposes of
this Paragraph 14, "Date of Termination" shall mean the date on which a Notice
of Termination is given, unless the parties agree to another date, and "Notice
of Termination" shall mean a written notice communicated by either party to
the other party which indicates that Employee's employment with KV is being
terminated.

                  (C) PAYMENTS ON TERMINATION AFTER CHANGE IN CONTROL.

                           (i) Employee's annual base salary through the Date
         of Termination at the rate in effect on the date Notice of
         Termination is given, including expenses, vacation pay, allowances
         and other compensation and benefits, and (ii) the amount, if any, of
         any bonus for a past fiscal year (and pro rata for any portion of the
         then current fiscal year through the Date-of Termination) which has
         not been awarded or paid under any bonus plans in which Employee is
         entitled to participate at the time of the Change of Control or under
         other bonus plans at least as beneficial to Employee. In addition, KV
         shall continue in full force and effect for the benefit of Employee
         through the Date of Termination all stock ownership, purchase or
         option plans, employee benefit or compensation plans, and insurance
         or disability plans in effect immediately preceding the Change of
         Control or plans substantially similar thereto.

                           (ii) In lieu of any further payments or benefits to
         be paid or otherwise provided under Paragraph 5 (excluding any stock
         option or restricted stock grants, and any deferred compensation
         benefits for any period subsequent to the Date of Termination), KV
         shall pay as severance pay ("Severance Pay") to Employee a lump sum
         payment equal to the sum of: (a) two (2) times the greater of: (x)
         Employee's base salary immediately prior to the Date of Termination,
         or (y) Employee's base salary in effect immediately prior to the date
         on which the Change of Control occurred, and (b) Employee's bonus,
         which would be payable in respect of the twenty-four (24) month
         period beginning on the Date of Termination as if Employee had
         continued his position assuming an annual bonus equal to the average
         of the three (3) complete bonus years immediately preceding the Date
         of Termination. Such bonus shall be calculated to be not less than
         the average of the prior three (3) years' bonuses paid to Employee.
         Such Severance Pay shall be subject to all applicable federal and
         state income taxes. The portion of the Severance Pay based upon
         Employee's base salary shall be paid on or before the fifth (5th) day
         following the Date of Termination, and the portion of the Severance
         Pay based upon any bonus plan shall be paid to Employee as and when
         payable under the terms of the applicable plan had Employee's
         employment continued. Employee, by written notice to KV at any time
         prior to a Change of Control of KV or the Date of Termination, may
         elect, in his sole discretion, to receive said Severance Pay
         interest-free at a future time, but in no event any later than
         twenty-four (24) months after the Date of Termination.

                           (iii) To the extent not otherwise provided for
         under the terms of any of KV's stock option agreements, all stock
         options granted by KV or any predecessor of KV to Employee shall vest
         and be exercisable or transferable as of the Date of Termination and,
         except for "incentive stock options" within the meaning of 26 U.S.C.
         Section 422, all options shall remain fully exercisable for six (6)
         months following the Date of Termination. In addition, any holding
         period for the underlying shares specified under any of KV's stock
         option agreements or restricted stock agreements with Employee shall
         automatically be amended and deemed to be the earlier of: (a) two (2)
         years from the date of exercise of the stock option, or (b) the Date
         of Termination.





                           (iv) KV shall maintain in full force and effect,
         for the continued benefit of Employee and members of Employee's
         family, for a period of twenty-four (24) months after the Date of
         Termination, all employee benefit plans and programs, including, but
         not limited to, plans and programs.

                  (D) APPLICATION OF SECTION 280G.

                  If it shall be determined that any payment or distribution
by KV to or for the benefit of Employee (whether paid or payable or
distributable pursuant to the terms of this Paragraph 14), would be subject to
the payment by Employee of the excise tax imposed by Section 280G(b)(2) of the
Internal Revenue Code of 1987, as amended, or any interest or penalties is
alleged to be due from Employee with respect to such excise tax (such excise
tax, together with any interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Employee's Severance Pay shall be
limited so as to avoid any Excise Tax.

