10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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, 2009

Or

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

For the transition period from             to             

Commission file number 1-9601

K-V PHARMACEUTICAL COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Delaware	43-0618919
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
One Corporate Woods Drive, Bridgeton, MO	63044
(Address of Principal Executive Offices)	(ZIP code)

(314) 645-6600

(Registrant’s telephone number, including area code)

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained herein, 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 28, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, was $755,273,000 and $84,710,000, respectively. As of February 28, 2010, the registrant had outstanding 37,736,871 and 12,111,835 shares of Class A Common Stock and Class B Common Stock, respectively.

DOCUMENTS INCORPORATED BY REFERENCE—None

EXPLANATORY NOTE

This Annual Report on Form 10-K for the fiscal year ended March 31, 2009 was delayed due to the time required to (1) complete the internal investigation conducted by the Audit Committee (the “Audit Committee”) of our Board of Directors (the “Board”) with respect to a range of specific allegations involving, among other items, U.S. Food and Drug Administration (the “FDA”) regulatory and other compliance matters and management misconduct, (2) resolve certain matters with a potential financial reporting impact resulting from such investigation and (3) evaluate the financial statement implications of the provisions of the consent decree we entered into with the FDA on March 2, 2009 and of the previously disclosed actions to recall all of the drug products we manufactured, suspend manufacturing and shipment of our products, substantially reduce our workforce and realign our cost and organizational structure.

For the same reasons, we had not filed with the U.S. Securities and Exchange Commission (the “SEC”) our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2008 (the “September 2008 Form 10-Q”), December 31, 2008 (the “December 2008 Form 10-Q”), June 30, 2009, September 30, 2009 and December 31, 2009. In addition, KPMG LLP, our independent registered public accounting firm, was unable to complete the SAS 100 review of the unaudited consolidated financial statements accompanying our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (the “June 2008 Form 10-Q”), which we filed with the SEC on August 11, 2008. As described in more detail in Amendment No. 1 on Form 10-Q/A to the June 2008 Form 10-Q, we are amending the June 2008 Form 10-Q to restate our consolidated balance sheet as of June 30, 2008 and the related consolidated statements of income and cash flows for the three months ended June 30, 2008. We are filing the September 2008 Form 10-Q, the December 2008 Form 10-Q and Amendment No. 1 on Form 10-Q/A to the June 2008 Form 10-Q on the same day as this Annual Report on Form 10-K.

We are in the process of preparing the Quarterly Reports on Form 10-Q for the quarters ended June 30, 2009, September 30, 2009 and December 31, 2009. However, we are unable at this time to estimate when any of these late reports will be filed with the SEC.

Information provided herein for periods after March 31, 2009 is preliminary and is not final or complete, and remains subject to change, possibly materially.

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains various forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and which may be based on or include assumptions concerning our operations, future results and prospects. Such statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “commit,” “intend,” “estimate,” “will,” “should,” “could,” “potential” and other expressions that indicate future events and trends.

All statements that address expectations or projections about the future, including without limitation, statements about product development, product launches, regulatory approvals, governmental and regulatory actions and proceedings, market position, acquisitions, sale of assets, revenues, expenditures, resumption of manufacturing and distribution of products and the impact of the recall and suspension of shipments on revenues, 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 PSLRA’s “safe harbor” provisions, we provide the following cautionary statements identifying important economic, competitive, political, regulatory and technological factors, among others, that 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) the ability to continue as a going concern;

(2) difficulties and uncertainties with respect to obtaining additional capital, as more fully described in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K;

(3) the consent decree between us and the FDA and our suspension of the production and shipment of all of the products that we manufacture and the related nationwide recall affecting all of the products that we manufacture, as well as the related material adverse effect on our revenue, assets and liquidity and capital resources, as more fully described in Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” in this Annual Report on Form 10-K;

(4) the possibility of further reducing our operations, including further reductions of our employee base, and significantly curtailing some or all of our efforts to meet the consent decree’s requirements and return our approved products to market in order to maintain and attempt to increase our limited cash and financial resources;

(5) the plea agreement between us and the U.S. Department of Justice and our obligations in connection therewith, as well as the related material adverse effect, if any, on our revenue, assets and liquidity and capital resources, as more fully described in Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” in this Annual Report on Form 10-K;

(6) changes in the current and future business environment, including interest rates and capital and consumer spending;

(7) the difficulty of predicting FDA approvals, including timing, and that any period of exclusivity may not be realized;

(8) the possibility of not obtaining FDA approvals or delay in obtaining FDA approvals;

(9) acceptance of and demand for our new pharmaceutical products;

(10) the introduction and impact of competitive products and pricing, including as a result of so-called authorized-generic drugs;

3

(11) new product development and launch, including the possibility that any product launch may be delayed;

(12) reliance on key strategic alliances;

(13) the availability of raw materials and/or products manufactured for us under contract manufacturing arrangements with third parties;

(14) the regulatory environment, including regulatory agency and judicial actions and changes in applicable law or regulations;

(15) fluctuations in revenues;

(16) the difficulty of predicting international regulatory approvals, including timing;

(17) the difficulty of predicting the pattern of inventory movements by our customers;

(18) the impact of competitive response to our sales, marketing and strategic efforts, including the introduction or potential introduction of generic or competing products against products sold by us and our subsidiaries;

(19) risks that we may not ultimately prevail in litigation, including product liability lawsuits and challenges to our intellectual property rights by actual or potential competitors or to our ability to market generic products due to brand company patents and challenges to other companies’ introduction or potential introduction of generic or competing products by third parties against products sold by us or our subsidiaries including without limitation the litigation and claims referred to in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K;

(20) the possibility that our current estimates of the financial effect of certain announced product recalls could prove to be incorrect;

(21) whether any product recalls or product introductions result in litigation, agency action or material damages;

(22) failure to supply claims by certain of our customers, including CVS Pharmacy, Inc., that, despite the formal discontinuation action by us of our products, we should compensate such customers for any additional costs they allegedly incurred for procuring products we did not supply;

(23) the satisfaction or waiver of the terms and conditions for the acquisition of the full U.S. and worldwide rights to Gestiva^™ set forth in the previously disclosed Gestiva^™ acquisition agreement, as amended;

(24) the series of putative class action lawsuits alleging violations of the federal securities laws by us and certain individuals, all as more fully described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K;

(25) the possibility that insurance proceeds are insufficient to cover potential losses that may arise from litigation, including with respect to product liability or securities litigation;

(26) the informal inquiry initiated by the SEC and any related or additional governmental investigative or enforcement proceedings as more fully described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K;

(27) the possibility that the pending investigation by the Office of Inspector General of the Department of Health and Human Services into potential false claims under Title 42 of the U.S. Code as more fully described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K could result in significant civil fines or penalties, including exclusion from participation in federal healthcare programs such as Medicare and Medicaid;

(28) delays in returning, or failure to return, certain or many of our approved products to market, including loss of market share as a result of the suspension of shipments, and related costs;

(29) the ability to sell or license certain assets, and the terms of such transactions;

4

(30) the possibility that default on one type or class of our indebtedness could result in cross default under, and the acceleration of, our other indebtedness; and

(31) the risks detailed from time to time in our filings with the SEC.

This discussion is not exhaustive, but is designed to highlight important factors that may impact our forward-looking statements.

Because the factors referred to above, as well as the statements included under the captions Item 1A—“Risk Factors,” Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on 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. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this “Cautionary Note Regarding Forward-Looking Statements” and the risk factors that are included under the caption Item 1A—“Risk Factors” in this Annual Report on Form 10-K, as supplemented by our subsequent SEC filings. Further, any forward-looking statement speaks only as of the date on which it is made and we are under no obligation to update any of the forward-looking statements after the date of this Annual Report on Form 10-K. 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.

5

PART I

Item 1. Business

(a) General Overview

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 (“Ther-Rx”), ETHEX Corporation (“ETHEX”) and Particle Dynamics, Inc. (“PDI”). Unless otherwise noted, when we refer to a specific fiscal year, we are referring to our fiscal year that ended on March 31 of that year. (For example, fiscal year 2009 refers to the fiscal year ended March 31, 2009.)

We were incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942.

We have been engaged 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 that are primarily focused in four principal areas: SITE RELEASE^®; 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 our wholly-owned subsidiary, ETHEX. In 1999, we established a wholly-owned subsidiary, Ther-Rx, to market proprietary branded pharmaceuticals directly to physicians.

Our wholly-owned subsidiary, 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 industry and other markets.

(b) Significant Recent Developments

Audit Committee Internal Investigation

As previously disclosed, in August 2008, the Audit Committee of our Board, with the assistance of outside legal counsel, including regulatory counsel with respect to FDA matters, and other advisers, conducted an internal investigation with respect to a range of specific allegations involving, among other items, FDA regulatory and other compliance matters and management misconduct. The investigation was substantially completed in December 2008 and the investigation of all remaining matters was completed in June 2009.

The investigation focused on, among other areas, FDA and other healthcare regulatory and compliance matters, financial analysis and reporting, employment and labor issues, and corporate governance and oversight. As part of its findings, the Audit Committee concluded that there were:

• instances of noncompliance by us with FDA and other healthcare regulations and deficiencies in our regulatory compliance policies and procedures;

• deficiencies in our financial analysis and budgeting controls and procedures;

• deficiencies in our human resources functions and our employment policies and procedures; and

• deficiencies in the conduct of certain members of the senior management team with respect to, among other things, its interaction with the Board.

As a result of these findings, the Audit Committee, with the assistance of its legal counsel, including regulatory counsel with respect to FDA matters, and other advisers, has prepared and approved a remedial framework, including supplements (the “Remedial Framework”). The Board, either directly or through a Special

6

Committee (as defined below) of the Board, has reviewed and approved the Remedial Framework. The Remedial Framework includes measures to:

• strengthen corporate governance and enhance Board oversight;

• strengthen and enhance compliance with FDA and related regulatory requirements;

• strengthen and enhance financial and accounting controls and procedures;

• strengthen and enhance policies and practices in the employment area; and

• strengthen and enhance compliance with federal and state legal and regulatory requirements governing pharmaceutical sales and marketing activities.

Measures to strengthen corporate governance and enhance Board oversight include: mandating direct access for certain officers and executives (including, for example, the Vice President of Corporate Quality) to the non-management members of the Board; an increased oversight role for certain committees of the Board composed solely of independent directors; expanding the membership of our disclosure committee to include executives with responsibilities over our operating divisions and regulatory affairs; and reviewing, revising and updating existing policies and procedures. In addition, our legal department has been reorganized and relocated adjacent to the Chief Executive Officer’s office to facilitate greater access to the legal department and more extensive involvement of the legal department in corporate governance and compliance matters. As discussed below, we have terminated the employment of a number of high-level employees.

Measures to strengthen and enhance compliance with FDA regulations and related regulatory compliance include retaining new outside consultants and counsel for FDA regulatory matters and, with their assistance, reviewing and revising our company policies, procedures and practices to enhance compliance with the FDA’s current good manufacturing practice requirements. Other related measures include: enhancing compliance with FDA drug application, approval and post-approval requirements; evaluating compliance with applicable foreign laws and regulations; and implementing internal reporting policies pursuant to which the chief compliance officer of our company will report periodically to the non-management members of the Board.

Measures to strengthen and enhance financial and accounting controls and procedures include: reviewing the staffing levels, capabilities and experience of the members of the finance department; strengthening and enhancing the internal audit process; and strengthening and enhancing the internal budgeting and forecasting process.

Measures to strengthen and enhance policies and practices in the employment area include engaging outside consultants and legal counsel to review our employment policies and practices.

Measures to strengthen and enhance compliance with federal and state legal and regulatory requirements governing pharmaceutical sales and marketing activities include: creating an internal compliance committee composed of members of senior management; adopting a company-wide policy that identifies adherence to our company’s compliance program as a material element in evaluating all employees, including management; and strengthening and enhancing the authority and responsibility of the chief compliance officer of our company.

Under the supervision of the Audit Committee, we have begun implementing certain of these remedial measures. In addition, the Remedial Framework may be supplemented from time to time with additional remedial measures.

Changes in Management

On December 5, 2008, the Board, acting upon the recommendation of the Audit Committee as a result of the investigation described above, terminated the employment agreement of Marc S. Hermelin, the Chief Executive Officer of our company at that time. In addition, the Board removed Mr. M. Hermelin as the Chairman of the Board and as the Chief Executive Officer, effective December 5, 2008. Mr. M. Hermelin has informed us,

7

however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board. Mr. M. Hermelin remains a member of the Board.

Effective December 5, 2008, the Board appointed David A. Van Vliet (formerly President and Chief Executive Officer of ETHEX) to serve as Interim Chief Executive Officer and Terry B. Hatfield, a director, to serve as non-executive Chairman of the Board.

On September 2, 2009, Thomas S. McHugh, the Vice President of Finance and Corporate Controller of our company, was named Interim Chief Financial Officer and Interim Treasurer. Mr. McHugh replaced Ronald J. Kanterman, who ceased serving as the Chief Financial Officer and Treasurer of our company as of such date. In addition, Mr. McHugh began to serve as the Chief Accounting Officer of our company on February 19, 2010. Mr. McHugh replaced Mr. Chibnall, who ceased serving as the Chief Accounting Officer of our company as of such date.

We have initiated a search for a Chief Financial Officer and formed a committee for that purpose. Mr. Van Vliet and certain members of the Board comprise the committee.

Special Committee

As previously disclosed, in December 2008 the Board appointed a Special Committee of the Board (the “Special Committee”) in response to the initiation of a series of putative class action shareholder lawsuits alleging violations of the federal securities laws by our company and certain individuals, the initiation of lawsuits alleging violations under the Employee Retirement Income Security Act (“ERISA”), as well as the receipt by our company of an informal inquiry from the SEC and certain requests for information from the Office of the United States Attorney for the Eastern District of Missouri and FDA representatives working with that office. We, at the direction of the Special Committee, are fully cooperating in these governmental matters.

Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree

In March 2008, representatives of the Missouri Department of Health and Senior Services, accompanied by representatives of the FDA, embargoed our inventory of certain unapproved drug products, prohibiting our commercial distribution of those products and restricting our ability to remove or dispose of them without permission. The state embargo was later superseded by a seizure of those products by the FDA. During the course of these events, we engaged in discussions with the involved state and federal representatives that led to certain morphine, oxycodone and hyoscyamine products being released, and our agreement to discontinue manufacturing and marketing substantially all of the unapproved products that had been seized.

During most of fiscal year 2008, we marketed approximately 30 products in our generic/non-branded respiratory line, which consisted primarily of cough/cold products. Following the embargo discussed above, we continued to market one generic cough/cold product with four strengths that had been approved by the FDA. As part of the consent decree, we have agreed not to manufacture or distribute any drugs that require FDA approval unless we have obtained such FDA approval; when we resume production under the terms of the consent decree, any drug product requiring approval that we manufacture and commercially distribute will be the subject of an approved New Drug Application (“NDA”), 505(b)(2) NDA, or Abbreviated New Drug Application (“ANDA”). See “—(d) Narrative Description Of Business—Government Regulation—New Product Development and Approval” in this Annual Report on Form 10-K for a summary description of NDAs, 505(b)(2) NDAs and ANDAs.

In May 2008, we received two reports of an oversized morphine sulfate extended-release tablet in commercial distribution. We conducted an investigation into the possible causes of any such oversized tablets and the likelihood that additional lots of morphine sulfate extended-release tablets or other products might contain oversized tablets. We instituted changes in our manufacturing processes to address the identified causes and intended to prevent any oversized tablets from entering commercial distribution. In addition, in June 2008,

8

ETHEX initiated voluntary recalls of morphine sulfate 30 mg and 60 mg extended-release tablets. In July 2008, a voluntary recall was initiated in Canada by the seller of specific lots of morphine sulfate 60 mg, 30 mg and 15 mg extended-release tablets that we manufactured for them.

On October 15, 2008, ETHEX commenced a voluntary recall of three specific lots of dextroamphetamine sulfate 5 mg tablets as a precaution due to the possible presence of oversized tablets.

On November 7, 2008, ETHEX announced a voluntary recall to the consumer level of multiple lots of five generic products of varying strengths as a precaution due to the potential presence of oversized tablets. These products included: propafenone HCl tablets, isosorbide mononitrate extended-release tablets, morphine sulfate extended-release tablets, morphine sulfate immediate release tablets, and dextroamphetamine sulfate tablets.

On November 10, 2008, ETHEX initiated a voluntary recall to the retail level as a precaution due to the possible presence of oversized tablets. This recall affected multiple lots of 18 generic/non-branded products.

On December 15, 2008, the FDA began an inspection of our facilities.

On December 19, 2008, we voluntarily suspended all shipments of our FDA approved drug products in tablet form and commenced a voluntary nationwide single production lot recall of one of our pain management drugs. The 14 products of varying strengths affected by the suspension included metoprolol succinate extended-release tablets (metoprolol), oxycodone HCl tablets and potassium chloride 20 mEq extended-release tablets.

Effective January 22, 2009, we voluntarily suspended the manufacturing and shipment of the remainder of our products, except for three products we distribute but do not manufacture and which do not generate a significant amount of revenue.

On January 28, 2009, we initiated a nationwide voluntary recall affecting most of our products. The recall was subsequently expanded on February 3, 2009. This recall affected multiple lots of over 150 branded and generic/non-branded products.

On January 30, 2009, in response to the FDA’s inspectional activities, we initiated the disposal of our existing inventory of products, which was subsequently mandated by the consent decree.

On February 2, 2009, the FDA issued a Form 483 Report that set forth inspectional observations.

On March 2, 2009, we entered into a consent decree with the FDA regarding our drug manufacturing and distribution. The consent decree was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 6, 2009. As part of the consent decree, we have agreed not to directly or indirectly do or cause the manufacture, processing, packing, labeling, holding, introduction or delivery for introduction into interstate commerce at or from any of our facilities of any drug, until we have satisfied certain requirements designed to demonstrate compliance with the FDA’s current good manufacturing practice (“cGMP”) regulations. The consent decree provides for a series of measures that, when satisfied, will permit us to resume the manufacture and distribution of approved drug products. We have also agreed not to distribute our products that are not FDA approved, including our prenatal vitamins and hematinic products, unless we obtain FDA approval for such products through the FDA’s ANDA or NDA processes.

As part of such measures set forth in the consent decree, we are required to provide, and have provided, to the FDA a work plan (the “Work Plan”) for approval, which sets forth the steps we have taken and will subsequently take to address previously identified deficiencies in our compliance with cGMP regulations.

On July 27, 2009, a representative of the Compliance Branch of the FDA’s Kansas City District, acting in conjunction with the Office of Compliance of the FDA’s Center for Drug Evaluation and Research (CDER),

9

notified us by electronic mail that the FDA had completed its review of the Work Plan. Subject to the addition of certain changes, to which we have agreed and incorporated into the Work Plan, the FDA has accepted the Work Plan. While acceptance of the Work Plan was pending, we, with the knowledge of the FDA, had already begun implementing certain measures set forth in the Work Plan.

The consent decree further provides that, before resuming manufacturing, we will retain and have an independent cGMP expert undertake a review of our facilities and operations and certify compliance with cGMP regulations. Following that certification, the FDA will make a determination as to whether we are in compliance. The consent decree further provides a process pursuant to which we may request approval from the FDA to resume manufacturing and distribution of up to two groups of approved products prior to receiving approval from the FDA to resume full operations. On January 13, 2010, our independent cGMP expert, Lachman Consultants (“Lachman”), notified the FDA that Lachman had performed a comprehensive inspection and that our facilities and controls are in compliance with cGMP and the consent decree with respect to the first group of products that we seek to manufacture and market. Once Lachman issues a certification regarding the first group of products that we seek to manufacture and market, we expect that the FDA will re-inspect our facilities and determine whether we are in compliance. A successful FDA inspection is a prerequisite to resuming manufacturing and shipment of our products. We cannot predict with certainty the timing or the outcome of the product certification or the inspection.

Even after a successful FDA inspection, we anticipate that additional data will need to be generated and submitted to the FDA with respect to certain of our products before we can return them to the market. For example, we will need to perform additional work with regard to product development and formulation and to submit additional data to the FDA before certain products can be returned to the market. Similarly, the FDA has also informed us that, with respect to certain of our products that are subject to ANDAs or supplemental ANDAs we had submitted before entering into the consent decree, we will need to develop and/or submit additional data before those applications can be resubmitted for the FDA’s review.

The steps taken by us in connection with the nationwide recall and suspension of shipment of all products manufactured by us and the requirements under the consent decree have had, and are expected to continue to have, a material adverse effect on our results of operations. We do not expect to generate any significant revenues from products that we manufacture until we can resume shipping certain or many of our approved products, which currently is not expected to occur until the fourth quarter of calendar year 2010 at the earliest. In the meantime, we must meet ongoing operating costs related to our employees, facilities and FDA compliance, as well as costs related to the steps we are currently taking to prepare for reintroducing our products to the market. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

Plea Agreement with the U.S. Department of Justice

As previously disclosed, we, at the direction of the Special Committee, responded to requests for information from the Office of the United States Attorney for the Eastern District of Missouri and FDA representatives working with that office. In connection therewith, on February 25, 2010, the Board, at the recommendation of the Special Committee, approved entering into a plea agreement with the Office of the United States Attorney for the Eastern District of Missouri and the Office of Consumer Litigation of the United States Department of Justice (referred to herein collectively as the “Department of Justice”).

The plea agreement was executed by the parties and was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 2, 2010. Pursuant to the terms of the plea agreement, ETHEX pleaded guilty to two felony counts, each stemming from the failure to make and submit a field alert report to the FDA in September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. Sentencing pursuant to the plea agreement also took place on March 2, 2010.

10

Pursuant to the plea agreement, ETHEX agreed to pay a criminal fine in the amount of $23.4 million in four installments. The first installment, in the amount of $2.3 million, is due within 10 days of sentencing. The second and third installments, each in the amount of $5.9 million, are due on December 15, 2010 and July 11, 2011, respectively. The fourth and final installment, in the amount of $9.4 million, is due on July 11, 2012. ETHEX also agreed to pay, within 10 days of sentencing, restitution to the Medicare and the Medicaid programs in the amounts of $1.8 million and $0.6 million, respectively. In addition to the fine and restitution, ETHEX agreed not to contest an administrative forfeiture in the amount of $1.8 million, which is payable 45 days after sentencing and satisfies any and all forfeiture obligations ETHEX may have as a result of the guilty plea. In total, ETHEX agreed to pay fines, restitution and forfeiture in the aggregate amount of $27.6 million.

In exchange for the voluntary guilty plea, the Department of Justice agreed that no further federal prosecution will be brought in the Eastern District of Missouri against ETHEX, KV and Ther-Rx regarding allegations of the misbranding and adulteration of any oversized tablets of drugs manufactured by us, and the failure to file required reports regarding these drugs and patients’ use of these drugs with the FDA, during the period commencing on January 1, 2008 through December 31, 2008.

In connection with the guilty plea by ETHEX, ETHEX is expected to be excluded from participation in federal healthcare programs, including Medicare and Medicaid. In addition, as a result of the guilty plea by ETHEX, the U.S. Department of Health and Human Services (“HHS”) may use its discretionary authority to also exclude our company from participation in federal healthcare programs. However, we are in receipt of correspondence from the Office of the Inspector General of HHS stating that, absent any transfer of assets or operations that would trigger successor liability, HHS has no present intent to exercise its discretionary authority to exclude our company as a result of the guilty plea by ETHEX.

In connection with the exclusion of ETHEX from participation in federal healthcare programs, we plan to cease operations of ETHEX. However, we have retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and are in possession of all intellectual property related to generic products, including all NDAs and ANDAs.

We currently do not anticipate that the voluntary guilty plea by ETHEX will have a material adverse effect on our efforts to comply with the requirements pursuant to the consent decree and to resume production and shipments of our approved products.

Workforce Reduction

On February 5, 2009, we commenced a substantial reduction of our workforce as part of an ongoing realignment of our cost structure that was necessitated by our product recalls and the requirements under the consent decree. We have also realigned and restructured the Ther-Rx sales force and, in connection with this realignment and restructuring, have significantly reduced the number of sales employees. In July 2009, we also realigned and restructured the production workforce and reduced the number of production employees by approximately 300. Most of these employees had been furloughed since February 2009. As a result of this realignment and restructuring, we have reduced our employee headcount from approximately 1,700 on December 31, 2008 to approximately 680 as of February 28, 2010. Despite the realignment and restructuring, we believe we have retained an adequate level of personnel to support our initial re-entry into the market.

Ability to Continue as a Going Concern

There is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included in this Annual Report on Form 10-K are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The historical consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments that might be necessary if we are unable to continue as a going concern.

11

The assessment of our ability to continue as a going concern was made by management considering, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. Our assessment was further affected by our fiscal year 2009 net loss of $313.6 million and the outstanding balance of cash, cash equivalents and short-term marketable securities of $75.7 million as of March 31, 2009. For periods subsequent to March 31, 2009, we expect losses to continue because we are unable to generate any significant revenues from our own manufactured products until we are able to resume shipping certain or many of our approved products, which currently is not expected to occur until the fourth quarter of calendar year 2010 at the earliest. In addition, we must meet ongoing operating costs as well as costs related to the steps we are currently taking to prepare for reintroducing our approved products to the market. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

We believe that we are not in compliance with one or more of the requirements of our mortgage loan arrangement as of March 31, 2009 (see Note 14—“Long-Term Debt” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Failure by us to comply with the requirements of the mortgage loan arrangement or to otherwise receive a waiver from the mortgage lender for any noncompliance could result in our outstanding mortgage debt obligation accelerating and immediately becoming due and payable. If the acceleration occurs and the mortgage debt is not immediately paid in full, an event of default could also be deemed to have occurred under the $200 million principal amount of 2.5% Contingent Convertible Subordinated Notes (the “Notes”). If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest could also become immediately due and payable. The acceleration of these outstanding debt obligations would materially adversely affect our business, financial condition and cash flows.

Based on current financial projections, we believe the continuation of our company as a going concern is primarily dependent on our ability to address, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. While we address these matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with reintroducing our approved products to the market (such as costs related to our employees, facilities and FDA compliance), remaining payments associated with the acquisition of the rights to Gestiva^™ (see Note 6—“Acquisitions” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K), the financial obligations pursuant to the plea agreement (see Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” included in this Annual Report on Form 10-K), as well as the significant costs, such as legal and consulting fees, associated with the steps taken by us in connection with the consent decree and the litigation and governmental inquiries. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, and/or if we experience adverse outcomes with respect to any of the governmental inquiries or litigation described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. See Item 1A—“Risk Factors” included in this Annual Report on Form 10-K regarding additional risks we face with respect to these matters.

12

In the near term, we are focused on meeting the requirements of the consent decree, which will allow our approved products to be reintroduced to the market, and are pursuing various means to increase cash. Since March 31, 2009, we have generated non-recurring cash proceeds to support our on-going operating and compliance requirements from the receipt of tax refunds, the monetization of our ARS and the sale of certain other assets (see Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the cash received). We also generated cash from the sale of certain products not manufactured by us under the distribution and supply agreement with Purdue (see Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). While these cash proceeds were sufficient to meet near-term cash requirements, we are pursuing ongoing efforts to increase cash including the continued implementation of cost savings, divestiture of PDI and other assets and the return of certain or many of our approved products to market in a timely manner. In addition, in order to continue to meet the expected near-term obligations described above, we will still need to obtain additional capital through additional asset sales. Based on our continuing assessment and identification of assets for future sale and the results of the currently proposed asset sales, we may elect to engage in external financing efforts. We currently do not anticipate issuing equity securities to raise additional capital. However, we continue to evaluate our capital needs and availability of financing to assess and identify the best available external financing alternatives. We cannot provide assurance that we will be able to realize the cost reductions we anticipate from reducing our operations or our employee base, that some or many of our approved products can be returned to the market in a timely manner, that our higher profit approved products will return to the market in the near term, that we can obtain additional cash through asset sales, or that external financing can be obtained when needed, under acceptable terms or in the amounts required. If we are unsuccessful in our efforts to sell assets and raise additional capital in the near term, we will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease operations in order to offset the lack of available funding.

Our ability to obtain capital has been and continues to be materially and negatively affected by a number of factors. The current and evolving credit market condition and general adverse economic conditions have caused the cost of prospective debt and equity financings to increase considerably. These circumstances have materially adversely affected liquidity in the financial markets, making terms for certain financings unattractive, and in some cases have resulted in the unavailability of financing. We also anticipate that the uncertainty created by the ongoing governmental inquiries and litigation described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, steps taken by us in connection with the nationwide recall and suspension of shipment of all drug products manufactured by us, the consent decree and the uncertainty with respect to when we will resume shipment of our products, if at all, will affect our ability to obtain capital on a timely basis, or at all. In light of the factors described above, we may not be able to obtain additional capital. Even if we are able to obtain additional financing or issue debt securities under these circumstances, the cost to us likely will be high and the terms and conditions are likely to be onerous. In addition, if we were to issue equity securities, such securities likely would be priced at or below the current market price for our securities. As a result, sales of equity securities at or below current market prices likely would result in substantial dilution for current shareholders who purchased our equity securities at or above current market prices.

We continue to evaluate the sale of certain of our assets, including the planned sale of our PDI subsidiary. However, due to the general economic slowdown, we will likely be exposed to risks related to the overall macro-economic environment, including a lower rate of return than we have historically experienced on our invested assets and being limited in our ability to sell assets. In addition, we cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales, including attractive pricing. In addition, divestitures of businesses such as PDI may also involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues and earnings associated with the divested business, and the disruption of operations in the affected business. In addition, divestitures potentially involve significant post-closing separation activities, which

13

could involve the expenditure of significant financial and employee resources. Inability to consummate identified asset sales or manage the post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows.

See Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Current and Anticipated Liquidity Position” for more information on our current and anticipated liquidity position as of February 28, 2010, including our cash position and expected near-term cash requirements. See also Item 1A—“Risk Factors—There is substantial doubt about our ability to continue as a going concern” and Note 3—“Going Concern and Liquidity Considerations” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(c) Industry Segments

We have historically operated in three industry segments consisting of branded products, specialty generics and specialty raw materials. We derive revenues primarily from directly marketing our own technologically distinguished brand-name and generic/non-branded products and products marketed under joint development agreements with other companies. 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 when marketing rights to products using our drug delivery technologies are licensed. In March 2009, because of liquidity concerns and expected near-term cash requirements, the Board approved the divestiture PDI, our specialty raw materials segment. As a result of the decision to sell PDI, we identified the assets and liabilities of PDI as held for sale at March 31, 2009 and have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented. See Note 24—“Segment Reporting” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. In connection with the exclusion of ETHEX from participation in federal healthcare programs, we plan to cease operations of ETHEX. However, we have retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and are in possession of all intellectual property related to generic products, including all NDAs and ANDAs.

(d) Narrative Description Of Business

Overview

We are an integrated specialty pharmaceutical company that develops, manufactures, acquires and markets technologically distinguished branded and generic/non-branded prescription pharmaceutical products. We have historically offered a broad range of dosage form capabilities including tablets, capsules, creams, liquids and ointments. We have conducted our branded pharmaceutical operations through Ther-Rx and our generic/non-branded pharmaceutical operations through ETHEX. Through PDI, which the Board has approved marketing for sale, we have developed, manufactured and marketed technologically advanced, value-added raw material products for the pharmaceutical industry and other markets.

We have developed drug delivery technologies which we utilize in our brand name and specialty generic/non-branded products. We have developed and patented drug delivery and formulation technologies primarily in four principal areas: SITE RELEASE^®, 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 Business Today

Because of the steps taken by us with respect to the nationwide recall and suspension of shipment of all products manufactured by us, the requirements under the consent decree, certain consequences resulting from the

14

entry into the plea agreement and the ongoing private litigation and governmental inquiries, we have realigned our operations and business to concentrate our efforts on maintaining and attempting to increase our limited cash and financial resources and expeditiously reintroducing certain approved products to the market. To that end, we have focused our recent efforts as follows:

• We are making efforts to expeditiously meet the requirements set forth in the consent decree. We do not expect to generate any significant revenues from products that we manufacture until we resume shipping certain or many of our approved products, which currently is not expected to occur until the fourth quarter of calendar year 2010 at the earliest. We are currently working with Lachman, an independent cGMP expert retained by us pursuant to the consent decree, to meet the requirements set forth in the consent decree.

• We have completed an analysis of our approved products to identify the product lines that we will attempt to reintroduce to the marketplace first. We plan to focus our efforts on those products that we believe will have the greatest and most immediate financial benefit to us.

• We have had past success in our generic business by developing and marketing versions of selected and complex extended-release brand-name products. We plan to continue our efforts with respect to such products because we believe there is a greater demand for these types of products and because these products have generated the highest revenues for us during the past two fiscal years.

• In February 2009, we commenced a company-wide restructuring effort designed to streamline our business and align our infrastructure to the reduced scale of our operations. Part of the realignment included a substantial reduction of our workforce that reduced headcount by approximately 1,000 employees. Despite the restructuring, we believe we have retained an adequate number of personnel to support our initial re-entry into the market. In conjunction with our restructuring effort, we also are examining and implementing process improvements in all areas of our company.

• Our restructuring effort also has included an updated criteria-based review of the pipeline of products we had under development. Product candidates in our development portfolio were evaluated based on factors with respect to each product that included, among other things, market potential, a revised return on investment profile, probability of clinical success, time and cost of development, synergies with our core competencies, and competitive landscape. Based on this evaluation and due to the restructuring effort undertaken to adjust our infrastructure and scale of operations (including a reduction in headcount of approximately 1,000 employees), we realigned our research and development efforts to focus on fewer projects that we believe have the highest potential return on investment in areas such as women’s healthcare for our branded business and complex extended-release products for our generic business.

• Cash management has become a particularly critical focus for us. As previously discussed, we have implemented significant cost saving measures to mitigate the financial impact of the suspension of the manufacturing and shipment of the products we manufacture. These measures included a substantial reduction of our workforce and an ongoing realignment of our cost structure. We have retained Morris Anderson & Associates Ltd., a financial and management consulting firm, to advise us with respect to restructuring our operations and cash management efforts.

• We have raised additional cash and continue to pursue additional initiatives to increase our cash. During fiscal year 2010, we have raised cash by, among other things, (1) selling to Perrigo Company our first-to-file Paragraph IV Abbreviated New Drug Application (“ANDA”) with the FDA for a generic equivalent version of GlaxoSmithKline’s Duac^® gel (we expect to receive an additional $2.0 million as a milestone payment upon the completion of a successful technical transfer), (2) monetizing all of the ARS held by us (see Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for information on a settlement agreement related to the monetization of our holdings of ARS and the proceeds received in connection therewith), (3) carrying back net operating losses to generate tax refunds and (4) selling certain products not manufactured by us under the distribution and supply agreement with Purdue Pharma L.P. (together with certain affiliated entities, “Purdue”) (see Note 26—“Subsequent Events” of the Notes to

15

the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the litigation with Purdue and descriptions of the settlement agreement, the patent license agreement and the distribution and supply agreement). However, as discussed elsewhere in this Annual Report on Form 10-K, in order to continue to meet our expected near-term cash requirements, we will still need to obtain additional capital. We have retained Robert W. Baird & Co. Incorporated to advise us with respect to raising additional capital. We have also initiated the process of divesting PDI, a non-core asset that is our wholly owned subsidiary that develops and markets specialty value-added raw materials. In addition, we are exploring opportunities to monetize other assets. See Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Current and Anticipated Liquidity Position” for more information on our current and anticipated liquidity position as of February 28, 2010, including our cash position and expected near-term cash requirements.

• We continue to review and modify our quality monitoring and testing programs and procedures in our effort to comply with the terms of the consent decree and cGMP regulations. To that end, we are implementing a series of procedures, which we believe will enhance quality standards in our products. Our goal currently is, and will continue to be, to enhance the quality, purity, safety and efficacy of each of our products. We believe that adherence to high quality standards can also promote a more efficient utilization of our personnel, materials and production capacity.

• In connection with the exclusion of ETHEX from participation in federal healthcare programs, we plan to cease operations of ETHEX. However, we have retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and are in possession of all intellectual property related to generic products, including all NDAs and ANDAs.

Despite our efforts, however, there can be no assurance that these or other initiatives intended to enable us to reintroduce certain of our approved products to the market will be successful within the time frames currently projected by management or at all. See also the risk factors set forth in Item 1A—“Risk Factors” included in this Annual Report on Form 10-K.

In addition, our top priority is to maintain and attempt to increase our limited cash and financial resources. As a result, if we determine that our current goal of meeting the consent decree’s requirements and returning our approved products to market is likely to be significantly delayed, we may decide to further reduce our operations, including further reductions of our employee base, and to significantly curtail some or all of our efforts to meet the consent decree’s requirements and return our approved products to market. Such decision would be made based on our ability to manage our near-term cash obligations, to obtain additional capital through asset sales and/or external financing and to expeditiously meet the consent decree’s requirements and return our approved products to market. If such decision were to be made, we currently anticipate that we would focus our efforts on developing product candidates in our development portfolio that we believe have the highest potential return on investment, which we currently believe to be primarily Gestiva™ (17-alphahydroxyprogesterone caproate). We also expect to evaluate other alternatives available to us in order to increase our cash balance.

Ther-Rx—History of Our Branded Products Segment

We established Ther-Rx in 1999 to market brand name pharmaceutical products that incorporated our proprietary technologies. Since its inception, Ther-Rx has generally focused on the women’s health therapeutic category in which physician specialists could be reached using a highly focused sales force. By targeting physician specialists, Ther-Rx was able to compete successfully without the need for a sales force as large as typically employed by pharmaceutical companies with less specialized product lines. Due to the nationwide recall and suspension of shipment of all products manufactured by us, Ther-Rx’s net revenues declined from $212.3 million in fiscal year 2008 to $114.8 million in fiscal year 2009. Due to the requirements under the consent decree, we currently do not anticipate generating significant revenues from our branded product segment until the fourth quarter of calendar year 2010 at the earliest.

16

We established our women’s healthcare franchise through our 1999 acquisition of PreCare^®, a prescription prenatal vitamin, from UCB Pharma, Inc. Building upon this acquisition, Ther-Rx reformulated the original product using proprietary technologies, and subsequently launched six internally developed products as extensions to the PreCare^® product line. This line of proprietary products led to Ther-Rx establishing itself as a leading provider of branded prescription prenatal vitamins in the United States. Sales of our prenatal vitamin product line were $47.4 million in fiscal year 2009. As part of the consent decree, we agreed not to distribute our prenatal vitamin products unless they are approved by the FDA, which would require submitting an NDA or ANDA. Due to the cost and difficulty associated with this regulatory requirement, we currently do not anticipate seeking such approval in the near future if at all. We had previously planned to divest our branded prenatal product line and associated trademarks and intellectual property. However, because our prenatal vitamin product line is unable to generate any revenues and is not approved by the FDA, we recorded an impairment charge during fiscal year 2009 to write-off the net book value of the intangible assets related to our branded prenatal vitamins.

In 2000, Ther-Rx launched its first internally-developed NDA product, Gynazole-1^® (butoconazole nitrate) Vaginal Cream, 2%, for treatment of vaginal yeast infections in women who are not pregnant. Gynazole-1^® incorporates our patented drug delivery technology, VagiSite^™. Sales of Gynazole-1^® were $12.4 million in fiscal year 2009. We have also entered into licensing agreements in which partners have acquired the rights to market Gynazole-1^® in over 50 markets including Europe, Latin America, the Middle East, Asia, Australia, New Zealand and Canada. Due to the requirements under the consent decree, we currently are not generating any licensing revenue under any of these agreements.

In January 2005, Ther-Rx introduced its second internally-developed NDA product, Clindesse^® (clindamycin phosphate) Vaginal Cream, for bacterial vaginosis in women who are not pregnant. Similar to Gynazole-1^®, Clindesse^® incorporates our proprietary VagiSite^™ bioadhesive drug delivery technology. Sales of Clindesse^® were $22.3 million in fiscal year 2009. We have also entered into licensing agreements in which partners have acquired the rights to market Clindesse^® in Spain, Portugal, Andorra, Brazil, Mexico, five Scandinavian markets, 18 Eastern European countries and the People’s Republic of China. Due to the requirements under the consent decree, we currently are not generating any licensing revenue under any of these agreements.

Ther-Rx established its presence in the oral hematinic category through the acquisition of Chromagen^® and Niferex^® in 2003. Technology-improved versions of these products were developed and introduced to the market mid-way through fiscal year 2004. In fiscal year 2006, we introduced two new hematinic products—Repliva 21/7^® and Niferex Gold^®. Sales of our hematinic product line were $22.9 million in fiscal year 2009. As part of the consent decree, we agreed not to distribute our branded hematinic products until approved by the FDA, which would require submitting an NDA or ANDA. Due to the cost and difficulty associated with this regulatory requirement, we currently do not anticipate seeking such approval in the near future if at all. We had previously planned to divest our branded hematinic product line and associated trademarks and intellectual property. However, because our hematinic product line is unable to generate any revenues and is not approved by the FDA, we have ceased efforts to divest this product line and associated trademarks and intellectual property and recorded an impairment charge during fiscal year 2009 to write-off the net book value of the intangible assets related to our branded hematinic products.

In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights to Evamist^™, a transdermal estrogen therapy. Under the terms of the asset purchase agreement for Evamist, we paid $10.0 million in cash at closing and made an additional cash payment of $141.5 million upon final approval of the product by the FDA in July 2007. Evamist^™ is indicated for the treatment of moderate-to-severe vasomotor symptoms due to menopause and targets the estrogen therapy market in which physicians and patients seek effective, low-dose therapy options. We began shipping this product at the end of fiscal year 2008 and officially launched it during the first quarter of fiscal year 2009. Sales of Evamist^™ were $2.6 million in fiscal year 2009. Because the product is manufactured by a third party, we have been able to continue marketing and selling Evamist^™ pursuant to the terms of the consent decree.