                  (E) APPLICATION OF RESTRICTIVE COVENANTS.

                  In the event of Employee's Termination after Change in
Control as defined in Paragraph 14(B), Employee shall be released from his
obligations under Paragraphs 12(A) and (E) of this Agreement; however,
Employee shall not be released from his obligations under Paragraphs 12(B),
(C) and (D).

                  15. Material Breach. Any breach of this Agreement shall be a
material breach of this Agreement.

                  16. Employee Consent. In order to preserve the rights under
this Agreement of KV and the Companies, KV and/or the Companies may advise any
third party with whom Employee may consider, establish or contract a
relationship of the existence of this Agreement and of its terms. KV and the
Companies shall have no liability for so acting.

                  17. Controlling Law. This Agreement shall be construed in
accordance with the laws of the State of Missouri. The parties agree that any
controversy arising with respect to this Agreement shall fall under the
exclusive jurisdiction of the Circuit Court of the County of St. Louis,
Missouri, and each party hereby consents to the jurisdiction of that court.

                  18. Remedies. Employee agrees that the promises in this
Agreement are reasonable and necessary to protect the legitimate business
interests of KV and the Companies, that any violation by Employee of any of
the promises in this Agreement would result in great damage and irreparable
injury to KV and/or the Companies, and that KV and/or the Companies have the
right to any and all legal and/or equitable remedies available for breach of
this Agreement. Employee further agrees that enforcement by KV and/or the
Companies of the promises contained in this Agreement by way of injunction
would not prevent Employee from making a living.

                  19. Severability. In the event any whole or partial
provision in this Agreement is deemed unenforceable, it shall not invalidate
the remaining whole or partial provisions of this Agreement. In addition, the
parties have attempted to limit Employee's right to compete only to the extent
necessary to protect KV from unfair competition. Consequently, the parties
further agree that if any whole or partial restrictive covenant in this
Agreement is deemed unenforceable because overly broad, it shall not
invalidate the remaining provisions of this Agreement.

                  20. Assignment. This Agreement is not assignable by
Employee, and shall be binding upon Employee and Employee's heirs, executors
and legal and/or personal representative. This Agreement is assignable by KV,
and shall inure to the benefit of KV, its successors and assigns.





                  21. Nonwaiver. Failure of KV, and/or the Companies to
exercise any of its/their rights in the event Employee breaches any of the
promises in this Agreement shall not be construed as a waiver of such a breach
or prevent KV and/or the Companies from later enforcing strict compliance with
the promises in this Agreement.

                  22. MODIFICATION. This Agreement contains the parties'
complete agreement, and supersedes any other agreement, oral or written,
pertaining to the subject matter of this Agreement. This Agreement may be
altered, amended or revoked at any time only by a writing signed by both
parties.

                  23. Notice. Any notice given by either party hereunder shall
be in writing and shall be personally delivered or shall be mailed, Express,
certified or registered mail, or sent by a generally recognized next business
day courier, postage or other charges prepaid, as follows:

                  To KV:

                           KV Pharmaceutical Company
                           2503 South Hanley Road St.
                           Louis, Missouri 63144

                           Attention: Director, Human Resources

                  To Employee:

                           At his address as set forth on the payroll
                           records of KV,

or to such other address as may have been furnished to the other party by
written notice. Notice shall be deemed given on the date personally delivered,
or if sent by Express Mail or next business day courier on the business day
following the date sent, or if otherwise mailed, two (2) calendar days after
the date postmarked.

                  24. ACKNOWLEDGMENT. Employee agrees that: (A) he fully
understandings his right to discuss all aspects of this Agreement with legal
or personal advisors of his choice, (B) 2to the extent he desired, he has done
so, (C) he has carefully read and fully understands all of the provision of
this Agreement, and (D) he has voluntarily entered into this Agreement.

                  IN WITNESS WHEREOF, Employee and KV have executed this
Agreement on the day and year first written above.