As previously disclosed, we entered into an asset purchase agreement (the “Original Gestiva Agreement”) dated as of January 16, 2008, with Cytyc Prenatal Products Corp. and Hologic, Inc. (Cytyc Prenatal Products Corp.

17

and Hologic, Inc. are referred to in this Annual Report on Form 10-K collectively as “Hologic”). On January 8, 2010, we entered into an Amendment (the “Gestiva Amendment”) to the Original Gestiva Agreement with Hologic.

The Original Gestiva Agreement provided for, among other things, the following:

• We would acquire the U.S. and worldwide rights to Gestiva™ (17-alpha hydroxyprogesterone caproate) and certain related assets (the “Purchased Assets”) upon approval of the pending New Drug Application for Gestiva (the “Gestiva NDA”) under review by the FDA.

• The Purchased Assets would be transferred and sold to us free and clear of all encumbrances on the transfer date (the “Transfer Date”), which is to occur no later than five business days after the satisfaction of certain conditions, including, among other things, (1) the approval of the Gestiva NDA by the FDA (as more fully described in the Original Gestiva Agreement) and (2) the delivery by us of the Additional Purchase Price Amount (as defined below). The FDA has not yet approved the Gestiva NDA and the Transfer Date has not yet occurred.

• We agreed to pay Hologic a total of $82.0 million for the Purchased Assets, in the following increments:

• A $7.5 million cash payment (the “Initial Purchase Price”) on the initial closing date. We made such payment in February 2008.

• A $2.0 million cash payment (the “NDA Milestone Payment”) upon receipt by Hologic of an acknowledgement from the FDA that Hologic’s response to the FDA’s October 20, 2006 “approvable” letter was sufficient for the FDA to proceed with its review of the Gestiva NDA. We made such payment in May 2008.

• A $72.5 million cash payment (the “Additional Purchase Price Amount”) to be paid on the Transfer Date.

• We and Hologic each had the right to terminate the Original Gestiva Agreement in the event that the Transfer Date did not occur by February 19, 2010, the second anniversary of the initial closing date (the “February 2010 Termination Right”).

The following is a description of the material terms by which the Gestiva Amendment modified the Original Gestiva Agreement (as amended, the “Amended Gestiva Agreement”):

• Hologic is no longer entitled to receive the Additional Purchase Price Amount. Instead, we agreed to pay the following:

• A $70.0 million cash payment (the “Amendment Payment”) upon execution of the Gestiva Amendment. We made such payment on January 8, 2010.

• Upon successful completion of agreed upon milestones, a series of additional future scheduled cash payments in the aggregate amount of $120.0 million, the first of which payments is due on the Transfer Date (which will occur after, among other things, the FDA approves the Gestiva NDA) and the last of which payments is due no later than 21 months after the FDA approves the Gestiva NDA, provided that the Transfer Date has already occurred. We have the right to prepay any such amounts at any time. In addition, if we are unable to obtain sufficient quantities of Gestiva^™ for a period of time (not to exceed 12 months) under certain specified circumstances set forth in the Amended Agreement, then the due date of the next following scheduled cash payment will be delayed for such period of time. The date on which we make the final cash payment is referred to as the “Final Payment Date.”

• If, prior to the Final Payment Date, we fail to timely pay a scheduled payment, we are obligated to transfer back to Hologic ownership of the Purchased Assets, including certain improvements made thereto by us, as well as other after-acquired assets and rights used by us in connection with the Gestiva™ business (the “Retransfer”). Certain liabilities associated with the foregoing are to be transferred to Hologic in connection with any Retransfer, subject to Hologic’s rights to reject the assumption of certain liabilities.

18

• The existing termination rights set forth in the Original Gestiva Agreement were modified to include the following:

• The February 2010 Termination Right has been eliminated.

• Hologic has the right to terminate the Amended Gestiva Agreement if we fail to deliver the cash payment due on the Transfer Date (as described above) within 10 days of receipt of notice from Hologic that all conditions related to the Transfer Date have been met.

As previously disclosed, Hologic informed us in January 2009 that the FDA, in a complete response letter, (1) indicated it would not approve Gestiva^™ until additional data and information are submitted to and accepted by the FDA and (2) requested Hologic to initiate a confirmatory clinical study and enroll a certain number of patients. We currently are working with Hologic to achieve the required patient enrollment and to submit the additional data and information in order to obtain FDA approval of the Gestiva NDA. Notwithstanding these efforts, we cannot provide any assurance that patient enrollment and submission of additional data and information will occur within the anticipated time schedule, or at all, or that the FDA will approve the Gestiva NDA.

The Amended Gestiva Agreement also provides that we are obligated to reimburse to Hologic on a monthly basis, subject to the conditions and approval processes set forth in the Amended Gestiva Agreement, all out-of-pocket expenses incurred by Hologic in connection with (1) seeking to obtain or obtaining FDA approval of the Gestiva NDA, (2) contracts relating to any pre-clinical or clinical trials involving Gestiva^™, (3) the research, development, regulatory approval, manufacture, distribution, marketing, sale and promotion of Gestiva™, including costs associated with making product improvements, and (4) certain other matters as set forth in the Amended Gestiva Agreement.

In August 2008, we entered into an expanded licensing arrangement with Acrux DDS PTY Ltd. (“Acrux”) for use of their transdermal spray technology (which is currently incorporated in Evamist^™) in up to six additional branded products. Under the agreement, we were required to make milestone payments and pay royalties to Acrux when the products were marketed. Although the agreement with Acrux is still in place, we presently do not intend to market the six branded products identified in the agreement.

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 tested an alternative formula in a Phase II study to determine which alternative to take into Phase III clinical trials. Upon completion of the Phase II study, we decided, at this time, to not move forward with development of the endometriosis product. As a result, we recorded in fiscal year 2009 an impairment charge of $2.5 million for intangible assets associated with this product.

As part of an ongoing realignment of our cost structure in connection with our inability to manufacture and ship products manufactured by us and the requirements under the consent decree, Ther-Rx reduced its branded sales force from approximately 330 specialty sales representatives at December 31, 2008 to approximately 80 specialty sales representatives at March 31, 2009. When we return the approved products we manufacture to market, we plan to primarily focus our Ther-Rx sales efforts in women’s healthcare. Because we plan to sell our products to highly targeted specialty physician groups that tend to be relatively concentrated, we believe we can address this market and future opportunities in a cost effective manner with a specialty-sized sales force. Ther-Rx also maintains a corporate sales and marketing management team dedicated to planning and managing Ther-Rx’s sales and marketing efforts.

Please see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for additional financial information with respect to Ther-Rx.

ETHEX—History of Our Specialty Generic/Non-Branded Segment

We established ETHEX in 1990 to utilize our portfolio of drug delivery systems to develop and market hard-to-copy generic/non-branded pharmaceuticals. Due to the nationwide recall and suspension of shipment of all products manufactured by us, net revenues for ETHEX declined from $364.2 million in fiscal year 2008 to

19

$197.2 million in fiscal year 2009. Due to the requirements under the consent decree, we currently do not generate significant revenues from our specialty generics segment and currently do not anticipate generating significant revenues until the fourth quarter of calendar year 2010 at the earliest.

In connection with the exclusion of ETHEX from participation in federal healthcare programs, we plan to cease operations of ETHEX. However, we have retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and are in possession of all intellectual property related to generic products, including all NDAs and ANDAs.

During the first three quarters of fiscal year 2009, ETHEX marketed over 160 products in its cardiovascular, pain management, women’s health, respiratory, gastrointestinal, dermatological, anti-anxiety, digestive enzyme and dental categories. Included in these previous product offerings were over 70 products that had not been approved for therapeutic equivalence by the FDA (i.e., “unapproved” products). As part of the consent decree, we agreed not to distribute any unapproved generic drugs until such products were approved under the FDA’s ANDA or NDA processes.

We are working expeditiously to satisfy the requirements set forth in the consent decree to return our approved products to market. The consent decree provides a process pursuant to which we may seek approval from the FDA to resume manufacturing and distribution of up to two groups of approved products prior to receiving approval from the FDA to resume full operations. We anticipate that any approved products put forth to the FDA for inspection prior to resuming full operations will consist of certain approved generic and branded products. However, we have not yet determined the amount of time it will take to resolve the issues identified in the consent decree and we currently do not anticipate resuming the manufacture and shipping of certain of our approved products until the fourth quarter of calendar year 2010 at the earliest.

Our ability to develop new products is currently limited until we are able to meet the requirements of the consent decree because, until the FDA agrees that we have adequately addressed cGMP issues, we cannot manufacture drugs for clinical trials. The consent decree currently allows us to manufacture drugs for non-clinical laboratory studies or other research and testing that do not involve exposure of human research subjects or bioequivalence testing. Although this currently precludes us from testing in humans any drugs under development that are made in our facilities, prior to entering into the consent decree, we had filed with the FDA ANDAs seeking permission to market generic versions of several branded products, including varying strengths of the following:

• Metadate CD^® (methylphenidate hydrochloride) Extended-Release Capsules

• Ritalin LA^® (methylphenidate hydrochloride) Extended-Release Capsules

• Focalin XR^® (dexmethylphenidate hydrochloride) Extended-Release Capsules

With respect to each of these ANDA submissions, we sought favorable court rulings in patent infringement actions filed against us by the sponsors of the branded products. See “—Government Regulation—New Product Development and Approval—The Drug Price Competition and Patent Term Restoration Act of 1984” in this Annual Report on Form 10-K for more information regarding patent certifications and litigation. Although we believe we have meritorious defenses to the infringement claims asserted against us in each of these lawsuits, we cannot be certain of the outcome, and a decision that a relevant patent is valid and infringed likely would significantly delay our ability to market any of these drugs. In addition, the litigation process itself can impose significant delays and expense. Further, although the consent decree does not specifically address these ANDA submissions, we anticipate that final approval of any of these ANDAs will not occur before the FDA has determined that we are compliant with cGMP regulations. See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. On March 1, 2010, we entered into a Settlement Agreement to settle the patent infringement actions with respect to Ritalin LA^® and Focalin XR^®. See Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the settlement.

20

As previously disclosed, in connection with the settlement of three patent infringement cases brought against us by Purdue on June 9, 2009, we and Purdue entered into a settlement agreement, patent license agreement and a distribution and supply agreement that provided us certain limited rights to sell generic versions of OxyContin^® extended-release tablets in the United States. See Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the litigation with Purdue and descriptions of the settlement agreement, the patent license agreement and the distribution and supply agreement.

Our portfolio of approved products includes four strengths of metoprolol succinate extended-release tablets (“metoprolol”), the generic version of Toprol-XL^® (marketed by AstraZeneca). In fiscal year 2006, we received a favorable court ruling in a patent infringement action filed against us by AstraZeneca based on our ANDA submissions to market the 100 mg and 200 mg dosage strengths. Because we were the first company to submit an ANDA for these dosage strengths and challenge the Toprol-XL^® patents, we received a 180-day exclusivity period during which no other generic version of the product could be approved. (See “—Government Regulation—New Product Development and Approval—180-Day Exclusivity.”) We began shipping the 100 mg and 200 mg dosage strengths in July 2007 and the 25 mg and 50 mg strengths upon FDA approval in March 2008 and May 2008, respectively.

ETHEX has a dedicated sales and marketing team, which includes an outside sales team. The outside sales team calls on wholesalers, distributors and national drugstore chains and mail order facilities. As part of an ongoing realignment of our cost structure in connection with our inability to manufacture and ship products manufactured by us and the requirements under the consent decree, ETHEX has reduced its sales and marketing team from 25 representatives at March 31, 2008 to seven representatives at March 31, 2009. We plan to focus our sales efforts with respect to our generic products on our portfolio of complex extended-release products, including metoprolol, potassium chloride extended-release tablets and diltiazem hydrochloride extended-release capsules, if and when we return such products to market.

Please see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for additional financial information with respect to ETHEX.

PDI—Our Value-Added Raw Material Business

PDI develops and markets specialty value-added raw materials, including drugs, directly compressible and microencapsulated products, and other products used in the pharmaceutical industry and other markets. 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 and efficiency and other manufacturing process advantages. PDI has also been a significant supplier of value-added raw materials for the development and manufacture of both existing and new products at Ther-Rx and ETHEX. A leased facility used by PDI was damaged by an accidental fire which occurred on June 1, 2009. The incident did not affect any of our finished product manufacturing, packaging, or distribution facilities. PDI’s primary business utilizes contract manufacturing, which was unaffected by the fire. We are in the process of marketing PDI for sale and have retained an advisor to assist us in the divestiture of PDI. As a result of the decision to sell PDI, we identified the assets and liabilities of PDI as held for sale at March 31, 2009 and have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented. Net revenues for PDI were $20.7 million in fiscal year 2009, up 14.6% over net revenues of $18.0 million for fiscal year 2008.

Our Business in the Future

Although subject to substantial uncertainties as discussed in this Annual Report on Form 10-K, our goal is to again be a successful participant in the pharmaceutical industry and we are making efforts to meet the requirements under the consent decree with the aim of expeditiously reintroducing our approved products to the market.

21

Assuming that we are successful with our efforts to meet the consent decree’s requirements and return our approved products to the market, our long-term goals and strategies will incorporate the following key elements:

• We plan to focus on projects that we believe have the highest potential return on investment, to streamline product lines, to implement company-wide efficiencies and to make disciplined spending decisions.

• We expect that our future product pipeline will consist of product opportunities resulting from both acquisitions and specifically targeted internal development efforts. We plan to optimize our product development portfolio by building on our core competencies in the area of women’s health for our branded business and in the area of extended-release products for our generic business. We plan to continue to seek branded product acquisition opportunities that are complementary to our current and planned portfolio of women’s health products. We believe that by streamlining our pipeline of product development opportunities and focusing on fewer products, we will be able to design products and the related production processes more effectively and introduce new products to market faster.

• We expect that our planned portfolio of branded products will reflect our focus on promoting the health and well-being of women. We believe we can address this market in a cost effective way by targeting specialty physician groups with a streamlined specialty sales force.

• We plan to grow revenues in our generic business by building upon our strategic core of complex extended-release products. We also plan to follow, when possible, a first-to-file Paragraph IV certification strategy, which is designed to provide approved products with a 180-day period of generic marketing exclusivity when first introduced. (See “—Government Regulation—New Product Development and Approval—Paragraph IV Certifications” for a summary description of Paragraph IV certifications.) Prior to entering into the consent decree, we had filed ANDAs with the FDA seeking permission to market generic versions of new extended-release products. As previously noted, we have negotiated a favorable settlement with regard to one of these ANDAs. With respect to each of the remaining ANDA submissions, we have sought favorable court rulings in patent infringement actions filed against us by the sponsors of the branded products. If our litigation position proves successful in these cases, we would expect to add the three new products to our existing portfolio of approved extended-release products. See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

• By concentrating our efforts on a reduced number of our most profitable product lines, we expect to be able to improve service levels to our customers. We believe that a revised portfolio of fewer products will also lead to better planned, more effective production schedules and help us achieve our primary goal of maintaining compliance with cGMP regulatory requirements. In addition, we plan to re-design our manufacturing facilities to incorporate newer equipment and streamlined processes, which we believe will help us reduce waste, increase efficiency, and, most importantly, maintain compliance with cGMP regulatory requirements. We expect to continue outsourcing production of certain key products if such outsourcing will help us to compete more effectively.

Despite our efforts, however, there can be no assurance that these initiatives will be successful. See also the risk factors set forth in Item 1A—“Risk Factors” included in this Annual Report on Form 10-K.

In addition, our top priority is to maintain and attempt to increase our limited cash and financial resources. As a result, if we determine that our current goal of meeting the consent decree’s requirements and returning our approved products to market is likely to be significantly delayed, we may decide to further reduce our operations, including further reductions of our employee base, and to significantly curtail some or all of our efforts to meet the consent decree’s requirements and return our approved products to market. Such decision would be made based on our ability to manage our near-term cash obligations, to obtain additional capital through asset sales and/or external financing and to expeditiously meet the consent decree’s requirements and return our approved products to market. If such decision were to be made, we currently anticipate that we would focus our efforts on developing product candidates in our development portfolio that we believe have the highest potential return on

22

investment, which we currently believe to be primarily Gestiva™ (17-alphahydroxyprogesterone caproate). We also expect to evaluate other alternatives available to us in order to increase our cash balance.

Sales and Marketing

We have marketed products directly to wholesalers, distributors, retail pharmacy chains, mail order pharmacies and group purchasing organizations. We also have marketed our products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes, pharmacy benefit management companies and government entities. These customers, referred to as “indirect customers,” purchase our products primarily through our wholesale or distributor customers.

In the past, we have been able to increase sales of our branded pharmaceutical products through physician sales calls and promotional efforts, including sampling, advertising and direct mail. By offering multiple products to the same group of specialty physicians, we have been able to optimize the effectiveness of our sales force. We plan to continue focusing our specialty-sized sales force on marketing our existing and future core of women’s healthcare products. Because our products are sold to highly targeted specialty physician groups that tend to be relatively concentrated, we believe we can address this market and future opportunities in a cost effective way with a specialty-sized sales force.

Ther-Rx also has a corporate sales and marketing management team dedicated to planning and managing Ther-Rx’s sales and marketing efforts. As part of an ongoing realignment of our cost structure relative to our inability to manufacture and ship products manufactured by us and the requirements under the consent decree, we have reduced our workforce to be in line with the anticipated level of ongoing business. Accordingly, Ther-Rx has reduced its branded sales force from approximately 330 specialty sales representatives at December 31, 2008 to approximately 80 specialty sales representatives at March 31, 2009.

ETHEX has a dedicated sales and marketing team, which includes an outside sales team that calls on wholesalers, distributors and national drugstore chains, and mail order facilities. As part of an ongoing realignment of our cost structure relative to our inability to manufacture and ship products manufactured by us and the requirements under the consent decree, ETHEX has reduced its sales and marketing team from 25 representatives at March 31, 2008 to seven representatives at March 31, 2009.

During fiscal year 2009, our three largest customers accounted for 26.9%, 26.5% and 10.4% of gross revenues. These customers were McKesson Drug Company, Cardinal Health, Inc., and Amerisource Corporation, respectively. In fiscal years 2008 and 2007, these customers accounted for gross revenues of 23.9%, 24.6% and 9.8%, and 25.7%, 21.1% and 14.4%, respectively.

Although we have sold our products internationally, we have not had material operations or sales in foreign countries and our sales are not subject to significant geographic concentration outside of the United States.

Research and Development

Our research and development activities have included the development of new drug delivery technologies, the formulation of brand name proprietary products and the development of generic/non-branded versions of previously approved brand name pharmaceutical products. In fiscal years 2009, 2008 and 2007, total research and development expenses were $69.8 million, $48.9 million and $31.6 million, respectively, excluding acquired in-process research and development.

Our ability to develop new products is currently limited until we are able to meet the requirements of the consent decree, because, until the FDA agrees that we have adequately addressed cGMP issues, we cannot manufacture drugs for clinical trials. The consent decree currently allows us to manufacture drugs for non-clinical laboratory studies or other research and testing that does not involve exposure of human research subjects or bioequivalence testing. This restriction precludes us from testing in humans any drugs under development that are made at our facilities.

23

As discussed above, our restructuring efforts included a criteria-based review of the pipeline of products we had under development. Product candidates in our development portfolio were evaluated based on factors with respect to each product that included, among other things, market potential, probability of clinical success, time and cost of development, synergies with our core competencies, and competitive landscape. Based on our evaluation, we realigned our research and development efforts to focus on fewer projects that we believe have the highest potential return on investment in areas such as women’s healthcare for our branded business and complex extended-release products for our generic business.

The current focus of our new drug development efforts includes working with Hologic to achieve the required patient enrollment and to submit the additional data and information required by the FDA in order to obtain FDA approval of the Gestiva NDA, an anti-infective product to be added to our existing portfolio of women’s healthcare products and extended-release products to be added to our generic portfolio, some of which are Paragraph IV certification opportunities.

Patents and Other Proprietary Rights

When appropriate and available, we actively seek 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 involves 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 adequate 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 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 year 2025 relating to our controlled-release, site-specific, quick dissolve and taste-masking technologies. We have been granted or acquired the rights to 46 U.S. patents and have 37 U.S. patent applications pending. In addition, we have 113 foreign issued patents and a total of 130 patent applications pending primarily in Canada, Europe, Australia, Japan, South America, Mexico and South Korea. We depend on our patents and other proprietary rights, although we cannot be certain of their confidentiality, validity and protection (see also Item 1A—“Risk Factors—We depend on our patents and other proprietary rights and cannot be certain of their confidentiality and protection”).