                                  "EMPLOYEE"



                                  /S/ DAVID S. HERMELIN
                                  -----------------------------------
                                  DAVID S. HERMELIN

                                  "KV"

                                  KV PHARMACEUTICAL COMPANY



                                  By /S/ Gerald R. Mitchell
                                     ---------------------------------
                                     GERALD R. MITCHELL VICE PRESIDENT,
                                     FINANCE








KV PHARMACEUTICAL COMPANY




                                                      [KV logo]




April 8, 1998

PERSONAL AND CONFIDENTIAL
- -------------------------

Mr. David S. Hermelin
c/o 2503 South Hanley
St. Louis, MO 63144

Re:      Agreement between KV Pharmaceutical Company and
         David S. Hermelin, dated November 18, 1996

Dear David:

By way of this letter, we are amending paragraph 6 of your Employment
Agreement with KV so as to read "a reduced annual rate of pay of Fifty-Five
Thousand Dollars ($55,000)..." so as to take into account your annual salary
review which occurred on April 1 of 1998.

Except as specifically modified by this letter, it is agreed that the
Agreement will remain in full force and effect as originally written.

Sincerely,

KV PHARMACEUTICAL COMPANY
/s/ Gerald R. Mitchell

Gerald R. Mitchell Vice
President, Finance


            2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144-2555
                        (314) 645-6600 TELEX: 62893445




                           KV PHARMACEUTICAL COMPANY
                       AMENDMENT TO EMPLOYMENT AGREEMENT


                  THIS AMENDMENT ("Amendment") is entered into effective
August 16, 2004 between DAVID S. HERMELIN ("Employee") and KV PHARMACEUTICAL
COMPANY, a Delaware corporation ("KV").

                  WHEREAS KV and Employee have in the past entered into
certain KV Pharmaceutical Company Employment and Confidential Information
Agreement, including but not LINT-lied to those dated May 2, 1990, November
18, 1996 (the "1996 Employment Agreement"), and to an Amendment dated April 8,
1998;

                  WHEREAS KV and Employee desire to make certain changes and
additions to 1996 Employment Agreement which superceded the 1990 Agreement,
and to modify and supercede the 1998 Amendment, all as provided herein;

                  NOW THEREFORE, in consideration of Employee's employment or
continued employment by KV and other valuable consideration, the receipt and
sufficiency of which are acknowledged, KV and Employee agrees as follows:

                  1. Paragraph 2 of the 1996 Employment Agreement regarding
"Nature of Employment" is hereby amended to specify the position of Vice
President, Corporate Strategy and Operations Analysis.

                  2. Paragraph 3 of the 1996 Employment Agreement regarding
"Compensation" is hereby amended to specify a base salary of Two Hundred
Twenty-Five Thousand Dollars ($225,000) effective August 16, 2004. In
addition, as relates to the fringe benefits normally provided to the other KV
employees at comparable employment levels, Employee shall be eligible to
receive an annual bonus that relates to performance and achievement of
objectives. Employee may, at his option, elect to have the value of this
annual bonus provided to him in the form of Incentive Stock Options granted
under Employer's existing Option Plan or a similar plan applying the
Black-Scholes Option Pricing Model to determine the number of options
equivalent in value to the bonus to be paid by the delivery of Incentive Stock
Options.

                  3. Paragraph 4 of the Employment Agreement regarding "Term"
is hereby amended in its entirety to read as follows:

                          4. TERM. This Agreement shall be effective as of the
        date first set forth above and continue until August 15, 2009, unless
        terminated sooner in accordance with Paragraph 5 of this Agreement. If
        not terminated sooner under Paragraph 5 hereof, this Agreement shall
        automatically renew for successive twelve (12) month periods unless
        and until either party terminates this Agreement pursuant to the
        provisions of Paragraph 5. Termination of this Agreement by either
        party, for any reason, shall in no matter affect the covenants
        contained in Paragraphs 7-11 of this Agreement.