We currently own more than 300 U.S. and foreign trademark registrations, including trademark protection for certain names of our proprietary controlled-release, tastemasking, site-specific and quick dissolve technologies. We intend to continue to seek trademark protection covering 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

All of our facilities at March 31, 2009, aggregating approximately 1.3 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 year 2010 through fiscal year 2017, subject in most cases to renewal at our option. See Item 2—“Properties” in this Annual Report on Form 10-K for more information.

24

We are required to maintain all facilities in compliance with the FDA’s cGMP requirements. In addition to compliance with cGMP, each pharmaceutical manufacturer’s facilities must be registered with the FDA. We are required to be registered with the U.S. Drug Enforcement Administration (the “DEA”), and similar state and local regulatory authorities because we handle controlled substances. We are also subject to the U.S. Environmental Protection Agency (the “EPA”), and similar state and local regulatory authorities if we generate toxic or dangerous wastes. In addition, we must comply with other applicable DEA and EPA requirements. Noncompliance with applicable legal and regulatory requirements can have a broad range of consequences, including warning letters, fines, seizure of products, product recalls, total or partial suspension of production and distribution, refusal to approve NDAs, ANDAs or other applications or revocation of approvals previously granted, withdrawal of product from marketing, injunction, withdrawal of licenses or registrations necessary to conduct business, disqualification from supply contracts with the government, and criminal prosecution. Additionally, under certain circumstances, the FDA also has the authority to revoke drug approvals previously granted.

As previously noted, on March 2, 2009, we entered into a consent decree with the FDA regarding our drug manufacturing and distribution. The consent decree was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 6, 2009. As part of the consent decree, we have agreed not to directly or indirectly do or cause the manufacture, processing, packing, labeling, holding, introduction or delivery for introduction into interstate commerce at or from any of our facilities of any drug, until we have satisfied certain requirements designed to demonstrate compliance with the FDA’s cGMP regulations. The consent decree provides for a series of measures that, when satisfied, will permit us to resume the manufacture and distribution of approved drug products marketed by our ETHEX and Ther-Rx subsidiaries. The consent decree further provides that, before resuming manufacturing, we will retain and have an independent cGMP expert undertake a review of our facilities and certify compliance with the FDA’s cGMP regulations. Following that certification, the FDA will make a determination as to whether our facilities are in compliance. The consent decree further provides a process pursuant to which we may request approval from the FDA to resume manufacturing and distribution of up to two groups of approved products prior to receiving approval from the FDA to resume full operations.

We do not expect to generate any significant revenues from products that we manufacture until we resume shipping certain or many of our approved products, which is currently not expected to occur until the fourth quarter of calendar year 2010 at the earliest. We also contract with third parties for the manufacture of certain of our products, which do not generate a significant amount of revenues. We are able to continue marketing these products under the consent decree because they are manufactured by a third party.

We are dependent on third parties for the supply of the raw materials necessary to develop and manufacture our products, including the active and inactive pharmaceutical ingredients used in our products. We are required to identify the suppliers of all the raw materials for our products in the drug applications we file with the FDA. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the FDA, which could interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist.

Competition

The primary means of competition in our industry are innovation and development, timely FDA approval, manufacturing capabilities, product quality, marketing, customer service, drug delivery systems, reputation and price. To compete effectively on the basis of price and remain profitable, a generic drug manufacturer must manufacture its products in a cost-effective manner. Our competitors include other specialty pharmaceutical companies, other generic and branded companies, and brand companies that, prior to patent expiration or as relevant patents expire, license their products to generic manufacturers for sale as what are commonly referred to as “authorized generics.” Further, regulatory approvals typically are not required for a brand manufacturer to sell its pharmaceutical products directly or through a third-party as authorized generics, nor do such manufacturers face any other significant barriers to entry into such market. It is possible, however, that even if we are able to

25

return some or all of our approved products to the market, certain of our existing customers will purchase smaller quantities or no quantities of our products. Such a potential loss of market share would likely result in limiting the prices we are able to charge for our approved products, which will negatively impact our gross margin. Moreover, entering into the consent decree may have damaged our reputation in the market, which could result in additional competitive disadvantages.

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 previously offered. Our branded pharmaceutical products have been subject to competition from alternative therapies during the period of patent protection and thereafter from generic equivalents. In addition, our generic/non-branded pharmaceutical products have been subject to competition from pharmaceutical companies engaged in the development of alternatives to the generic/non-branded products we previously offered or have undertaken to develop. 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 and safety, breadth of product line, differentiated features of our products and price. We believe that, once we have satisfied the requirements of the consent decree, our patents, proprietary trade secrets, technological expertise, product development and manufacturing capabilities will enable us to develop products to compete effectively in the marketplace.

In addition, we have competed for product acquisitions with other pharmaceutical companies. We have also competed 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. Based on total assets, annual revenues and market capitalization, our branded and generic businesses are considerably smaller than many of our competitors and other national competitors in these product areas. Many of our competitors have been in business for a longer period of time, have a greater number of products on the market and have greater financial, marketing, managerial and other resources than we do, including greater research and development capabilities and experience. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more readily than we do. If we directly compete with them for the same markets and/or products, their financial strength could prevent us from capturing a meaningful share of those markets.

Government Regulation

General Overview

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 (the “FDCA”), and other federal and state statutes and regulations govern or influence, among other things, the development, testing, manufacture, safety, labeling, storage, recordkeeping, approval, advertising, promotion, sale, import, export 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.

Manufacturers of controlled substances must also comply with the federal Controlled Substances Act of 1970 (the “CSA”) and regulations promulgated by the DEA, as well as similar state and local regulatory requirements for manufacturing, distributing, testing, importing, exporting and handling controlled substances. Manufacturers that generate toxic or dangerous wastes also must comply with the Environmental Protection Act and its implementing regulations.

Noncompliance with applicable legal and regulatory requirements can have a broad range of consequences, including warning letters, fines, seizure of products, product recalls, total or partial suspension of production and distribution, refusal to approve NDAs, ANDAs or other applications or revocation of approvals previously

26

granted, withdrawal of product from marketing, injunction, withdrawal of licenses or registrations necessary to conduct business, disqualification from supply contracts with the government, and criminal prosecution.

Product development and approval within the FDA 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. After a product is approved, the FDA may revoke or suspend the product approval if compliance with post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies or evidence of safety concerns. Further, 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. 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.

New Product Development and Approval

All applications for FDA approval must contain information relating to product formulation, raw material suppliers, stability, product testing, manufacturing processes, manufacturing facilities, packaging, labeling, quality control, and evidence of safety and effectiveness for intended uses. For a generic drug product, instead of safety and effectiveness data, an application must demonstrate that the proposed product is the same as the branded drug in several key characteristics. There are three types of applications used for obtaining FDA approval of new non-biological drug products:

• New Drug Application (“NDA”). An NDA, sometimes referred to as a “full NDA,” generally is submitted when approval is sought to market a drug with active ingredients that have not been previously approved by the FDA. Full NDAs typically are submitted for newly developed branded products and, in certain instances, an applicant submits an NDA or NDA supplement for a change to one of its previously approved products, such as a new dosage form, a new delivery system or a new indication.

• 505(b)(2) New Drug Application. Another form of an NDA is the so-called “505(b)(2) NDA,” which typically is used to seek FDA approval of products that share characteristics (often, the active ingredient(s)) with a previously approved product of another company, but contain modifications to, or differences from, the approved product that preclude submission of an abbreviated new drug application. A 505(b)(2) NDA is in order where at least some of the information required for approval does not come from studies conducted by or for the applicant or for which the applicant has obtained a right of reference. Usually, this means the application relies on the FDA’s previous approval of a similar product or reference listed drug, or published data in scientific literature that are not the applicant’s.

• 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 or 505(b)(2) NDA and listed in the FDA’s “Orange Book.” Rather than directly demonstrating the product’s safety and effectiveness, as is required of an NDA, an ANDA must show that the proposed generic product is the same as the previously approved product in terms of active ingredient(s), strength, dosage form, route of administration and bioavailability. In addition, with certain exceptions, the generic product must have the same labeling as the branded product to which it refers.

27

Branded Product Development. The process by which a drug product, other than a generic product, is approved for marketing in the United States can take from three to more than 10 years, and 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;

• submission of a full NDA or 505(b)(2) NDA containing, to the extent required, 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;

• satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities; and

• FDA approval of the application.

To the extent that a 505(b)(2) NDA applicant can rely on the referenced application, it may not be required to conduct some of these steps.

Preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as toxicology and pharmacology animal studies to help define the pharmacological profile of the drug and assess the potential safety and efficacy of the product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices and the U.S. Department of Agriculture’s Animal Welfare Act and its implementing regulations. Failure to conform to these legal and regulatory standards can lead to invalidation of the tests and the need to conduct them again. The results of these studies, which are submitted to the FDA as part of the IND and are reviewed by the FDA before the commencement of human clinical trials, 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. 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. However, positive results of preclinical tests do not necessarily indicate positive results in human clinical trials.

An 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. If there are concerns or questions, the IND sponsor and the FDA must resolve them before clinical trials may begin. The FDA may authorize trials only on specified terms and may suspend clinical trials at any time on various grounds, including a finding that patients are being exposed to unacceptable health risks. If the FDA places a study on clinical hold, the sponsor must resolve all of the FDA’s concerns before the study may proceed. The IND application process may be extremely costly and can substantially delay development of products. Similar restrictive requirements also apply in other countries.

Clinical trials involve the administration of the investigational product to humans under the supervision of qualified principal investigators. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols submitted to the FDA as part of an IND. In addition, each clinical trial is approved and conducted under the auspices of an independent institutional review board (“IRB”) and with each subject’s informed consent. The IRB at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for a variety of reasons, including a belief that the test subjects are being exposed to an unacceptable health risk. The sponsor may also suspend or terminate a clinical trial at any time.

28

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.

Success in early-stage clinical trials does not necessarily assure success in later-stage clinical trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or even prevent regulatory approval.

The results of the product development, including preclinical studies, clinical studies, and product formulation and manufacturing information, are then submitted to the FDA as part of the NDA. The FDA also may conclude that as part of the NDA or 505(b)(2) NDA, the sponsor must develop a risk evaluation and mitigation strategy (REMS) to ensure that the benefits of the drug outweigh the risks. A REMS may have different components, including a package insert directed to patients, a plan for communication with healthcare providers, restrictions on a drug’s distribution, or a medication guide to provide better information to consumers about the drug’s risks and benefits.

The FDA reviews each submitted application before accepting it for filing, and may refuse to file the application if it does not appear to meet the minimal standards for filing. If the FDA refuses to file an application and requests additional information, the application must be resubmitted with the requested information. Once the submission is accepted for filing, the FDA begins an in-depth review of the application to determine, among other things, whether a product is safe and effective for its intended use. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation.

Acceptance for filing of an application does not assure FDA approval for marketing. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the submitted data, which could delay, limit, or prevent regulatory approval. If it concludes that the application does not satisfy the regulatory criteria for approval, the FDA typically issues a “complete response letter” communicating the agency’s decision not to approve the application and outlining the deficiencies in the submission. The complete response letter may request additional information, including additional preclinical testing or clinical trials. Even if such information and data are submitted, the FDA may ultimately decide that the NDA or 505(b)(2) NDA does not satisfy the criteria for approval.

If the FDA approves the application, the agency may require post-marketing studies, also known as Phase IV studies, as a condition to approval. These studies may involve continued testing of a product and development of data, including clinical data, about the product’s effects in various populations and any side effects associated with long-term use. After approval, the FDA also may require post-marketing studies or clinical trials if new safety information develops. Failure to conduct these studies in a timely manner may result in substantial civil fines.

Generic/Non-Branded Product Development. FDA approval of an ANDA is required before marketing in the United States a generic equivalent of a previously approved drug product, which is known as the “reference listed drug.” Generally, an ANDA must demonstrate that the proposed generic product has the same active

29

ingredient(s) and in the same strength as the reference listed drug, and is in the same dosage form and delivered by the same route of administration. The ANDA also must show that the two products are bioequivalent, which means that, within defined parameters, their active ingredients are absorbed at the same rate and to the same extent. For drugs that are systemically absorbed (as opposed to locally acting), bioequivalence is usually demonstrated by means of bioavailability studies of the active ingredient in the bloodstream, conducted in a relatively small number of human subjects. Further, with certain exceptions, a proposed generic product must have the same labeling as the reference listed drug. Generally, a generic product that meets these criteria and is approved is considered therapeutically equivalent to the reference listed drug, and is given an “A” rating in the FDA’s Orange Book, which communicates FDA’s expectation that the two products can be expected to have the same safety and efficacy profile. This, in turn, often is the basis for substitution of the generic product for the reference listed drug, under state law. There are circumstances under which an ANDA may be submitted for a generic product that differs from the reference listed drug in certain characteristics, such as strength or dosage form. Generic products approved with such differences do not qualify for therapeutic equivalence and generally are not substitutable under state law.

Because it typically does not require preclinical and clinical studies (relying instead on the studies establishing the safety and efficacy of the reference listed drug), the ANDA development process is generally less time consuming and complex than the NDA development process. Nonetheless, it does require submission of significant technical information about product formulation and manufacturing, as well as compliance with cGMP. In addition, submission or approval of an ANDA can be subject to delays due to patent rights or regulatory marketing exclusivities associated with the reference listed product. Upon approval, the first-filed ANDA that challenges the patents associated with a reference listed drug may be eligible for a 180-day period of exclusivity during which no other ANDA with the same reference listed drug may be approved. (See “—The Drug Price Competition and Patent Term Restoration Act of 1984” below for a discussion of the patent and exclusivity provisions affecting ANDAs.)

The development and approval process for generic products, although generally much shorter than that of products approved under an NDA or 505(b)(2) NDA, can still be a matter of years. In addition, certain changes to a product approved under an ANDA require submission of an ANDA supplement, and the time it takes to obtain, analyze and present the necessary information or data and have the FDA review the supplement can be significant.

Current Good Manufacturing Practices. One requirement for FDA approval of NDAs, 505(b)(2) NDAs and ANDAs is that our manufacturing facilities, procedures, and operations conform to FDA requirements, generally referred to as current Good Manufacturing Practices, or cGMP. The requirements for FDA approval encompass all aspects of the production process, including validation and recordkeeping, and involve changing and evolving standards.

As described above, our ability to develop and market new products currently is limited until we are able to demonstrate compliance with cGMP in accordance with the requirements of the consent decree. Among other things, the consent decree limits our manufacturing to drugs intended for use in non-clinical laboratory studies or other research and testing that does not involve exposure of human research subjects.

The Drug Price Competition and Patent Term Restoration Act of 1984. The Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act (“Hatch-Waxman”), established an abbreviated process for obtaining FDA approval for generic versions of approved branded drug products. In addition to establishing a shorter, less expensive pathway for approval of generic drugs, Hatch-Waxman provides incentives for the development of new branded products and innovations to approved products by means of marketing exclusivities and extension of patent rights.

Five-Year and Three-Year Marketing Exclusivity. Hatch-Waxman provides two distinct marketing exclusivity provisions that may either preclude the submission, or delay the approval, of an ANDA or 505(b)(2)

30

NDA referencing the drug. A five-year marketing exclusivity period is provided to the first applicant to gain approval of an NDA or 505(b)(2) NDA for a product that contains an active ingredient not found in any other approved product (i.e., a “new chemical entity” or “NCE”). The FDA is prohibited from accepting for filing any ANDA or 505(b)(2) NDA for a product that relies on the approved NCE as the reference listed drug for five years from the date of approval of the NCE, or four years in the case of an ANDA or 505(b)(2) NDA that challenges a patent associated with the reference listed drug. (See discussion below regarding patent challenges.) The five-year exclusivity protects the entire new chemical entity franchise, including all products containing the active ingredient for any use and in any strength or dosage form, from an ANDA or 505(b)(2) NDA, but does not preclude filing, review or approval of a full NDA for a product with the same active ingredient.

Hatch-Waxman also provides three years of marketing exclusivity for applications for products that are not new chemical entities, if the application contains the results of new clinical investigations (other than bioavailability studies) that were essential to approval of the application. Examples of such applications include applications for new indications, dosage forms (including new drug delivery systems), strengths, or conditions of use for an already approved product. This three-year marketing exclusivity period protects against the approval of ANDAs and 505(b)(2) NDAs for the innovation that required clinical data; it does not prohibit the FDA from accepting or approving ANDAs or 505(b)(2) applications for other products containing the same active ingredient. The five- and three-year marketing exclusivity periods apply equally to patented and non-patented drug products.

Paragraph IV Certifications. Under Hatch-Waxman, NDA applicants and NDA holders must provide certain information about patents related to the branded drug for listing in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the “Orange Book.” When an ANDA or 505(b)(2) application is submitted, it must contain one of several possible certifications regarding each of the patents listed in the Orange Book for the branded product that is the reference listed drug. A certification that a listed patent is invalid or will not be infringed by the sale of the proposed product is called a “Paragraph IV” certification. Within 30 days of the filing of such an ANDA or 505(b)(2) NDA, the applicant must notify the NDA holder and patent owner that the application has been submitted, and provide the factual and legal basis for the applicant’s opinion that the patent is invalid or not infringed.

Once a patent-challenging ANDA or 505(b)(2) NDA has been filed, the NDA holder or patent holder may challenge the Paragraph IV certification by filing suit for patent infringement. If this is done within 45 days of receiving notice of the Paragraph IV certification, a one-time 30-month stay of FDA’s ability to approve the ANDA or 505(b)(2) application is triggered. The FDA may approve the proposed product before the expiration of the 30-month stay only if a court finds the patent invalid or not infringed, or if the court shortens the period because the parties have failed to cooperate in expediting the litigation.

Although restrictions under the consent decree currently preclude us from testing any new generic drugs under development that are made in our facilities, prior to entering into the consent decree, we had submitted ANDAs with the FDA seeking permission to market generic versions of several branded products, including varying strengths of the following:

• Metadate CD^® (methylphenidate hydrochloride) Extended-Release Capsules

• Ritalin LA^® (methylphenidate hydrochloride) Extended-Release Capsules

• Focalin XR^® (dexmethylphenidate hydrochloride) Extended-Release Capsules

With respect to each of these ANDA submissions, we have sought favorable court rulings in patent infringement actions filed against us by the sponsors of the branded products. Although we believe we have meritorious defenses to the infringement claims asserted against us in each of these lawsuits, we cannot be certain of the outcome, and a decision that a relevant patent is valid and infringed likely would significantly delay our ability to market any of these drugs. In addition, the litigation process itself can impose significant delays and expense. Further, although the consent decree does not specifically address these ANDA submissions,

31

we anticipate that final approval of any of these ANDAs will not occur before the FDA has determined that we are compliant with cGMP regulations. See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. On March 1, 2010, we entered into a Settlement Agreement to settle the patent infringement actions with respect to Ritalin LA^® and Focalin XR^®. See Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” and Note 26— “Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the settlement.

180-Day Exclusivity. Under certain circumstances, Hatch-Waxman rewards the first applicant that submits an ANDA containing a Paragraph IV certification with 180 days of marketing exclusivity, during which no later-filed Paragraph IV ANDA for a generic version of the same product can enter the market. The exclusivity does not block approval of products submitted in a 505(b)(2) NDA. The 180-day exclusivity is applied on a “product-by-product” basis, which means that the first applicant (or applicants, if submitting on the same day) to submit an ANDA with a Paragraph IV certification to any listed patent is eligible to receive the single period of exclusivity. Any later applicant that is the first to submit an ANDA containing a Paragraph IV certification to a different patent does not receive exclusivity. The 180-day exclusivity period is triggered only on the first commercial marketing of the first applicant’s (or first applicants’) generic product, but eligibility for exclusivity will be forfeited in certain circumstances, including if the applicant fails to come to market in a timely manner, withdraws the ANDA or all of its Paragraph IV certifications, enters into an anti-competitive agreement with the NDA holder or patent owners, or if all of the patents that earned the applicant the exclusivity expire. On forfeiture, any later-submitted ANDA may be approved once review of the application is complete.

Patent Term Restoration. Under Hatch-Waxman, a portion of the patent term lost during product development and FDA review of an NDA or 505(b)(2) NDA is restored if approval of the application is the first permitted commercial marketing of a drug containing the active ingredient. The patent term restoration period is generally one-half the time between the effective date of the IND and the date of submission of the NDA, plus the time between the date of submission of the NDA and the date of FDA approval of the product. The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of FDA approval of the product. Only one patent claiming each approved product is eligible for restoration and the patent holder must apply for restoration within 60 days of approval. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for patent term restoration.