                  4. Paragraph 5 of the Employment Agreement regarding
"Termination" is hereby amended in its entirety to read as follows:

                  5. TERMINATION.

                 (A) VOLUNTARY. Employee may terminate this Agreement at the
        end of each one year anniversary date prior to and including the end
        of the initial term for any reason, by notifying KV in writing three
        (3) calendar months prior to the end of each such period. After
        completion of the initial term, Employee may terminate this Agreement
        by providing 120 calendar days notice to KV at any time. Either such
        events written notice shall be directed to KV's Vice President,
        Staffing. In the event of such voluntary termination at the end of any
        such one-year anniversary date prior to and including the end of the
        initial term, Employee agrees to remain on the job for the balance of
        the 90-day notice period and for three (3) additional months after the
        end of any such period and at all times faithfully, industriously, and
        to the best of his ability, experience and talents, perform all of the
        duties that have been required of him prior to Employee's notice of
        termination, all to the reasonable satisfaction of KV. Employee agrees
        that he will remain actively at work, as described above and will
        continue to be compensated at his normal rate, during the entire six
        (6) month notice, unless he is released from all responsibilities
        prior to the end of the notice, by the Board of Directors or the Chief
        Executive Officer of KV, in which case, his compensation shall be
        discontinued. Because of the nature of the position and the business,
        Employee agrees that if he should fail to fully comply with the notice
        required by this subsection, and if he should fail to fully comply
        with the requirement to remain on the job and faithfully and to the
        best of his ability perform all of his duties, KV will incur damages
        as a direct result and that the amount of said damages will be
        difficult to ascertain. Accordingly, specific performance will be
        required unless KV releases Employee from these obligations. In the
        event Employee terminates this Agreement upon 120 days calendar notice
        after completion of the initial term, KV, in its sole discretion,
        shall determine whether Employee shall continue to be employed during
        the notice period.

                 If Employee decided to terminate his employment with KV,
        Employee shall disclose Employee's decision to terminate to the Vice
        President, Staffing of KV and shall not disclose such information to
        any other party (except for a subsequent employer of Employee which
        has agreed to keep such information confidential until KV has
        announced Employee's termination) until such time as the Vice
        President, Staffing of KV determines how and when to announce
        Employee's termination.

                 (B) INVOLUNTARY. In the event of involuntary termination by
        KV, except termination for cause, KV shall provide Employee with
        severance pay of no less than one times the Employee's annual base
        salary, then in effect under Paragraph 3 of this Agreement, plus an
        amount equal to the average of the two most recent fiscal year's
        bonuses, less usual withholdings. This severance package shall be paid
        in twelve (12) equal monthly installments, each payment to be made on
        the last day of each of the twelve (12) calendar months following the
        last day worked. In addition, KV shall provide Employee, at KV's
        expense, with medical, disability and life insurance coverage and all
        other insurance coverage of the same or similar types, and in the same
        or similar

Page 2 of 7




         amounts as KV is providing to Employee immediately prior to the last
         day worked. This continuation of insurance coverage shall cease the
         earlier of twelve (12) months after the last date worked or at such
         time as Employee obtains other full-time, non-temporary employment
         which provides comparable coverage. In addition, as of the last date
         worked unless Employee is involuntarily terminated for cause, those
         stock options which are vested and exercisable by Employee shall
         remain exercisable for twelve (12) months following the last date
         worked.

                 In consideration of the severance pay provided under this
         paragraph, in the event of the cancellation, termination or
         expiration of the Employment Agreement for any reason, Employee
         Agrees to provide reasonable and necessary services to assist KV in
         transition of responsibilities and ongoing continuity of his job
         function unless KV does not request such services.

                 KV may terminate this Agreement for cause and in such event
         Employee shall not be entitled to any severance pay or benefits set
         forth in Paragraph 5(B). The term "for cause" as used herein shall
         mean (i) commission of a dishonest or criminal act in respect of
         Employee's employment or conviction of a felony, or (ii) breach of
         trust or gross negligence, or (iii) willful refusal to perform duties
         imposed by this Agreement which are legal and not improper, or (iv)
         Employee's violation of Paragraph 7, 8, 9 or 10 of this Agreement, or
         (v) the continuing neglect or failure of Employee to perform the
         duties reasonably assigned to Employee by KV and after notice from KV
         of such neglect or failure, Employee's failure to cure such neglect
         or failure. Any termination of this agreement by. KV shall be
         effective only upon providing Employee with written notice and
         advising Employee as to whether his termination is for cause.