Drug Products Marketed Without FDA Approval. Under the FDCA, FDA regulations, and statements of FDA policy, certain drug products are permitted to be marketed in the U.S. without prior approval. Within the past few years, the FDA has revised its enforcement policies, significantly limiting the circumstances under which these unapproved products may be marketed. If the FDA determines that a company is distributing an unapproved product that requires approval, the FDA may take enforcement action in a variety of ways, including product seizures and seeking a judicial injunction against distribution. Moreover, the FDA has said that, if it takes action against a company for an unrelated violation, it may expand its enforcement to other products manufactured or distributed by the company. Previously, in addition to drugs that have been subject to FDA review and approval, we manufactured and distributed a number of drug products without FDA approval. As part of the consent decree, we have agreed not to manufacture or distribute any drugs that require FDA approval unless we have obtained such FDA approval; when we resume production under the terms of the consent decree, any drug product requiring approval that we manufacture and commercially distribute will be the subject of an approved NDA, 505(b)(2) NDA, or ANDA.

Post-Approval/Marketing Obligations. Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, which include company obligations to manufacture products in accordance with cGMP, maintain and provide to the FDA updated safety and efficacy information, report adverse experiences with the product, keep certain records and periodic reports, obtain FDA approval of certain manufacturing or labeling changes, and comply with FDA promotion and advertising requirements and restrictions. Failure to meet these obligations can result in various adverse consequences, both voluntary and

32

FDA-imposed, including product recalls, withdrawal of approval, restrictions on marketing, and the imposition of civil fines and criminal penalties against the NDA holder. In addition, later discovery of previously unknown safety or efficacy issues may result in restrictions on the product, manufacturer or NDA holder.

Furthermore, new government requirements may be established that could delay or prevent regulatory approval of our products under development, or affect the conditions under which approved products are marketed. For instance, the Food and Drug Administration Amendments Act of 2007 provides the FDA with expanded authority over drug products after approval. This legislation enhanced the FDA’s authority with respect to post-marketing safety surveillance, including, among other things, the authority to require additional post-marketing studies or clinical trials, labeling changes as a result of safety findings, registration of clinical trials, and making clinical trial results publicly available.

Among other things, drug manufacturers and their subcontractors must register their establishments with the FDA and certain state agencies and list their products with the FDA. The FDA periodically inspects manufacturing facilities in the United States and abroad to assure compliance with the applicable cGMP regulations and other requirements. Facilities also are subject to inspections by other federal, foreign, state or local agencies. In complying with the cGMP regulations, manufacturers must continue to expend time, money and effort in recordkeeping and quality control to assure that the product meets applicable specifications and other post-marketing requirements. At the conclusion of an FDA inspection, the FDA investigator may issue a list of inspectional observations, documented on “Form 483.” Typically, a company has an opportunity to respond to the Form 483 observations and work with the FDA to address the agency’s concerns. Failure to comply with FDA’s cGMP regulations or other requirements can lead to civil, criminal, or administrative sanctions or remedies, including the suspension of manufacturing operations. On February 2, 2009, at the conclusion of an FDA inspection, we were issued a Form 483 that identified a number of instances of alleged cGMP noncompliance. As discussed elsewhere, we voluntarily suspended manufacturing and distribution of our products, and on March 2, 2009, we entered into a consent decree with the FDA regarding our drug manufacturing and distribution. See Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” in this Annual Report on Form 10-K for more information.

Post-approval marketing and promotion of drugs is an area of particular FDA scrutiny and enforcement. Among the issues addressed by FDA regulations are print and broadcast advertising for prescription drugs, promotional activities involving the Internet, dissemination of materials regarding off-label uses of approved products, and sponsorship of scientific and educational activities. Failure to comply with FDA requirements can have negative consequences, including adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Although physicians may prescribe legally available drugs for uses that are not described in the drug’s labeling (known as “off-label use”), manufacturers may not promote such off-label uses. Manufacturers may, however, engage with medical professionals in scientific or medical dialogue that involves information related to off-label uses, so long as it is done in a non-promotional manner.

Prescription Drug Marketing Act. The Prescription Drug Marketing Act (“PDMA”), which amended the FDCA, imposes detailed requirements on the distribution of prescription drug samples and requires state licensing of wholesale distributors of prescription drugs under federal guidelines that include minimum standards for storage, handling and record keeping. 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. Failure to comply with the PDMA or applicable state requirements can lead to sanctions, including substantial civil and criminal penalties and potential restrictions on sales or other activities within particular states.

International Approvals. For international markets, a pharmaceutical company is subject to regulatory requirements, inspections and product approvals substantially identical to those in the United States. In connection with any future marketing, distribution and license agreements that we may enter into, our licensees

33

or we may accept or assume responsibility for such foreign regulatory approvals. The time and cost required to obtain these international market approvals may be different from those required for FDA approval.

U.S. Drug Enforcement Administration. The DEA regulates certain drug products containing controlled substances, such as opiods, and List I chemicals, such as pseudoephedrine, pursuant to the CSA. The CSA and DEA regulations impose specific requirements on manufacturers and other entities that handle these substances including with respect to registration, recordkeeping, reporting, storage, security and distribution. Recordkeeping requirements include accounting for the amount of product received, manufactured, stored and distributed. Companies handling either controlled substances or List I chemicals are also required to maintain adequate security and to report suspicious orders, thefts and significant losses. The DEA periodically inspects facilities for compliance with the CSA and its regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation or denial of renewal of DEA registrations, injunctions, or civil or criminal penalties.

We utilize controlled substances in certain of our current products and products in development and therefore must meet the requirements of the CSA and the related regulations administered by the 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

We are subject to the requirements of the CSA and DEA regulations in the handling of any controlled substances in schedules II-V or any of the List I chemicals identified in the CSA. Specifically, we are subject to regulation in the current manufacture and distribution of products containing pseudoephedrine, a List I chemical. As a result of a series of amendments to the CSA, the DEA has imposed increased restrictions on the manufacture and distribution of pseudoephedrine products. For example, the Comprehensive Methamphetamine Control Act of 1996 was enacted to authorize the DEA to monitor transactions involving chemicals that may be used illegally in the production of methamphetamine. The Comprehensive Methamphetamine Control Act of 1996 establishes certain registration and recordkeeping requirements for manufacturers of OTC cold, allergy, asthma and diet medicines that contain ephedrine, pseudoephedrine or phenylpropanolamine (PPA).

More recently, the Reauthorization Act of 2005 was signed into law on March 9, 2006. The Reauthorization Act of 2005 included the Combat Methamphetamine Epidemic Act. This law further amended the CSA and provided additional requirements for the sale of pseudoephedrine products. Among the various provisions, this national legislation places certain restrictions on the purchase and sale of all products that contain ephedrine, pseudoephedrine or PPA (List I chemical products). The CSA also imposed import and production quotas for List I chemicals, including pseudoephedrine.

The CSA, as amended, also imposed daily restrictions on the amount of List I chemical products a retailer may sell to a consumer (3.6 grams per day) and limitations on the amount of List I chemical products a consumer may purchase (9.0 grams) over a 30-day period. Further, effective September 30, 2006, the CSA requires that (a) retail sellers maintain a logbook that tracks the sales of List I chemical products to individuals, and (b) purchasers provide valid identification in order to purchase List I chemical products. Many states have also enacted legislation regulating the manufacture and distribution of pseudoephedrine products. We are subject to these state requirements as well.

Medicaid and Other Drug Reimbursement Programs. Government reimbursement programs include Medicare, Medicaid, the 340B drug pricing program, TriCare and State Pharmacy Assistance Programs established according

34

to statute, government regulations and policy. The Centers for Medicare and Medicaid Services (“CMS”) administers the Medicaid drug rebate agreements between the federal government and pharmaceutical manufacturers. Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its pharmaceuticals that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under a fee-for-service arrangement. (In addition, some states require supplemental rebates as a condition of including the manufacturer’s drug on the state Medicaid program’s Preferred Drug List.) Pursuant to recently enacted health reform legislation, rebates will be due on both Medicaid fee-for-service utilization as well as utilization of Medicaid managed care organizations; however, the timing of the implementation of this change remains unclear because it requires revisions to agreements between state Medicaid programs and such organizations.

This federal requirement is effectuated through the Medicaid rebate agreement, which is between each manufacturer and the Secretary of Health and Human Services. The agreement provides that the drug manufacturer will remit a rebate to each state Medicaid agency, on a quarterly basis. Pursuant to recently enacted health reform legislation, effective for rebate periods after December 31, 2009, the rebates are as follows: for noninnovator products, in general generic drugs marketed under ANDAs, the rebate amount is 13% of the Average Manufacturer Price (“AMP”) for the quarter; for innovator products, in general brand-name products marketed under NDAs, the rebate amount is the greater of 23.1% of the AMP for the quarter or the difference between such AMP and the best price for that same quarter. The 23.1% is lowered to 17.1% for certain clotting factor and pediatric drug products. An additional rebate for innovator products is payable in the amount by which, if any, the product’s AMP has increased at a rate faster than inflation since the product’s launch. Recently enacted health reform legislation changes the additional rebate formula for certain products that qualify as new formulations of existing drugs, effective for drugs paid for by a state as of the first quarter of calendar year 2010, so that the additional rebate for such products can be increased and based on the additional rebate for the original drug. It also caps the total rebate amount for innovator drugs at 100% of the AMP.

We have a Medicaid rebate agreement in effect with the federal government. Federal and/or state governments have and are expected to continue to enact measures aimed at reducing the cost of drugs to such governmental payers as well as the public, including the enactment in December 2003 of Medicare legislation that expanded the scope of Medicare coverage to include outpatient drugs (Part D), starting in January 2006, the Deficit Reduction Act of 2005 (the “DRA”), as well as recently enacted health reform legislation. We cannot predict the nature of such measures or their impact on our profitability. Various states have in recent years also adopted Medicaid supplemental drug rebate programs that are intended to provide the individual states with additional manufacturer rebates on Medicaid utilization over and above those required under a manufacturer’s federal Medicaid agreement. States also have created drug coverage and corresponding manufacturer rebate programs for non-Medicaid populations, known as state pharmaceutical assistance programs. These rebate programs are generally designed to mimic the federal drug rebate program in terms of how the manufacturer rebates are calculated. Although there are a number of Medicaid supplemental and state pharmacy assistance rebate programs in which we participate, they are insignificant in the aggregate compared to our quarterly Medicaid drug rebate obligations.

The DRA amended the Medicaid statute in a number of ways, including to revise the methodology for the calculation of federal upper limits, a type of cap on the amounts a state Medicaid program can reimburse pharmacies for multiple source drugs (drugs where there are at least two equivalent versions on the market, for example, a branded and a generic version, or two or more generic versions) dispensed to Medicaid patients, and AMP, as well as to require the public availability of AMP data.

In July 2007, CMS issued a final rule regarding the calculation of AMP as well as the other statutory amendments made by the DRA. This rule, as required by the DRA amendments, requires CMS to use AMP to calculate federal upper limits. Prior to the enactment of this legal requirement, CMS typically used the Average Wholesaler Price (“AWP”) or Wholesaler Acquisition Cost (“WAC”) in the calculation of federal upper limits.

35

The rule also rejected requests to postpone the public availability of AMP data. In mid-December 2007, a preliminary injunction was granted, resulting in postponement of the actual implementation of these aspects of the DRA and the rule such that AMP currently cannot be used to calculate federal upper limits and also cannot be disclosed to the public. The relevant court case is still pending and the injunction remains in place, resulting in a continual postponement of the implementation of these requirements. We do not know how the new methodology for calculating federal upper limits, if implemented, will affect our pharmacy customers or to what extent these customers will seek to pass on any decrease in Medicaid reimbursements to us. We cannot predict how the sharing of manufacturer-specific data may impact competition in the marketplace. Recently enacted health reform legislation also will affect these issues. Effective fourth quarter of calendar year 2010, the federal upper limit will be calculated using a weighted average AMP, based only on those multiple source drugs that are nationally available for purchase by retail community pharmacies and where there are three or more equivalent versions of the product on the market. The definition of AMP also will change, which may affect the Medicaid rebate amount, as described above. In addition, this legislation will change the publicly available AMP data to include only weighted average monthly AMPs as well as average retail survey prices determined by the Medicaid program.

A manufacturer must also participate in the 340B drug pricing program in order for federal funds to be available to pay for the manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge statutorily-defined covered entities no more than the 340B discounted price for the manufacturer’s covered outpatient drugs. The formula for determining the discounted purchase price is defined by statute and is based on the AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. To the extent that recently enacted health reform legislation, as discussed above, causes the statutory and regulatory definitions of AMP and the Medicaid rebate amount to change, these changes also will impact the discounted purchase prices that a manufacturer is obligated to provide under this program. This same health reform legislation also expands the 340B drug pricing program to include new entity types and obligates manufacturers to sell to covered entities if they sell to any other purchaser, effective for drugs purchased on or after January 1, 2010.

The recently enacted health care reform legislation currently is the subject of further proposed amendments in Congress, which if passed, could further impact these programs and us.

There has been enhanced political attention, governmental scrutiny and litigation at the federal and state levels of the prices paid or reimbursed for pharmaceutical products under Medicaid and other government programs. See Item 1A—“Risk Factors—Investigations of the calculation of average wholesale prices may adversely affect our business” and Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Federal Contracting/Pricing Requirements. We also make our products available for purchase by authorized users of the Federal Supply Schedule, or FSS, of the General Services Administration pursuant to our FSS contract with the Department of Veterans Affairs. Under the Veterans Health Care Act of 1992, or the VHCA, we are required to offer deeply discounted FSS contract pricing to four federal agencies—the Department of Veterans Affairs, the Department of Defense, the Coast Guard and the Public Health Service (including the Indian Health Service)—for federal funding to be made available to pay for our products under the Medicaid program and Medicare Part B, and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSS pricing to those four federal agencies must be equal to or less than the “Federal Ceiling Price,” which is, at a minimum, 24% off the Non-Federal Average Manufacturer Price, or “Non-FAMP,” for the prior fiscal year. In addition, if we are found to have knowingly submitted false information to the government, the VHCA provides for civil monetary penalties not to exceed $100,000 per false item of information in addition to other penalties available to the government.

Tricare Retail Program. On March 17, 2009, the Department of Defense (“DoD”) Tricare Management Activity (“TMA”) issued a Final Rule pursuant to Section 703 of the National Defense Authorization Act of 2008

36

(“NDAA”) to establish a program under which it will seek Federal Ceiling Price-based rebates from drug manufacturers on Tricare retail utilization. Under the Final Rule, which became effective May 26, 2009, DoD asserts an entitlement to rebates on Tricare Retail Pharmacy utilization from January 28, 2008 forward, unless TMA grants a waiver or compromise of amounts due from quarters that have passed prior to execution of a voluntary agreement with DoD. Ther-Rx submitted a request for waiver for the entirety of its rebate liability based on utilization occurring on or after January 28, 2008, and before July 15, 2009, the effective date of its Tricare voluntary rebate agreement with DoD. The total amount for which a waiver was requested is approximately $500,000. ETHEX did not request a waiver, instead opting to pay all rebate liability since the date of enactment of the NDAA. ETHEX also entered into a Tricare voluntary rebate agreement with DoD, which became effective July 13, 2009.

Pursuant to the terms of the Final Rule, during the pendency of Ther-Rx’s waiver request, we are not required to pay rebates for amounts subject to the request and DoD considers our company in compliance with the requirements of the Final Rule with respect to the requirement to pay such amounts. In addition, in the event that DoD does not grant our request in full, we have reserved the right to challenge DoD’s assertion that it is owed rebates based on Tricare retail utilization from the date of enactment of the NDAA and prior to the execution of a voluntary agreement.

The Final Rule provides that, absent an agreement from the manufacturer to provide Tricare retail rebates, DoD will designate the manufacturer’s product(s) as Tier 3 (non-formulary) and require that beneficiaries obtain prior authorization in order for the product(s) to be dispensed at a Tricare retail pharmacy. Moreover, DoD has asserted in the Final Rule the right to apply offsets and/or proceeds under the Debt Collection Act, in the event that a company does not pay rebates. DoD required rebate agreements to be submitted by manufacturers on or before June 1, 2009. We submitted proposed voluntary pricing for both Ther-Rx and ETHEX in a timely manner.

Per the Final Rule, rebates are computed by subtracting the applicable FCP from the corresponding Annual Non-FAMP. We believe the estimated liability for Tricare retail utilization from January 28, 2008 through July 14, 2009 is approximately $500,000. It is possible that, pursuant to the waiver request submitted by us, in accordance with the provisions of the Final Rule, DoD will agree to accept a lesser sum or waive payment of the entire amount for these pre-agreement periods.

Anti-Kickback and False Claims Statutes. In addition to the FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical and medical device industries in recent years. These laws include anti-kickback statutes and false claims statutes.

The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease, or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration to individuals or entities in a position to prescribe, purchase, or recommend our products may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid or to reduce an amount owed to the federal government. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product or for allegedly misreporting the pricing data on which Medicaid rebates are calculated so as to reduce the amount of rebates owed to state Medicaid programs. Other companies have been prosecuted for causing false claims to be

37

submitted because of the company’s marketing of the product for unapproved, and thus non-reimbursable, uses. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, debarment from contracting with the government, criminal fines, and imprisonment.

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.

Employees

We have realigned and restructured our sales force and our production workforce. As a result of such measures, we have reduced our employee headcount from approximately 1,700 on December 31, 2008 to approximately 680 on February 28, 2010. As of March 31, 2009, we employed a total of 610 employees.

Executive Officers of Our Company

The following is a list of our current executive officers, 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
David A. Van Vliet	54	Interim President and Interim Chief Executive Officer since December 2008; President and Chief Executive Officer, ETHEX Corporation from August 2008 to December 2008; Chief Administration Officer of our company from September 2006 to August 2008; member of the Board of our company 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.
Michael S. Anderson	60	President and Chief Executive Officer, ETHEX Corporation since December 2008; Corporate Vice President, Industry Presence and Development from February 2006 to December 2008; Chief Executive Officer, Ther-Rx Corporation from February 2000 to February 2006.
Paul T. Brady	46	Corporate Vice President, Business Development Administration of our company since 2007; 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.
Gregory J. Divis, Jr.	42	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.

38

Name	Age	Position Held and Past Experience
Janice C. Forsyth	56	General Counsel, Vice President and Secretary of our company since January 2010; Vice President and Deputy General Counsel, Express Scripts, Inc. from May 2005 to December 2009; Vice President and Chief Compliance Officer, Express Scripts, Inc. from January 2000 to May 2005.
Thomas S. McHugh	45	Interim Chief Financial Officer, Interim Treasurer, Vice President of Finance and Corporate Controller since September 2009; Chief Accounting Officer since February 2010; Vice President of Finance and Corporate Controller of our company from January 2009 to September 2009; Managing Director and Global Controller, BearingPoint, Inc. from December 2005 to November 2008; Chief Financial Officer, Huttig Building Products, Inc., from 2000 to 2005.

Available Information

We make available, free of charge through our Internet website (http://www.kvpharmaceutical.com), our Annual Reports 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 SEC. 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 website, and available in print to any shareholder who requests them. The information posted on our website is not incorporated into this Annual Report on Form 10-K.

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 risk factors could have a material adverse effect on our business, financial position, results of operations or cash flows. These risk factors may not include all of the important risks that could affect our business or our industry that could cause our future financial results to differ materially from historic or expected results or that could cause the market price of our common stock to fluctuate or decline. The following discussion of our risk factors should be read in conjunction with the Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K. Because of these and other factors, past financial performance should not be considered an indication of future performance.

There is substantial doubt about our ability to continue as a going concern.

There is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included in this Annual Report on Form 10-K are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The historical consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and

39

Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. Our assessment was further affected by our fiscal year 2009 net loss of $313.6 million and the outstanding balance of cash, cash equivalents and short-term marketable securities of $75.7 million as of March 31, 2009. For periods subsequent to March 31, 2009, we expect losses to continue because we are unable to generate any significant revenues from our own manufactured products until we are able to resume shipping certain or many of our approved products, which currently is not expected to occur until the fourth quarter of calendar year 2010 at the earliest. In addition, we must meet ongoing operating costs as well as costs related to the steps we are currently taking to prepare for reintroducing our approved products to the market. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

We believe that we are not in compliance with one or more of the requirements of our mortgage loan arrangement as of March 31, 2009 (see Note 14—“Long-Term Debt” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Failure by us to comply with the requirements of the mortgage loan arrangement or to otherwise receive a waiver from the mortgage lender for any noncompliance could result in our outstanding mortgage debt obligation accelerating and immediately becoming due and payable. If the acceleration occurs and the mortgage debt is not immediately paid in full, an event of default could also be deemed to have occurred under the $200 million principal amount of 2.5% Contingent Convertible Subordinated Notes. If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest could also become immediately due and payable. The acceleration of these outstanding debt obligations would materially adversely affect our business, financial condition and cash flows.