                 Employee acknowledges that the duties and obligations of
         Paragraphs 7, 8, 10, 11 and 12 shall survive the termination of his
         employment.

                 In the event Employee is involuntarily terminated by KV for
         reasons other than for cause, employee will receive the severance pay
         and benefits set forth in Paragraph 5(B).

                  6. Paragraph 6 of the 1996 Employment Agreement is hereby
deleted in its entirety.

                  7. Paragraph 12 of the Employment Agreement regarding
"Restrictive Covenants" is hereby amended in its entirety to read as follows:

         12. RESTRICTIVE COVENANTS. The parties acknowledge and agree that at
the time this Agreement was entered, the business of KV and the Companies was
the sale and distribution of drug delivery products for generic sale and the
sale of specified branded women's health care products. Employee agrees that
during the thirty-six (36) consecutive months immediately following
termination of Employee's employment with KV, regardless of how, when or why
that employment ends, Employee shall not, without prior authorization of KV,
in any manner or in any capacity, directly or indirectly, for himself or any
other person or entity, actually or attempt:


Page 3 of 7




                          (A) to engage in the same business as KV anywhere KV
is actively conducting business.

                          (B) to interfere with or take away:

                                   (1) 1 any customer that is conducting
business with KV and/or the Companies;

                                   (ii) any customer that has conducted
business with KV and/or the Companies during the twenty-four (24) months
immediately preceding termination of employment; or


                          (C) to interfere with any of the suppliers of KV
and/or the Companies, including, without limitation, reducing in any material
way the willingness or capability of any supplier to continue supplying KV
with its and/or the Companies with their present or contemplated requirements;
or

                          (D) to solicit or interfere with the relationship
between KV and any of its employees or agents, and/or the Companies and any of
their employees or agents; or

                          Employee further agrees that he shall not engage in
any of the activities listed above
while he is employed by KV.

         This non-compete is not intended to prevent Employee from using his
general skills, knowledge and experience in strategic planning, the
administration, management and control of a company or in leveraging or
building a company through acquisitions, mergers, divestitures, etc. unless
such conduct has an actual, demonstrable and substantial detrimental effect on
KV or the Companies. Employee acknowledges and agrees that his experience,
knowledge and capabilities are such that he can obtain employment in the
pharmaceutical, chemical, food, industrial, household, confectionery or other
businesses, and that the enforcement of this Paragraph 12 by way of injunction
would not prevent Employee from earning a livelihood. Employee further agrees
that if he has any questions regarding the scope of activities restricted by
this Paragraph 12, he shall, to avoid confusion or misunderstanding, submit
the question(s) in writing to the Vice President, Staffing for a written
response by KV. Employee additionally agrees to keep KV advised of the
identity of his employer and his work location during the period covered by
this paragraph.

         8. Paragraph 14 of the Employment Agreement regarding "Change of
Control" is hereby amended in its entirety to read as follows:

                          14.       CHANGE OF CONTROL.

                          (A) DEFINITION. For purposes of this Agreement, a
        "Change of Control" of KV shall mean the occurrence of any one of the
        following events:

                                   (i) any "person," as such term is used in
Section 13(d) of the Securities Exchange Act of 1934, becomes a "beneficial
owner," as such term is used in

Page 4 of 7




Rule 13d-3 promulgated under that Act, of twenty percent (20%) or more of the
voting stock of KV;

                                   (ii) the majority of the Board consists of
individuals other than Incumbent Directors, which term means the members of
the Board on the date of this Agreement; provided that any person becoming a
director subsequent to such date whose election or nomination for election was
supported by two-thirds (2/3) of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director;

                                   (iii) KV adopts any plan of liquidation
providing for the distribution of all or substantially all of its assets;

                                   (iv) all or substantially all of the assets
or business of KV is disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of KV immediately prior to such merger,
consolidation or other transaction beneficially own, directly or indirectly,
in substantially the same proportion as they owned the voting stock of the
company, all of the voting stock or other ownership interests of the entity or
entities, if any, that succeed to the business of KV); or

                                   (v) KV combines with another company and is
the surviving corporation but, immediately after the combination, the
shareholders of KV, immediately prior to the combination hold, direct or
indirectly, fifty percent (50%) or less of the voting stock of the combined
company (there being excluded from the number of shares held by such
shareholders, but not from the voting stock of the combined company, any
shares received by affiliates of such other company in exchange for stock of
such other company).

                           (B) TERMINATION AFTER CHANGE IN CONTROL. In the
event of a Change of Control of KV, if (i) immediately preceding such Change
of Control, Employee was providing services under Paragraph 2, and (ii)
Employee's employment in such capacity terminates within a two-year period
following such Change of Control ("Termination"), voluntarily or
involuntarily, with or without cause, for any reason whatsoever, except for
the death or disability of Employee, Employee shall be entitled to the
compensation and benefits provided in Paragraph 14(C). An involuntary
termination shall include, but not be limited to, those circumstances in which
Employee's employment is affirmatively or constructively terminated. For
purposes of this Paragraph 14, "Date of Termination" shall mean the date on
which a Notice of Termination is given, unless the parties agree to another
date, and "Notice of Termination" shall mean a written notice communicated by
either party to the other party which indicates that Employee's employment
with KV is being terminated.; "constructive termination" shall mean a
substantial change in Employee's duties, work location, or compensation within
two years following a Change of Control.


Page 5 of 7




                           (C) PAYMENTS ON TERMINATION AFTER CHANGE IN CONTROL.

                                   (i) Employee's annual base salary through
the Date of Termination at the rate in effect on the date Notice of
Termination is given, including vacation pay, allowances and other
compensation and benefits, and (ii) the amount, if any, of any bonus for the
past fiscal year (and pro rata for any portion of the then current fiscal year
through the Date of Termination) which has not been awarded or paid under any
bonus plans in which Employee is entitled to participate at the time of the
Change of Control or under other bonus plans at least as beneficial to
Employee. In addition, KV shall continue in full force and effect for the
benefit of Employee through the Date of Termination all stock ownership,
purchase or option plans, employee benefit or compensation plans, and
insurance or disability plans in effect immediately preceding the Change of
Control or plans substantially similar thereto; and

                                   (ii) In lieu of any further payments or
benefits to be paid or otherwise provided under Paragraph 5 (excluding any
stock option or restricted stock grants, any deferred compensation benefits
for any period subsequent to the Date of Termination, or as further provided
under subparagraphs (iii) and (iv), below), KV shall pay as severance pay
("Severance Pay") to Employee a lump sum payment equal to two (2) times
Employee's base salary in effect immediately prior to the date on which the
Change of Control occurred, and Employee's bonus, which would be payable in
respect of the twenty-four (24) month period beginning on the Date of
Termination as if Employee had continued his position assuming an annual bonus
equal to the average of the two -(2) complete bonus years immediately
preceding the Date of Termination. Such bonus shall be calculated to be not
less than the average of the prior two (2) years' bonuses paid to Employee.
Such Severance Pay shall be subject to all applicable federal and state income
taxes. The portion of the Severance based upon Employee's base salary shall be
paid on or before the fifth (5th) day following the Date of Termination, and
the portion of the Severance Pay based upon any bonus plan shall be paid to
Employee as and when payable under the terms of the applicable plan had
Employee's employment continued. Employee,, by written notice to KV at any
time prior to a Change of Control of KV or the Date of Termination, may elect,
in his sole discretion, to receive said Severance Pay interest-free at a
future time, but in no event any later than twelve (12) months after the Date
of Termination.

                                   (iii) To the extent not otherwise provided
for under the terms of any of KV's stock option agreements, all stock options
granted by KV or any predecessor of KV to Employee shall fully vest and be
exercisable or transferable as of the Date of Termination and shall remain
fully exercisable following the Date of Termination.

                                   (iv) With respect to welfare benefits
(health, life, dental, AD&D), KV shall maintain in full force and effect, for
the continued benefit of Employee and members of Employee's family, for a
period of twenty four (24) months after the Date of Termination; all employee
benefit plans and programs, which KV otherwise provides for its employees.