Based on current financial projections, we believe the continuation of our company as a going concern is primarily dependent on our ability to address, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. While we address these matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with reintroducing our approved products to the market (such as costs related to our employees, facilities and FDA compliance), remaining payments associated with the acquisition of the rights to Gestiva™ (see Note 6—“Acquisitions” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K), the financial obligations pursuant to the plea agreement (see Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” included in this Annual Report on Form 10-K), as well as the significant costs, such as legal and consulting fees, associated with the steps taken by us in connection with the consent decree and the litigation and governmental inquiries. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, and/or if we experience adverse outcomes with respect to any of the governmental inquiries or litigation described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

In the near term, we are focused on meeting the requirements of the consent decree, which will allow our approved products to be reintroduced to the market, and are pursuing various means to increase cash. Since March 31, 2009, we have generated non-recurring cash proceeds to support our on-going operating and compliance requirements from the receipt of tax refunds, the monetization of our ARS and the sale of certain other assets (see Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the cash received). We also generated cash from the sale of certain products not manufactured by us under the distribution and supply agreement with

40

Purdue (see Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). While these cash proceeds were sufficient to meet near-term cash requirements, we are pursuing ongoing efforts to increase cash including the continued implementation of cost savings, divestiture of PDI and other assets and the return of certain or many of our approved products to market in a timely manner. In addition, in order to continue to meet the expected near-term obligations described above, we will still need to obtain additional capital through additional asset sales. Based on our continuing assessment and identification of assets for future sale and the results of the currently proposed asset sales, we may elect to engage in external financing efforts. We currently do not anticipate issuing equity securities to raise additional capital. However, we continue to evaluate our capital needs and availability of financing to assess and identify the best available external financing alternatives. We cannot provide assurance that we will be able to realize the cost reductions we anticipate from reducing our operations or our employee base, that some or many of our approved products can be returned to the market in a timely manner, that our higher profit approved products will return to the market in the near term, that we can obtain additional cash through asset sales, or that external financing can be obtained when needed, under acceptable terms or in the amounts required. If we are unsuccessful in our efforts to sell assets and raise additional capital in the near term, we will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease operations in order to offset the lack of available funding.

We may not be able to raise sufficient funds to continue our current operations.

We are expending significant efforts to raise additional capital by, among other things, pursuing asset sales (as described in the next risk factor). We may also pursue obtaining bank loans and/or engaging in debt and/or equity financings. We have retained Morris Anderson & Associates Ltd., a financial and management consulting firm, to advise us with respect to restructuring our operations and cash management efforts. We also have retained Robert W. Baird & Co. Incorporated to advise us with respect to raising additional capital.

Our ability to obtain additional capital has been and continues to be materially and negatively affected by a number of factors. The current and evolving credit market condition and general adverse economic conditions have caused the cost of prospective debt and equity financings to increase considerably. These circumstances have materially adversely affected liquidity in the financial markets, making terms for certain financings unattractive, and in some cases have resulted in the unavailability of financing. We also anticipate that the uncertainty created by the ongoing governmental inquiries and private litigation, steps taken by us in connection with the nationwide recall and suspension of shipment of all products manufactured by us, the consent decree, and the uncertainty with respect to when we will resume shipment of our products, if at all, will affect our ability to obtain capital on a timely basis, or at all. In light of the factors described above, we may not be able to obtain additional capital. Even if we are able to obtain additional financing or issue debt securities under these circumstances, the cost to us will likely be high and the terms and conditions are likely to be onerous. In addition, if we were to issue equity securities, such securities likely would be priced at or below current market prices. As a result, sales of equity securities at or below current market prices likely would result in substantial dilution for current shareholders who purchased our equity securities at or above current market prices.

If we are unsuccessful in our initiative to raise additional capital, our cash balances could deteriorate further, which could have a material adverse effect on our ability to continue as a going concern.

We have decided to sell certain assets. Such sales could pose risks and may materially adversely affect our business. Our failure to liquidate or sell assets on terms favorable to us, or at all, could have a material adverse effect on our financial condition and cash flows.

We currently plan to sell certain of our assets, such as our PDI subsidiary. However, due to the general economic slowdown, we will likely be exposed to risks related to the overall macro-economic environment, including a lower rate of return than we have historically experienced on our invested assets and being limited in our ability to sell assets.

41

As noted above, we plan to market for sale certain assets and will seek to identify other assets for potential sale. However, we cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales, including attractive pricing. In addition, divestitures of businesses may also involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues and earnings associated with the divested business, and the disruption of operations in the affected business. In addition, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of significant financial and employee resources. Our inability to consummate identified sales or manage the post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows. If we are unsuccessful in our initiative to raise additional capital through asset sales, our cash balances could deteriorate further, which could have a material adverse effect on our ability to remain a going concern.

If we are unable to address the issues identified in the consent decree and resume manufacturing and distribution of some or all of our approved products in a timely and cost effective manner, our business, financial position, results of operations and cash flows will continue to be materially adversely affected.

On March 2, 2009, we entered into a consent decree with the FDA regarding our drug manufacturing and distribution, which is described in more detail under Item 1—“Business—(b) Significant Recent Developments” in this Annual Report on Form 10-K. Our actions and the requirements under the consent decree have had, and are expected to continue to have, a material adverse effect on our liquidity position and operating results. We do not expect to generate any significant revenues from products that we manufacture until we resume shipping certain or many of our approved products. In the meantime, we must meet ongoing operating costs related to our employees, facilities and FDA compliance, as well as costs related to the steps we currently are taking to prepare for reintroducing our products to the market.

The consent decree requires us, before resuming manufacturing, to retain an independent cGMP expert to undertake a review of our facilities, policies, procedures and practices and to certify compliance with the FDA’s cGMP regulations. On January 13, 2010, our independent cGMP expert, Lachman, notified the FDA that it had performed a comprehensive inspection and that our facilities and controls are in compliance with cGMP and the consent decree with respect to the first group of products that we seek to manufacture and market. Once a certification from Lachman consultants regarding the first group of products that we seek to manufacture and market is issued, we expect that the FDA will re-inspect our facilities and determine whether our facilities are in compliance. A successful FDA inspection is a prerequisite to us resuming shipment of our products. We cannot predict with certainty the timing or the outcome of the product certification or the inspection.

We currently do not expect to resume product shipments until the fourth quarter of calendar year 2010 at the earliest. In addition, we expect that any resumption of shipments will be limited initially to certain selected products and will be expanded incrementally thereafter. Despite our efforts, there can be no assurance that our initiatives intended to comply with the requirements under the consent decree and enable us to reintroduce certain of our approved products to the market will be successful within the time frames currently projected by management or at all. If we are not able to obtain FDA’s permission to resume manufacturing and distribution of our products in a timely manner at a reasonable cost, our business, financial position, results of operations and cash flows will continue to be materially adversely affected, which would have a material adverse effect on our ability to continue as a going concern.

In addition, our top priority is to maintain and attempt to increase our limited cash and financial resources. As a result, if we determine that our current goal of meeting the consent decree’s requirements and returning our approved products to market is likely to be significantly delayed, we may decide to further reduce our operations, including further reductions of our employee base, and to significantly curtail some or all of our efforts to meet the consent decree’s requirements and return our approved products to market. Such decision would be made based on our ability to manage our near-term cash obligations, to obtain additional capital through asset sales and/or external financing and to expeditiously meet the consent decree’s requirements and return our approved

42

products to market. If such decision were to be made, we currently anticipate that we would focus our efforts on developing product candidates in our development portfolio that we believe have the highest potential return on investment, which we currently believe to be primarily Gestiva™ (17-alphahydroxyprogesterone caproate). We also expect to evaluate other alternatives available to us in order to increase our cash balance.

Even if we are able to address the issues identified in the consent decree and resume manufacturing and distribution of some or all of our approved products in a timely and cost effective manner, our business, financial position, results of operations and cash flows could continue to be materially adversely affected.

As discussed above, we have been unable to manufacture or ship any of our products for an extended period of time. We operate in a highly competitive industry and it is possible that, even if we are able to return some or all of our approved products to the market, certain of our existing customers will purchase smaller quantities or no quantities of our products. Such a potential loss of market share would likely result in limiting the prices we are able to charge for our approved products, which will negatively impact our gross margin.

In addition, our financial position is expected to be adversely affected by our inability to manufacture and distribute our unapproved products until such time as there is an approved ANDA or NDA for each such product, which will only occur if we decide to pursue, and are able to fund, the studies required for such approvals. It is possible that we may not be able to return all or many of our unapproved products to the market. Moreover, entering into the consent decree may have damaged our reputation in the market, which could result in a competitive disadvantage. Furthermore, 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. Therefore, even after we are able to resume manufacturing and shipment of our approved products, our business might not continue to generate cash flow at or above historic levels, which could have a material adverse effect on our financial position, results of operations and cash flows.

We face continuing risks in connection with the plea agreement with the Department of Justice related to allegations of failure to make and submit field alert reports to the FDA in September 2008.

As more fully described in Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” in this Annual Report on Form 10-K, at the recommendation of the Special Committee, our Board approved entering into a plea agreement with the Department of Justice that relates to allegations of failure to make and submit field alert reports to the FDA in September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. In exchange for the voluntary guilty plea by ETHEX, the Department of Justice agreed that no further federal prosecution will be brought in the Eastern District of Missouri against ETHEX, KV or Ther-Rx regarding allegations of the misbranding and adulteration of any oversized tablets of drugs manufactured by us, and the failure to file required reports regarding these drugs and patients’ use of these drugs with the FDA, during the period commencing on January 1, 2008 through December 31, 2008. However, the plea agreement does not bind any governmental office or agency other than the United States Attorney for the Eastern District of Missouri and the Office of Consumer Litigation and we cannot rule out regulatory or other actions by governmental entities not party to the plea agreement. In addition, the plea agreement does not limit the rights and authority of the United States of America to take any civil, tax or administrative action against us, and any recommendation in the plea agreement as to the amount of loss or restitution is not binding upon the United States in any civil or administrative action by the government against us.

We may also become subject to claims by private parties with respect to the alleged conduct that is the subject of the plea agreement.

Pursuant to the plea agreement, we are subject to a criminal fine in the aggregate amount of $23.4 million, payable in four installments. If we fail to make any of the installment payments, the United States Attorneys Office, in its sole discretion, may void the plea agreement, keep any payments already made under the plea agreement and prosecute us using, among other evidence, the admissions made in the plea agreement.

43

An adverse resolution of the private litigation and governmental inquiries could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are fully cooperating in certain governmental matters, including the SEC informal inquiry and the pending investigation by the Office of Inspector General of HHS into potential false claims under Title 42 of the U.S. Code. (See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) We are not aware whether, or the extent to which, any pending governmental inquiries and/or related private litigation might result in the payment of fines or penalties or the imposition of operating restrictions on our business; however, if we are required to pay fines or penalties, the amount could be material.

Furthermore, any governmental enforcement action could require us to operate under significant restrictions, place substantial burdens on management, hinder our ability to attract and retain qualified employees and/or cause us to incur significant costs. The pending governmental inquiries could result in, among other things, indictment and criminal prosecution of our company or one or more of our subsidiaries. Any indictment, conviction or settlement arising out of these inquiries could result in our company or one or more of our subsidiaries being excluded from participation in federal healthcare programs and could have a material adverse effect on our business, financial condition, results of operations and future prospects.

In connection with the guilty plea by ETHEX pursuant to the plea agreement, ETHEX is expected to be excluded from participation in federal healthcare programs, including Medicare and Medicaid. As a result, HHS may use its discretionary authority to seek to similarly exclude our company from participation in federal healthcare programs. While we are in receipt of correspondence from the HHS stating that, absent any transfer of assets or operations that would trigger successor liability, HHS has no present intent to exercise its discretionary authority to exclude our company as a result of the guilty plea by ETHEX, we cannot provide any assurance regarding the stance the HHS is likely to take in the future. In addition, HHS may impose operating restrictions on us or subject us to requirements that could have a material adverse effect on our business, financial condition, results of operations and future prospects.

In addition, we are subject to a number of private litigation matters as more fully described in Note 16— “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. If we do not prevail in one or more pending lawsuits, we may be required to pay a significant amount of monetary damages.

Our ongoing private litigation and governmental inquiries also could impair our ability to raise additional capital.

Continuing negative publicity from the consent decree, the plea agreement and ongoing litigation and governmental inquiries may have a material adverse effect on our business, financial condition, results of operations and cash flows.

As a result of the consent decree, the plea agreement, ongoing litigation and governmental inquiries and related matters, we have been the subject of negative publicity. This negative publicity may harm our relationships with current and future investors, government regulators, employees, customers and vendors. For example, negative publicity may adversely affect our reputation, which could harm our ability to obtain new customers, maintain existing business relationships with other parties and maintain a viable business in the future. Also, it is possible that the negative publicity and its effect on our work environment could cause our employees to terminate their employment or, if they remain employed by us, result in reduced morale that could have a material adverse effect on our business. In addition, negative publicity has and may continue to adversely affect our stock price and, therefore, employees and prospective employees may also consider our stability and the value of any equity incentives when making decisions regarding employment opportunities. As a result, our business, financial condition, results of operations and cash flows could be materially adversely affected.

44

The consent decree, the plea agreement, the ongoing private litigation and governmental inquiries, and the internal investigation by the Audit Committee have resulted in significant fees, costs and expenses, diverted management time and resources, and could have a material adverse effect on our business, financial condition and cash flows.

We have incurred significant costs associated with, or consequential to, the steps taken by us in connection with the nationwide recall and suspension of shipment of all products manufactured by us, the requirements under the consent decree, the plea agreement, the ongoing private litigation and governmental inquiries, and the internal investigation by the Audit Committee, including legal fees (including advancement of legal fees to individuals pursuant to our indemnification obligations), accounting fees, consulting fees and similar expenses. Although we believe that a portion of these expenditures may be recoverable from insurance policies that we have purchased, the insurance does not extend to all of these expenditures, the insurance limits may be insufficient even with respect to expenditures that would otherwise be covered, and the insurance carriers have reserved their rights to contest coverage under the insurance policies on multiple grounds. In addition, our Board, management and employees have expended a substantial amount of time in connection with these matters, diverting resources and attention that would otherwise have been directed toward our operations and implementation of our business strategy.

We expect to continue to spend additional time and incur significant additional professional fees, expenses and costs, including administrative expenses similar to those discussed above, as well as costs associated with the Remedial Framework, including supplements, approved by the Audit Committee and adopted, either directly or through the Special Committee, by the Board.

Pursuant to the plea agreement, we are subject to fines, restitution and forfeiture in the aggregate amount of $27.6 million. In addition, we are not aware whether, or the extent to which, any pending governmental inquiries and/or related private litigation might result in the payment of fines or penalties or the imposition of operating restrictions on our business; however, if we are required to pay fines or penalties, the amount could be material. In addition, if we do not prevail in one or more pending lawsuits, we may be required to pay a significant amount of monetary damages, which could have a material adverse effect on our financial position, results of operations and cash flows.

We have been unable to timely file our periodic reports with the SEC.

We have not filed with the SEC our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2008 (the “September 2008 Form 10-Q”), December 31, 2008 (the “December 2008 Form 10-Q”), June 30, 2009, September 30, 2009 and December 31, 2009. In addition, KPMG LLP was unable to complete the SAS 100 review of the unaudited consolidated financial statements accompanying our Quarterly Report on Form 10-Q for the first fiscal quarter ended June 30, 2008 (the “June 2008 Form 10-Q”), filed by the Company with the SEC on August 11, 2008. As previously disclosed on our Current Report on Form 8-K filed with the SEC on February 10, 2010, we concluded that the unaudited financial statements accompanying the June 2008 Form 10-Q contained errors in the application of certain accounting practices and procedures and should no longer be relied upon.

On the same day this Annual Report on Form 10-K was filed with the SEC, we also filed the September 2008 Form 10-Q, the December 2008 Form 10-Q and an amendment to the June 2008 Form 10-Q which will contain the restatement of our consolidated balance sheet as of June 30, 2008 and the related consolidated statement of income and cash flows for the three months ended June 30, 2008. We are in the process of preparing the Quarterly Reports on Form 10-Q for the quarters ended June 30, 2009, September 30, 2009 and December 31, 2009. However, we are unable at this time to estimate when these reports will be filed with the SEC.

Our efforts to become current with our SEC filings have required and will continue to require substantial management time and attention as well as additional accounting and legal expense. In addition, if we are unable to become current with our filings with the SEC, we may face several adverse consequences. Investors in our

45

securities will not have information regarding the current state of our business and financial condition with which to make decisions regarding investment in our securities. When this information does become available to investors, it may result in an adverse effect on the trading price of our common stock. Also, we will not be eligible to use a “short form” registration statement on Form S-3 for a period of 12 months after the time we become current in our SEC filings. Until we are again eligible to use Form S-3, we would be required to use a registration statement on Form S-1 to register securities with the SEC or issue such securities in a private placement, which could increase the cost of raising capital. If we do not become current with our SEC filings, our securities may be delisted from the New York Stock Exchange. In addition, we believe we are not in compliance with one or more of the requirements pursuant to a mortgage loan arrangement. See the risk factor entitled “We believe we are not in compliance with one or more of the requirements of an outstanding mortgage loan, which could have a material adverse effect on our business, financial condition and cash flows” for more information.

We are involved in various legal proceedings and may experience unfavorable outcomes of such proceedings.

We are involved in various legal proceedings, including, but not limited to, patent infringement, product liability, breach of contract, and shareholder class action lawsuits and proceedings relating to Medicaid reimbursements that involve claims for, or the possibility of, fines and penalties involving substantial amounts of money or other relief (see Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Any adverse determination with respect to any legal proceedings or inquiries could have a material adverse effect on our business, financial position and results of operations.

As discussed above, the Board in December 2008 appointed the Special Committee in response to the initiation of a series of putative class action shareholder lawsuits alleging violations of the federal securities laws by our company and certain individuals, the initiation of lawsuits alleging violations under the Employee Retirement Income Security Act (ERISA), as well as the receipt by our company of an informal inquiry from the SEC and certain requests for information from the Office of the United States Attorney for the Eastern District of Missouri and FDA representatives working with that office.

With respect to the securities and ERISA claims and related governmental inquiries, we maintain directors and officers liability insurance that we believe should cover a portion of the defense and potential liability costs associated with these matters. Nonetheless, the insurance does not extend to all of these expenditures, and the insurance limits may be insufficient even with respect to expenditures that would otherwise be covered. Moreover, the insurance carriers have reserved their rights to contest coverage under the insurance policies on multiple grounds. The expenses associated with these matters have been substantial, and we expect that they will continue to be so. Furthermore, defense of the litigations and cooperation with ongoing governmental inquiries is expected to divert management attention from normal course business operations. An adverse outcome with respect to these matters could have a material adverse effect on our business, financial position and results of operations.

In addition, as previously disclosed, on December 5, 2008, the Board terminated the employment agreement of Marc S. Hermelin, the Chief Executive Officer of our company at that time, “for cause” (as that term is defined in such employment agreement). The Board also removed Mr. M. Hermelin as Chairman of the Board and as the Chief Executive Officer, effective December 5, 2008. In accordance with the termination provisions of his employment agreement, we determined that Mr. M. Hermelin would not be entitled to any severance benefits. Furthermore, as a result of the termination of Mr. M. Hermelin’s employment agreement “for cause,” we also determined we were no longer obligated for the retirement benefits specified in the employment agreement. However, Mr. M. Hermelin informed us that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board. Although no litigation is pending regarding this matter, to the extent Mr. M. Hermelin elects to bring litigation and in the event we ultimately are unsuccessful in such litigation, we may be required to pay substantial amounts to Mr. M. Hermelin, which could have a material adverse effect on our financial condition, liquidity position and capital resources.

46

We may be subject to substantial damages for product liability claims.

The design, development, manufacturing and sale of our products involve an inherent business risk of exposure to product liability claims by consumers and other third parties in the event that the use of our products is alleged to have resulted in adverse effects. In particular, the administration of drugs to humans may cause, or may appear to have caused, adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time.

As described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K, we are involved in various product liability claims, including both lawsuits and pre-litigation claims. Product liability claims are complex in nature and, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention, may adversely affect our reputation, may reduce demand for our products and may result in significant damages. We may also become subject to claims by private parties with respect to the alleged conduct that is the subject of the plea agreement.

We currently have product liability insurance to protect against and manage the risks involved with our products, but we cannot provide assurances that the level or breadth of any insurance coverage will be sufficient to cover fully all potential claims. In addition, we are subject to the risk that our insurers will seek to deny coverage for claims that we believe should be covered. Furthermore, adequate insurance coverage might not be available in the future at acceptable costs, if at all. Significant judgments against us for product liability not covered or not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business.

Our industry is highly regulated and our products are subject to ongoing regulatory review, and even if we address the issues identified in the consent decree and resume manufacturing and distribution of some or all of our approved products, we likely will continue to be subject to heightened scrutiny with regard to our operations.

Our company, our drug products, the manufacturing facilities for our drug products, the distribution of our drug products, and our promotion and marketing materials are subject to strict and continual review and periodic inspection by the FDA and other regulatory agencies for compliance with pre-approval and post-approval regulatory requirements, including cGMP regulations, adverse event reporting, advertising and product promotion regulations, and other requirements.

As a result of our consent decree and the plea agreement, we anticipate that we will be scrutinized more closely than other companies by the FDA and other regulatory agencies, even if we address the issues identified in the consent decree and resume manufacturing and distribution. Failure to comply with manufacturing and other post-approval state or federal laws, regulations of the FDA and other regulatory agencies can, among other things, result in warning letters, fines, increased compliance expense, denial or withdrawal of regulatory approvals, additional product recalls or seizures, forced discontinuance of or changes to important promotion and marketing campaigns, operating restrictions and criminal prosecution. The cost of compliance with pre- and post-approval regulation may have a negative effect on our operating results and financial condition.

In addition, the requirements or restrictions imposed on us or our products may change, either as a result of administratively adopted policies or regulations or as a result of the enactment of new laws and new government oversight. At present, the activities of pharmaceutical companies are subject to heightened scrutiny by federal and state regulators and legislators, and FDA enforcement is expected to increase. Any new statutory or regulatory provisions or policy changes could result in delays or increased costs during the period of product development, clinical trials, and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements.

47

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 prior to their commercialization. Our research and development activities, preclinical studies and clinical trials (where required), manufacturing and the anticipated marketing of our product candidates are subject to extensive regulation by a wide range of governmental authorities in the United States, including the FDA. To satisfy FDA regulatory approval standards for the commercial sale of our product candidates, we must, among other requirements, demonstrate in adequate and well-controlled clinical trials that our product candidates are safe and effective.

Even if we believe that data from our preclinical and clinical studies demonstrates safety and efficacy, our analysis of such data is subject to confirmation and interpretation by the FDA, which may have different views on the design, scope or results of our clinical trials, which could delay, limit or prevent regulatory approval. The FDA wields substantial discretion in deciding whether a drug meets the approval criteria, and even if approved, such approval may be conditioned on, among other things, restricted promotion, restricted distribution, a risk evaluation mitigation strategy, or post-marketing studies. Such restrictions may negatively affect our ability to market the drug among competitor products, as well as adversely affect our business.

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. If we are unable to commercialize products under development or that we acquire, our future operating results may suffer.

Failure to recruit and enroll patients for clinical trials may cause the development and approval of Gestiva^™ to be delayed.

As described above, the process for obtaining FDA approval of a drug candidate requires demonstration of the drug candidate’s safety and efficacy in pre-clinical and clinical trials, including in human subjects. To yield clinically relevant information, these trials must be performed with an adequate number of patients. The failure to recruit and enroll appropriate patients for clinical trials, therefore, may cause delay in the development of product candidates.

As previously disclosed, Hologic informed us in January 2009 that the FDA, in a complete response letter, (1) indicated it would not approve Gestiva^™ until additional data and information are submitted to and accepted by the FDA and (2) requested Hologic to initiate a confirmatory clinical study and enroll a certain number of patients. We currently are working with Hologic to achieve the required patient enrollment and to submit the additional data and information in order to obtain FDA approval of the Gestiva NDA. Notwithstanding these efforts, we cannot provide any assurance that patient enrollment and submission of additional data and information will occur within the anticipated time schedule, or at all, or that the FDA will approve the Gestiva NDA.

Delays in patient enrollment may occur for a variety of reasons. The completion of clinical trials depends, among other things, on Hologic’s ability to enroll a sufficient number of patients who remain in the Gestiva™ study until its conclusion. The enrollment of patients depends on many factors, including:

• the patient eligibility criteria defined in the protocol;

• the size of the patient population required for analysis of the trial’s therapeutic endpoints;

• the proximity of patients to study sites;

• the design of the trial;

• the ability to recruit clinical trial investigators with the appropriate competencies and experience;

• the ability to obtain and maintain patient consents;

48

• the risk that patients enrolled in clinical trials will drop out of the trials before completion; and

• competition for patients by clinical trial programs for other treatments.

The Gestiva^™ confirmatory study competes with other clinical trials for other drug candidates, and such competition reduces the number and types of patients available for the confirmatory study, because some patients who might have opted to enroll in the Gestiva^™ trial instead opt to enroll in a trial being conducted by another company. Delays in patient enrollment could impact Hologic’s ability to complete the confirmatory study and submit the data to the FDA.

If we fail to pay to Hologic any of the remaining payments under the Amended Gestiva Agreement, our rights to the Gestiva assets will transfer back to Hologic.

As discussed in Item 1—“Business—(d) Narrative Description Of Business—Ther-Rx—History of Our Branded Products Segment,” we entered into the Gestiva Amendment which modified the Original Gestiva Agreement. Pursuant to the Gestiva Amendment, we made a $70 million cash payment to Hologic upon execution of the Gestiva Amendment in January 2010. In addition, we are required to pay a series of additional future scheduled cash payments in the aggregate amount of $120 million upon successful completion of agreed upon milestones. (The date on which we make the final cash payment is referred to as the “Final Payment Date.”) If, prior to the Final Payment Date, we fail to timely pay a scheduled payment, we are obligated to transfer back to Hologic ownership of the Purchased Assets (as defined in the Amended Gestiva Agreement), including certain improvements made thereto by us, as well as other after-acquired assets and rights used by us in connection with the Gestiva business (the “Retransfer”). If the Retransfer were to occur, we would not be reimbursed for the payments we have made up to that point to Hologic under the Amended Gestiva Agreement. Our failure to pay any of the remaining payments under the Amended Gestiva Agreement and the resulting Retransfer could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Even if we are able to address the issues identified in the consent decree and resume our drug development plans, some of our product candidates may have to undergo rigorous and expensive clinical trials, the results of which are uncertain and could substantially delay or prevent us from bringing drugs to market.

Before we receive regulatory approvals for the commercial sale of any of our drug candidates, our drug candidates are subject to extensive pre-clinical testing and clinical trials to demonstrate their safety and efficacy in humans. Conducting pre-clinical testing and clinical trials is a lengthy, time-consuming, expensive, and uncertain process that often takes many years. Furthermore, we cannot be sure that pre-clinical testing or clinical trials of any drug candidates will demonstrate the safety and efficacy of our drug candidates at all or to the extent necessary to obtain FDA approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier preclinical studies and clinical trials.

We cannot assure you that we or our collaborators will successfully complete the planned clinical trials. Our collaborators or we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following events:

• our clinical trials may produce negative or inconclusive results, and we may decide, or the FDA may require us, to conduct additional clinical and/or preclinical studies or to abandon development programs;

• trial results may not meet the level of statistical significance required by the FDA;

• we, independent institutional review boards or the FDA, may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks; and

• the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use.

49

Even if we are able to address the issues identified in the consent decree and resume our drug development plans, our pre-clinical or clinical trials for some of our products under development may be unsuccessful or delayed.

Significant delays in clinical trials could materially affect our product development costs and delay regulatory approval of our product candidates. We do not know whether clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. There are a number of factors that may cause delays or suspension in clinical trials:

• delays or failures in obtaining regulatory authorization to commence a trial;

• inability to manufacture sufficient quantities of acceptable materials for use in clinical trials;

• the delay or failure in reaching agreement on contract terms with prospective study sites;

• delays in recruiting patients to participate in a clinical trial;

• the delay or failure in obtaining independent institutional review board review and approval of the clinical trial protocol;

• the failure of third-party clinical trial managers, including clinical research organizations, to perform their oversight of the trials or meet expected deadlines;

• the failure of our clinical investigational sites and related facilities and records to be in compliance with the FDA’s Good Clinical Practices, including the failure to pass FDA inspections of clinical trials;

• unforeseen safety issues;

• inability to secure clinical trial insurance;

• lack of demonstrated efficacy in the clinical trials;

• our inability to reach agreement with the FDA on a trial design that we are able to execute;

• difficulty in adequately following up with patients after treatment; or

• changes in laws, regulation, or regulatory policy.

If clinical trials for our drug candidates are unsuccessful, delayed or cancelled, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business and cause our stock price to decline.

Suspension of product shipments has exposed us to failure to supply claims from our customers and could expose us to additional claims in the future.

In addition to the loss of revenue, the suspension of product shipments exposes us to possible claims for certain additional costs. Pursuant to arrangements between us and certain of our customers, such customers, despite the formal discontinuation action by us of our products, may assert, and certain customers, including CVS Pharmacy, Inc. have asserted, that we should compensate such customers for any additional costs they incurred for procuring products we did not supply. The amount of such compensation is affected by the price of any replacement product. Following our suspension of shipments, the price of certain products increased significantly, thereby potentially increasing the amount of any such compensation. While we have recorded an estimated liability for failure to supply claims as of March 31, 2009 based on notices we received from our customers, the actual amount of liability from current and additional claims we may face, if asserted and determined to be meritorious, could be much higher and could have a material adverse effect on our liquidity position and operating results.

See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the legal action brought against us by CVS Pharmacy, Inc.

Product recall costs had, and could continue to have, a material adverse effect on our business, financial position, results of operations and cash flows.

We have incurred significant costs and suffered economic losses as a result of the ongoing recall of our products and voluntary disposal of inventory in connection with the recall of our products (see Note 13—

50

“Accrued Liabilities” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Also, as a result of the recall, production suspension of our products and the disposal of our existing inventory of products required under the consent decree, management established inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to drug products we manufactured, as well as raw materials for those drug products that had no potential use in products to be manufactured in the future (see Note 9—“Inventories” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Management was required to make judgments about the future benefit of our raw materials. Actual reserve requirements could differ significantly from management’s estimates, which could have a significant unfavorable impact on our future gross margins.

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 (“HMOs”) and managed care organizations (“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 AWPs have led to excessive payments for prescription drugs.

The regulations regarding reporting and payment obligations with respect to Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. We and other pharmaceutical companies are defendants in a number of suits filed by state attorneys general and have been notified of an investigation by the United States Department of Justice with respect to Medicaid reimbursement and rebates. (See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) While we cannot predict the outcome of the investigation, possible remedies that the U.S. government could seek include treble damages, civil monetary penalties, debarment from contracting with the government and exclusion from the Medicare and Medicaid programs. In connection with such an investigation, the U.S. government may also seek a Corporate Integrity Agreement (administered by the Office of Inspector General of Health and Human Services) with us which could include ongoing compliance and reporting obligations. Because our processes for these calculations and the judgments involved in making these calculations involve, and will continue to involve, subjective decisions and complex methodologies, these calculations are subject to the risk of errors. In addition, they are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could result in material changes. Further, effective October 1, 2007, the Centers for Medicaid and Medicare Services (“CMS”) adopted new rules for Average Manufacturer’s Price (“AMP”) based on the provisions of the DRA. While the matter remains subject to litigation and proposed legislation, one potential significant change as a result of the DRA is that AMP would need to be disclosed to the public. AMP was historically kept confidential by the government and participants in the Medicaid program. Disclosing AMP to competitors, customers, and the public at large could negatively affect our leverage in commercial price negotiations.

In addition, as also disclosed herein, a number of state and federal government agencies are conducting investigations of manufacturers’ reporting practices with respect to AWPs in which they have suggested that reporting of inflated AWP has led to excessive payments for prescription drugs. We and numerous other pharmaceutical companies have been named as defendants in various actions relating to pharmaceutical pricing issues and whether allegedly improper actions by pharmaceutical manufacturers led to excessive payments by Medicare and/or Medicaid.

Any governmental agencies that have commenced, or may commence, an investigation of our company could impose, based on a claim of violation of fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties, debarment from contracting with the government and possible exclusion from federal health care programs including Medicare and/or Medicaid. Some of the applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity with regard to how to properly calculate and report payments—and even in the absence of any such ambiguity—a governmental

51

authority may take a position contrary to a position we have taken, and may impose civil and/or criminal sanctions. Any such penalties or sanctions could have a material adverse effect on our business, financial position and results of operations.

We have material weaknesses in our internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on our business.

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, the effectiveness of our internal control over financial reporting.

Based on our evaluation of internal control over financial reporting as of March 31, 2009, we have determined that certain material weaknesses as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), existed at our company. Specifically, we have determined that we had six material weaknesses in our control environment or entity-level controls, seven material weaknesses surrounding financial statement preparation and review procedures, and five material weaknesses related to our application of accounting controls.

Management is in the process of implementing steps to remediate these material weaknesses. However, we cannot provide assurances that such remediation will be effective. See Item 9A—“Controls and Procedures” included in this Annual Report on Form 10-K 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.

Also, additional 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 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 the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. In addition, solely as a result of the material weaknesses, we have determined that our disclosure controls and procedures were not effective as of March 31, 2009. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

52

We believe we are not in compliance with one or more of the requirements of an outstanding mortgage loan, which could have a material adverse effect on our business, financial condition and cash flows.

In March 2006, as previously disclosed, we entered into a $43.0 million mortgage loan arrangement, of which approximately $35.5 million remains outstanding as of February 28, 2010. We are current in all our financial payment obligations under the mortgage loan arrangement. However, we believe that we are not currently in compliance with one or more of the requirements of the mortgage loan documentation. Accordingly, the $37.4 million that remained outstanding under the mortgage arrangement as of March 31, 2009 was classified as a current liability as of March 31, 2009. Failure by us to remedy such noncompliance or to otherwise receive a waiver from the lender for such noncompliance could result in, among other things, our outstanding obligations with respect to the mortgage loan accelerating and immediately becoming due and payable, which would materially adversely affect our business, financial condition and cash flows.

Pursuant to the indenture governing our convertible notes, our default in the payment of other indebtedness or any final non-appealable judgments could result in our convertible notes becoming immediately due and payable, which could have a material adverse effect on our business, financial condition and cash flows.

In May 2003, we issued $200.0 million principal amount of 2.5% Contingent Convertible Subordinated Notes which mature in 2033 (the “Notes”). We are current in all our financial payment obligations under the indenture governing the Notes. However, a failure by us or any of our subsidiaries to pay any indebtedness or any final non-appealable judgments in excess of $750,000 constitutes an event of default under the indenture. An event of default would permit the trustee under the indenture or the holders of at least 25% of the Notes to declare all amounts owing to be immediately due and payable and exercise other remedies, which would materially adversely affect our business, financial condition and cash flows, as well as our ability to continue as a going concern. In addition, if an event of default under the indenture were to be triggered and the Notes repaid, we would recognize cancellation of indebtedness income. Such cancellation of indebtedness income would result in a tax liability to the extent not reduced by our tax attributes.

Increased indebtedness may impact our financial condition and results of operations.

At March 31, 2009 and February 28, 2010, we had $238.5 million and $236.2 million, respectively, of outstanding debt, consisting of $200.0 million principal amount of Notes, the remaining principal balance of a $43.0 million mortgage loan and the remaining amount owed on $2.0 million of installment payment agreements.

Our level of indebtedness may have several important effects on our future operations, including:

• we will be required to use a portion of our cash flow from operations or otherwise 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 may affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes.

Even after we are able to resume manufacturing and shipment of our products, 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 historic 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;

53

• 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.

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, 2013, 2018, 2023 and 2028. 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.

Our cost-reducing measures could yield unintended consequences, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As previously disclosed, we implemented significant cost savings measures to mitigate the financial impact of our actions to recall all of the products we manufactured and to suspend manufacturing and shipment of our products pending compliance with the terms of the consent decree. These measures included a substantial reduction of our workforce, which commenced on February 5, 2009, and an ongoing realignment of our cost structure. We realigned and restructured the sales force for our Ther-Rx subsidiary, and our production workforce. As a result, we reduced our employee headcount from approximately 1,700 on December 31, 2008 to approximately 610 on March 31, 2009. The cost-reducing measures taken by us could yield unintended consequences, such as distraction of our management and employees, the inability to retain and attract new employees, business disruption, a negative impact on morale among remaining employees, attrition beyond our planned reduction in workforce and reduced employee productivity, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, our reductions in personnel may subject us to risks of litigation, which could result in substantial cost. We cannot guarantee that the cost reduction measures, or other measures we may take in the future, will result in the expected cost savings, or that any cost savings will be unaccompanied by these or other unintended consequences.

Our future growth will largely depend upon our ability to fund and 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 grow our business in the future. To do this we will need to identify, develop and commercialize technologically enhanced branded products and drugs that are off-patent or where we can challenge the patents 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.

Our ability to develop new products is currently limited until we are able to meet the requirements of the consent decree and demonstrate to the FDA’s satisfaction our compliance with the FDA’s cGMP regulations. As it relates to new drugs, the consent decree permits us to manufacture drugs for non-clinical laboratory studies or other research and testing that do not involve exposure of human research subjects or bioequivalence testing. Although this restriction precludes us from testing in humans any drugs under development that are made in our facilities, prior to entering into the consent decree we had filed ANDAs with the FDA seeking permission to market generic versions of several branded products, including varying strengths of the following:

• Metadate CD^® (methylphenidate hydrochloride) Extended-Release Capsules

• Ritalin LA^® (methylphenidate hydrochloride) Extended-Release Capsules

• Focalin XR^® (dexmethylphenidate hydrochloride) Extended-Release Capsules

54

With respect to each of these ANDA submissions, we have sought favorable court rulings in patent infringement actions filed against us by the sponsors of the branded products. See Item 1—“Business—(d) Narrative Description Of Business—Government Regulation—New Product Development and Approval—The Drug Price Competition and Patent Term Restoration Act of 1984” in this Annual Report on Form 10-K for more information regarding patent certifications and litigation. Although we believe we have meritorious defenses to the infringement claims asserted against us in each of these lawsuits, we cannot be certain of the outcome, and a decision that a relevant patent is valid and infringed likely would significantly delay our ability to market any of these drugs. In addition, the litigation process itself can impose significant delays and expenses. Further, although the consent decree does not specifically address these ANDA submissions, we anticipate that final approval of any of these ANDAs will not occur before the FDA has determined that we are compliant with cGMP regulations. See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. On March 1, 2010, we entered into a Settlement Agreement to settle the patent infringement actions with respect to Ritalin LA^® and Focalin XR^®. See Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the settlement.

Our acquisition strategy may not be successful.

Although our ability to fund an acquisition is currently limited by the consent decree and lack of available funding, we intend to continue in the future 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. Although the pharmaceutical industry is crowded, we have been issued a substantial number of patents in the U.S. and in many 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 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 accurately 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 patent examiner has been able to identify and cite the best prior art available to him during the examination process, any patent issued to us could later be found by a court or a patent office during post-issuance proceedings to be invalid in view of newly-discovered prior art or already considered prior art or other legal reasons. Furthermore, there are categories of “secret” prior art unavailable to any examiner, such as the prior inventive activities of others, which could form the basis for invalidating any patent. In addition, there are other reasons why a patent may be found to be invalid, such as an offer for sale or public use of the patented invention in the 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 United States Patent and Trademark Office (the “USPTO”) that they knew was material to patentability.

The coverage claimed in a patent application can be significantly altered during the examination process either in the U.S. or abroad. Consequently, our pending or future patent applications may not result in the

55

issuance of patents or may result in issued patents having claims significantly different from that of the patent application as originally filed. 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 USPTO, 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. Even where we ultimately prevail before the USPTO or in litigation, the expense of these proceedings can be considerable. 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.

In addition, 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 associated goodwill, 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.

Third parties may claim that we infringe on their proprietary rights, or seek to circumvent ours.

We have been sued for, and may in the future be required to defend against charges of infringement of patents, trademarks or other proprietary rights of third parties. We are involved in defending various patent

56

lawsuits resulting from ANDA filings by ETHEX and in an effort by a third-party company to invalidate certain of our patents. See Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 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. More generally, the outcome of intellectual property litigation and disputes is uncertain and presents a risk to our business.

If an intellectual property 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 into the U.S. certain of our products, and therefore could have a material adverse effect on our business or results of operations. 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. As noted above, certain patent infringement lawsuits are currently pending against us, any of which could have a material adverse effect on our future business, financial condition, results of operations or cash flows.

Our dependence on key executives and qualified scientific, technical and managerial personnel could affect the development and management of our business.

We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain qualified personnel necessary for the development and management of our business. Although we do not believe the loss of one individual would materially harm our business, our business might be harmed by the loss of services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel. While we have employment agreements with certain of our key executives, we do not ordinarily enter into employment agreements (other than agreements related to confidentiality and proprietary rights) with our other scientific, technical and managerial employees.

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, 2009, our three largest customers, which are wholesale distributors, accounted for 26.9%, 26.5% and 10.4% 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.

57

The use of legal, regulatory and legislative strategies by competitors, as well as the impact of proposed legislation, may increase our costs associated with the introduction or marketing of our generic products, could delay or prevent such introduction and/or could significantly reduce our profit potential.