Page 6 of 7




                           (D) APPLICATION OF SECTION 280G AND SECTION 4999.
         If it shall be determined that any payment or distribution by KV to
         or for the benefit of Employee (whether paid or payable or
         distributable pursuant to the terms of this Paragraph 22, would be
         considered to be a parachute payment as defined in Section 280G of
         the Internal Revenue Code such that it would be subject to the
         payment by Employee of the excise tax imposed by Section 4999 of the
         Internal Revenue Code of 1987, as amended, or any interest or
         penalties is alleged to be due from Employee with respect to such
         excise tax (such excise tax, together with any interest and
         penalties, are hereinafter collectively referred` to as the "Excise
         Tax"), then Employee's Severance Pay shall be limited, as determined
         by Employer in its discretion, so as to avoid any Excise Tax.

                 9. Continuation of Other Provisions of 1996 Employment
         Agreement. The paragraphs of the 1996 Employment Agreement which have
         not been amended by this Amendment shall remain in full force and
         effect. Other than the surviving provisions of the 1996 Employment
         Agreement, this Amendment otherwise is an integrated document and
         sets forth the entire understanding of the parties with respect to
         the subject matter hereof and fully supersedes any and all prior
         understandings, arrangements, industry usage, course of dealing
         and/or agreements between the parties hereto concerning such subject
         matter, whether reduced to writing or not.

                 IN WITNESS WHEREOF, Employee and KV have executed this
Amendment on the day and year first written above.


                                  "EMPLOYEE"



Dated: 8/16/04                    /s/ David S. Hermelin
       ---------                  ---------------------------
                                  David S. Hermelin


                                  "KV"


                                  KV PHARMACEUTICAL COMPANY



Dated: 8/16/04                    /s/ Gerald R. Mitchell
       ---------                  ---------------------------
                                  Gerald R. Mitchell




Page 7 of 7

EX-21

                                                                    Exhibit 21

                             List of Subsidiaries

ETHEX Corporation

Ther-Rx Corporation

Particle Dynamics, Inc.

Drugtech Corporation

FP1096, Inc.

Drugtech SARL (Switzerland)

KV Pharmaceutical Company Limited (UK)




                                     173

EX-23.1

                                                                  Exhibit 23.1

           Consent of Independent Registered Public Accounting Firm
           --------------------------------------------------------


The Board of Directors
K-V Pharmaceutical Company:

We consent to the incorporation by reference in the registration statements
(Nos. 2-56793, 2-76173, 33-46400, 33-44927, 333-00199, 333-48252 and
333-85516) on Form S-8 and registration statements (Nos. 333-87402 and
333-106294) on Form S-3 of our reports dated March 25, 2008, with respect to
the consolidated balance sheets of K-V Pharmaceutical Company and subsidiaries
(the Company) as of March 31, 2007 and 2006, the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 2007, and
the related financial statement schedule for the years then ended,
management's assessment of the effectiveness of internal control over
financial reporting as of March 31, 2007 and the effectiveness of internal
control over financial reporting as of March 31, 2007, which reports appear in
the March 31, 2007 annual report on Form 10-K of K-V Pharmaceutical Company.

Our report dated March 25, 2008 on the consolidated financial statements
refers to the Company's adoption of the provisions of Statement of Financial
Accounting Standards No. 123 (Revised 2004), "Share-Based Payment", effective
April 1, 2006.

Our report dated March 25, 2008 on the consolidated financial statements
states that the Company's consolidated balance sheet as of March 31, 2006, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for the years ended March 31, 2006 and
2005, have been restated.

Our report dated March 25, 2008 on management's assessment of the
effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting as of March 31,
2007 expresses our opinion that the Company did not maintain effective
internal control over financial reporting as of March 31, 2007 because of the
effect of material weaknesses on the achievement of the objectives of the
control criteria and contains an explanatory paragraph that states that the
existence of a number of material weaknesses resulted in more than a remote
likelihood that a material misstatement of the Company's annual or interim
financial statements would not be prevented or detected in various account
balances.



KPMG, LLP
St. Louis, Missouri
March 25, 2008

                                     174

EX-31.1

                                                                  EXHIBIT 31.1
                                                                  ------------

                                CERTIFICATIONS

I, Marc S. Hermelin, Chairman of the Board and Chief Executive Officer,
certify that:

1.       I have reviewed this Annual Report on Form 10-K of K-V Pharmaceutical
         Company;

2.       Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact
         necessary to make the statements made, in light of the circumstances
         under which such statements were made, not misleading with respect to
         the period covered by this report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash
         flows of the registrant as of, and for, the periods presented in this
         report;

4.       The registrant's other certifying officer(s) and I are responsible
         for establishing and maintaining disclosure controls and procedures
         (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
         internal control over financial reporting (as defined in Exchange Act
         Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

         (a)      Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this
                  report is being prepared;

         (b)      Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting
                  and the preparation of financial statements for external
                  purposes in accordance with generally accepted accounting
                  principles;

         (c)      Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure
                  controls and procedures, as of the end of the period covered
                  by this report based on such evaluation; and

         (d)      Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred
                  during the registrant's most recent fiscal quarter (the
                  registrant's fourth fiscal quarter in the case of an annual
                  report) that has materially affected, or is reasonably
                  likely to materially affect, the registrant's internal
                  control over financial reporting; and

5.       The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over
         financial reporting, to the registrant's auditors and the audit
         committee of the registrant's board of directors (or persons
         performing the equivalent functions):

         (a)      All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect
                  the registrant's ability to record, process, summarize and
                  report financial information; and

         (b)      Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date: March 25, 2008
      --------------
                                               /s/   MARC S. HERMELIN
                                        ------------------------------------
                                                  Marc S. Hermelin
                                        Chairman and Chief Executive Officer
                                           (Principal Executive Officer)

                                     175

EX-31.2

                                                                  EXHIBIT 31.2
                                                                  ------------

                                CERTIFICATIONS

I, Ronald J. Kanterman, Vice President and Chief Financial Officer, certify
that:

1.       I have reviewed this Annual Report on Form 10-K of K-V Pharmaceutical
         Company;

2.       Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact
         necessary to make the statements made, in light of the circumstances
         under which such statements were made, not misleading with respect to
         the period covered by this report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash
         flows of the registrant as of, and for, the periods presented in this
         report;

4.       The registrant's other certifying officer(s) and I are responsible
         for establishing and maintaining disclosure controls and procedures
         (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
         internal control over financial reporting (as defined in Exchange Act
         Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

         (a)      Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this
                  report is being prepared;

         (b)      Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting
                  and the preparation of financial statements for external
                  purposes in accordance with generally accepted accounting
                  principles;

         (c)      Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure
                  controls and procedures, as of the end of the period covered
                  by this report based on such evaluation; and

         (d)      Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred
                  during the registrant's most recent fiscal quarter (the
                  registrant's fourth fiscal quarter in the case of an annual
                  report) that has materially affected, or is reasonably
                  likely to materially affect, the registrant's internal
                  control over financial reporting; and

5.       The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over
         financial reporting, to the registrant's auditors and the audit
         committee of the registrant's board of directors (or persons
         performing the equivalent functions):

         (a)      All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect
                  the registrant's ability to record, process, summarize and
                  report financial information; and

         (b)      Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


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

                                     176

EX-32.1

                                                                  EXHIBIT 32.1
                                                                  ------------





                           CERTIFICATION PURSUANT TO
                            18 U.S.C. SECTION 1350,
                            AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of K-V Pharmaceutical Company (the
"Company") on Form 10-K for the fiscal year ended March 31, 2007, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Marc S. Hermelin, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results
                  of operations of the Company.






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

                                     177

EX-32.2

                                                                  EXHIBIT 32.2
                                                                  ------------





                           CERTIFICATION PURSUANT TO
                            18 U.S.C. SECTION 1350,
                            AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of K-V Pharmaceutical Company (the
"Company") on Form 10-K for the fiscal year ended March 31, 2007, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Ronald J. Kanterman, Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results
                  of operations of the Company.









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

                                     178