Our competitors, both branded and generic, often pursue strategies to prevent or delay competition from generic alternatives to branded products. These strategies include, but are not limited to:

• entering into agreements whereby other generic companies will begin to market an authorized generic, a generic equivalent of a branded product, at the same time generic competition initially enters the market;

• filing citizen’s petitions with the FDA or other regulatory bodies, including timing the filings so as to thwart generic competition by causing delays of our product approvals;

• seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence;

• initiating legislative efforts to limit the substitution of generic versions of branded pharmaceuticals;

• filing suits for patent infringement that may delay regulatory approval of many generic products;

• introducing “next-generation” products prior to the expiration of market exclusivity for the reference product, which often materially reduces the demand for the first generic product for which we seek regulatory approval;

• obtaining extensions of market exclusivity by conducting clinical trials of branded drugs in pediatric populations or by other potential methods;

• persuading regulatory bodies to withdraw the approval of branded drugs for which the patents are about to expire, thus allowing the manufacturer of the branded product to obtain new patented products serving as substitutes for the products withdrawn; and

• seeking to obtain new patents on drugs for which patent protection is about to expire.

In the United States, some companies have lobbied Congress for amendments to the Hatch-Waxman Act that would give them additional advantages over generic competitors. For example, although the term of a company’s drug patent can be extended to reflect a portion of the time an NDA is under regulatory review, some companies have proposed extending the patent term by a full year for each year spent in clinical trials rather than the one-half year that is currently permitted.

If proposals like these in the United States were to become effective, our entry into the market and our ability to generate revenues associated with new products may be delayed, reduced or eliminated, which could have a material adverse effect on our business, financial position and results of operations.

One of the key incentives for a manufacturer of generic products to challenge the patents associated with the reference listed drug is the possibility of obtaining a 180-day period of exclusivity, during which no other generic version of the same product may be marketed. See Item 1—“Business—(d) Narrative Description Of Business—Government Regulation—New Product Development and Approval” in this Annual Report on Form 10-K. As discussed elsewhere, we believe that we have the first-filed Paragraph IV ANDA for a number of products, and are currently engaged in patent infringement litigation with regard to those products. We may not ultimately prevail in such litigation, and if we do not, it likely would significantly delay the approval and subsequent marketing of the subject product. Additionally, even if we prevail in the litigation, we may not receive final FDA approval of our ANDAs, and if approved, we may not be granted 180-day exclusivity.

58

Commercialization of a generic product prior to final resolution of patent infringement litigation could expose us to significant damages if the outcome of the 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. A patent holder may also recover damages caused by the erosion of prices for its patented drug as a result of the introduction of our generic drug in the marketplace. Further, in the case of a willful infringement, which requires a complex analysis of the totality of the circumstances, such damages may be trebled. However, in order to realize the economic benefits of some of our products, we may decide to risk an amount that may exceed the profit we anticipate making on our product. There are a number of factors we would need to consider in order to decide whether to launch our product prior to final resolution, including among other things (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 prior to final resolution of patent infringement litigation could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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 through license agreements. 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 lack of sufficient liquidity to fund our obligations, insufficient resources to adequately develop and market a product, lack of market development despite our efforts and lack of product acceptance. Our failure to fulfill our obligations could result in the loss of our rights under a license agreement.

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

We expend a significant amount of resources on research and development efforts that may not lead to successful product introductions.

We conduct research and development primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations. Typically, research costs related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDA filings. 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 application for approval, 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

59

commercialization. In addition, as set forth in the risk factor entitled “Our future growth will largely depend upon our ability to fund and develop new products” above, although the consent decree does not specifically address these ANDA submissions, we anticipate that final approval of any ANDAs will not occur before the FDA has determined that we are compliant with cGMP, and we cannot assure that the FDA will make such a determination.

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. 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 or finished product 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 (including Evamist^™), from many different domestic and foreign suppliers.

We also 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, or access to such materials or products on commercially reasonable terms. 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 CSA and the related regulations administered by the 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 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.

Assuming we are able to comply with the requirements under the consent decree and resume the manufacture and distribution of our approved 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 typically 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.

60

During fiscal year 2009, sales of our branded products and generic/non-branded products accounted for 36.7% and 63.1%, respectively, of our net revenues. During the same period, branded products and generic/non-branded products generated gross margins of 86.1% and 44.2%, respectively.

Factors that may cause our sales mix to vary include:

• the number and timing of new product introductions;

• marketing exclusivity on products, if any, which may be obtained;

• the level of competition in the marketplace with respect to 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.

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.

We may incur charges for impairment of intangible and other long-lived assets.

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 and other long-lived 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 or other long-lived assets being evaluated we must determine the fair value of the intangible or other long-lived assets. If the fair value of these 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 all long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If we determine that an intangible or long-lived asset is impaired, a non-cash impairment charge would be recognized.

61

Because circumstances can change, the value of intangible and long-lived 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 assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs. In addition, in the event of a sale of any of our assets, we might not recover our recorded value of the associated assets.

In connection with the steps taken by us with respect to the nationwide recall and suspension of shipment of all products manufactured by us, the requirements under the consent decree and the ongoing private litigation and governmental inquiries, we completed an evaluation of each of our intangible assets, and as a result of these evaluations, recognized certain impairment charges. See Note 11—“Intangible Assets and Goodwill” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for information on the impairment charges recorded by us during fiscal year 2009.

There are inherent uncertainties involved in the estimates, judgments and assumptions used in the preparation of our financial statements, and any changes in those estimates, judgments and assumptions could have a material adverse effect on our financial condition and results of operations.

The consolidated financial statements that we file with the SEC are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP involves making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. A summary of our significant accounting practices is included as Note 2—“Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 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, property and equipment, 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.

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.

62

These cost-containment measures and health care reform proposals could affect our ability to sell our products. Recently, President Obama and members of Congress have proposed significant reforms to the U.S. healthcare system, and both the U.S. Senate and House of Representatives have conducted hearings about U.S. healthcare reform. The Obama administration’s fiscal year 2010 budget included proposals to reduce Medicare and Medicaid spending and reduce drug spending. In addition, members of Congress have proposed a single-payer healthcare system, a government health insurance option to compete with private plans and other expanded public healthcare measures. We are unable to predict the ultimate content or timing of any future healthcare reform legislation and its impact on us. If significant reforms to the healthcare system in the United States are implemented, those reforms may have a material adverse effect on our financial condition and results of operations.

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

Our ability to market generic pharmaceutical products successfully depends, in part, on the acceptance of the products by independent third parties, including pharmacies, government formularies and other retailers, as well as patients. In the past, we have manufactured, and assuming we comply with the requirements under the consent decree we anticipate that in the future we will again manufacture, a number of prescription drugs that are used by patients with 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 that 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 FDCA, the CSA 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 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 DEA and similar applicable state and local regulatory authorities if they handle controlled substances, and with the 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.

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-

63

party reimbursement. 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, we cannot predict whether we will obtain FDA or other necessary approvals or whether the rate, timing and cost of such approvals will adversely affect our product introduction plans or results of operations.

We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback and false claims laws.

Several types of state and federal laws, including anti-kickback and false claims statutes, have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. See Item 1—“Business—(d) Narrative Description Of Business—Government Regulation—Anti-Kickback and False Claims Statutes” for more information.

We endeavor to comply with the applicable fraud and abuse laws and to operate within related statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution. However, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration to individuals or entities in a position to prescribe, purchase, or recommend our products may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Violations of fraud and abuse laws may be punishable by civil and/or criminal sanctions, including substantial fines and civil monetary penalties, debarment from contracting with the government, as well as the possibility of exclusion from federal and state health care programs, including Medicaid, Medicare and Veterans Administration health programs. Furthermore, the laws applicable to us are broad in scope and are subject to evolving interpretations and permit governmental authorities to exercise significant discretion. Any determination by a governmental authority that we are not in compliance with applicable laws and regulations could have a material adverse effect on our reputation, business operations and financial results.

The market price of our securities 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 and the market price of our common stock has significantly declined. In addition, any or all of the following may have a significant impact on the market price of our common stock: our ability to continue as a going concern; developments regarding our compliance with the consent decree and returning certain or many of our products to market, including loss of market share as a result of the suspension of shipments, and related costs; developments regarding our ability to raise additional capital; developments regarding private litigation and governmental inquiries; our reporting of prices used by government agencies or third parties in setting reimbursement rates; the introduction by other companies of generic or competing products; the eligibility of our products for Medicaid, Medicare or other reimbursement; 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 our drug technologies or products; financial condition and results which are different from securities analysts’ forecasts; economic and other external factors; and period-to-period fluctuations in our financial results.

64

Future sales of common stock could adversely affect the market price of our Class A or Class B Common Stock.

As of February 28, 2010, an aggregate of 4,053,366 shares of our Class A Common Stock and 27,500 shares of our Class B Common Stock were issuable upon exercise of outstanding stock options under our stock option plans, and an additional 1,844,717 shares of our Class A Common Stock and 1,309,050 shares of Class B Common Stock were reserved for the issuance of additional options and shares under these plans. In addition, as of February 28, 2010, 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.

As a result of owning a large percentage of our Class B Common Stock, certain principal shareholders have control over matters requiring shareholder approval and such shareholders could approve certain proposals that may not be consistent with our other shareholders’ objectives or desires and could prevent or delay certain types of corporate transactions, such as a change of control, even if such corporate transactions might be beneficial to our other shareholders.

Our authorized capital stock consists of Class A Common Stock and Class B Common Stock. Each share of Class A Common Stock is entitled to one-twentieth of one vote and each share of Class B Common Stock is entitled to one vote. Marc S. Hermelin, the son of our founder and our former chief executive officer and former chairman of the Board, beneficially owns, either individually or through certain trusts of which he is one of the trustees, approximately 2.8 million shares of Class A Common Stock and approximately 6.3 million shares of Class B Common Stock, corresponding to approximately 46.0% of the aggregate voting power of our two classes of common stock outstanding as of January 31, 2010. In addition, David S. Hermelin, Mr. M. Hermelin’s son and our former vice president of corporate strategy and operations analysis, separately beneficially owns, either individually or through certain trusts of which he is one of the trustees, approximately 1.5 million shares of Class A Common Stock and approximately 2.2 million shares of Class B Common Stock, corresponding to approximately 16.2% of the aggregate voting power of our two classes of common stock outstanding as of January 31, 2010. Mr. M. Hermelin and Mr. D. Hermelin are members of our Board.

Accordingly, these principal shareholders are able to control the outcome of all actions requiring shareholder approval, including the election of directors, the adoption or amendment of provisions in our Certificate of Incorporation or By-Laws, and the approval of mergers and other significant corporate transactions. Depending upon the matters being presented to shareholders, the interests of the principal shareholders may not be aligned with the interests of our other shareholders and the principal shareholders may support proposals or actions with which you may disagree and which may not be consistent with your objectives or desires. The concentration of outstanding votes in the principal shareholders makes it unlikely that any other shareholder will be able to affect our management or strategic direction and may also prevent or delay a change in our management or voting control, our acquisition by a third party, or another similar transaction, even if such transaction is in our best interest or the best interest of our other shareholders. This concentrated control is also likely to discourage third parties from initiating any potential merger, takeover or other change-of-control transaction that is not supported by the principal shareholders and that may otherwise be beneficial to us or our other shareholders.

In addition, our Certificate of Incorporation does not provide for a staggered, or classified, Board and does not prohibit shareholder action by written consent. As a result, a shareholder controlling a majority of the aggregate voting power of our two classes of common stock can replace some or all members of the Board at any time, subject to compliance with the federal securities laws, the regulations of the SEC and our By-Laws.

65

Our By-Laws require the unanimous approval by the members of the Board of certain acts or resolutions of the Board, which could limit our ability to issue equity securities or raise capital.

Section 13 of Article III of our By-Laws provides that the following acts or resolutions of the Board or any committee of the Board require approval by a unanimous affirmative vote or unanimous written consent of the members of the Board then in office (other than any directors who affirmatively recuse themselves prior to the vote):

• the approval of any agreement or contract, or the issuance of any security, which confers stockholder voting rights;

• the increase in the number of the members of the Board, in accordance with Section 1 of Article III of the By-Laws, to a number which is in excess of eight (8); and

• the approval of any contract, agreement or other document or instrument which contains any provision (1) which imposes a penalty, acceleration of debt, purchase obligation or other adverse effect upon the corporation resulting from the election or appointment of any individual to the Board or the removal of any member of the Board or (2) which restricts, limits or dilutes the right of the stockholders to elect or appoint any individual to the Board or to remove any member of the Board.

As a result, our ability to issue equity securities or to enter into agreements that include certain provisions related to a change of control may be limited, which could adversely affect our ability to raise capital and to meet our obligations as they become due.

Our Certificate of Incorporation and Delaware law may have anti-takeover effects.

Our 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 Board, with a unanimous vote, has the authority to issue additional shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the shareholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The existence of two classes of common stock with different voting rights and the ability of our Board 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 Certificate of Incorporation and By-Laws 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 certain of the stock options we have granted provide for the acceleration of vesting in the event of a change in control of our company.

Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Under Delaware law, our Certificate of Incorporation and By-Laws and certain indemnification agreements to which we are a party, we have an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors, officers and associates with respect to current and future inquiries,

66

investigations and litigation (see Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). In connection with some of these pending matters, we are required to, or we have otherwise agreed to, advance, and have advanced, significant legal fees and related expenses to several of our current and former directors, officers and associates and expect to continue to do so while these matters are pending. Certain of these obligations may not be “covered matters” under our directors’ and officers’ liability insurance, or there may be insufficient coverage available. Further, in the event the directors, officers and associates are ultimately determined to not be entitled to indemnification, we may not be able to recover the amounts we previously advanced to them.

In addition, we have incurred significant expenses in connection with the pending inquiries, investigations and litigation. We maintain directors’ and officers’ liability insurance for non-indemnifiable securities claims and have met the retention limits under these policies. We cannot provide any assurances that pending claims, or claims yet to arise, will not exceed the limits of our insurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be able to cover our claims. Due to these insurance coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification and other obligations, which may have a material adverse effect on our financial condition, results of operations and cash flows.

If we do not meet the New York Stock Exchange continued listing requirements, our common stock may be delisted.

In order to maintain our listing on the New York Stock Exchange (“NYSE”), we must continue to meet the NYSE minimum share price listing rule, the minimum market capitalization rule and other continued listing criteria. If our common stock were delisted, it could (i) reduce the liquidity and market price of our common stock; (ii) negatively impact our ability to raise equity financing and access the public capital markets; and (iii) materially adversely impact our results of operations and financial condition.

Current global economic conditions may adversely affect our industry, business, financial position and results of operations.

The global economy is currently undergoing a period of unprecedented volatility, and the future economic environment may continue to be less favorable than that of recent years. This has led, and could further lead, to reduced consumer spending in the foreseeable future, and this may include spending on healthcare. While generic drugs present an attractive alternative to higher-priced branded products, our sales could be negatively impacted if patients forego obtaining healthcare. In addition, reduced consumer spending may drive us and our competitors to decrease prices. These conditions may adversely affect our industry, business, financial position and results of operations.

Item 1B. Unresolved Staff Comments

On February 9, 2009, we received a comment letter from the Staff of the Division of Corporate Finance of the SEC with respect to its review of our Annual Report on Form 10-K for the fiscal year ended March 31, 2008, as amended, our Definitive Proxy Statement on Schedule 14A filed July 29, 2008, and the June 2008 Form 10-Q. We responded to the letter, and on July 17, 2009, received a response letter from the SEC, to which we also responded. While many of the Staff’s comments have been resolved, we have two unresolved Staff comments, which will remain open until the Staff has had an opportunity to review the amendment to the June 2008 Form 10-Q and the September 2008 Form 10-Q when filed by us. As disclosed in the “Explanatory Note” of this Annual Report on Form 10-K, the amendment to the June 2008 Form 10-Q as well as the September 2008 Form 10-Q were filed on the same day as this Annual Report on Form 10-K.

67

Item 2. Properties

Our corporate headquarters is located at One Corporate Woods Drive, Bridgeton, Missouri. Previously, our corporate headquarters was located at 2503 South Hanley Road in St. Louis County, Missouri, and contains approximately 35,000 square feet of floor space. We currently have a lease on the building which expires on December 31, 2011 and has a three-year renewal option. The building is leased from an affiliated partnership of Marc S. Hermelin, our former Chairman and former Chief Executive Officer. Mr. M. Hermelin is a member of the Board and a principal shareholder of our 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 Footage	Usage	Lease Expires	Renewal Options
Leased Facilities
30,150	PDI Mfg./Whse.	11/30/12	5 Years(1)
10,000	PDI/KV Lab/Whse.	11/30/10	None
15,000	KV/PDI Office	02/28/10	2 Years
23,000	KV Office/R&D/Mfg.	12/31/11	5 Years(1)
41,316	KV Warehouse	11/30/11	None
33,860	Pharmaceutical Division Offices	05/01/13	5 Years
153,326
Owned Facilities
128,960	KV Office/Mfg.
121,731	KV Office/Whse./Lab(2)
87,252	KV Mfg.
88,852	KV Lab
302,940	KV Mfg./Whse./Corporate/ETHEX/Ther-Rx Office(2)
259,988	ETHEX/Ther-Rx/PDI Distribution(2)
96,360	KV Warehouse
1,086,083

(1) Two five-year options.

(2) In March 2006, we entered into a $43.0 million mortgage loan arrangement with one of our primary lenders secured, in part, by these properties. This loan bears interest at a rate of 5.91% (and a default rate of 10.905%) and matures on April 1, 2021.

A leased facility used by PDI was damaged by an accidental fire which occurred on June 1, 2009. The incident did not affect any of our finished product manufacturing, packaging, or distribution facilities. PDI’s primary business utilizes contract manufacturing, which was unaffected by the fire.

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 operational plans.

Item 3. Legal Proceedings

The information set forth under Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K is incorporated in this Item 3 by reference.

Item 4. Submission of Matters to a Vote of Security Holders

None.

68

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

As of February 28, 2010, there were 770 holders of record of Class A Common Stock and 306 holders of record of Class B Common Stock (not separately counting shareholders whose shares are held in “nominee” or “street” names).

(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 years 2009 and 2008, as reported on the New York Stock Exchange, were as follows:

	Class A Common Stock
	Fiscal Year 2009				Fiscal Year 2008
Quarter	High		Low		High		Low
First	$	26.15	$	18.16	$	28.35	$	24.58
Second		23.77		18.87		28.80		26.09
Third		22.32		1.99		31.34		27.16
Fourth		3.68		0.46		28.20		24.71
	Class B Common Stock
	Fiscal Year 2009				Fiscal Year 2008
Quarter	High		Low		High		Low
First	$	26.13	$	18.34	$	28.40	$	24.61
Second		23.92		18.83		28.90		25.96
Third		22.28		2.18		31.25		27.30
Fourth		3.78		0.58		28.09		24.63

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. Holders of one class of common stock are entitled to receive dividends, other than dividends payable in our capital stock, only if dividends in the same type of property are simultaneously declared with respect to the other class of common stock. When, and if, we declare and distribute dividends on the Class B Common Stock, other than dividends payable in our capital stock, the Class A Common Stock must receive a dividend in the amount of 120% of the dividend distributed on the Class B Common Stock. Dividends of $70,000 were paid in each of fiscal years 2009 and 2008 on 40,000 shares of outstanding Cumulative Convertible Preferred Stock. There were no undeclared and unaccrued cumulative preferred dividends at March 31, 2009.

The Board 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 the Board. See also Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for information relating to our equity compensation plans.

69

	Issuer Purchases of Equity Securities
Period	Total number of shares purchased(a)	Weighted Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares (or units) that may yet be purchased under the plans or programs
1/1/09-1/31/09	2,708	$	7.49	—	—
2/1/09-2/28/09	30,751		11.17	—	—
3/1/09-3/31/09	40,049		8.50	—	—
Total	73,508	$	9.58	—	—

(a) Shares were purchased from employees upon their termination pursuant to the terms of our 1991 and 2001 Stock Option Plans.

Equity Compensation Plan Information

The following information regarding our compensation plans is furnished as of March 31, 2009, the end of our most recently completed fiscal year.

	Equity Compensation Plan Information Regarding Class A Common Stock
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (c)
Plan Category
Equity compensation plans approved by security holders(1)	4,173,327	$	12.20	2,174,481
Equity compensation plans not approved by security holders	—		—	—
Total	4,173,327	$	12.20	2,174,481

(1) Consists of our 1991 and 2001 Incentive Stock Option Plans. See Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

	Equity Compensation Plan Information Regarding Class B Common Stock
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (c)
Plan Category
Equity compensation plans approved by security holders(1)	119,260	$	22.81	1,224,750
Equity compensation plans not approved by security holders	—		—	—
Total	119,260	$	22.81	1,224,750

(1) Consists of our 1991 and 2001 Incentive Stock Option Plans. See Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

70

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 our Class A Common Stock and $100 in our Class B Common Stock, the NYSE Composite Index, and the S&P Pharmaceuticals Index on March 31, 2004, and reinvestment of all dividends. Our stock’s performance may not continue into the future with the same or similar trends depicted in the graph below.

	Years Ended March 31,
	2005	2006	2007	2008	2009
K-V PHARMACEUTICAL Class A K-V PHARMACEUTICAL Class B	94.46 85.44	98.21 87.70	100.69 89.81	101.63 91.41	6.72 8.77
NYSE COMPOSITE	110.95	130.30	149.78	145.51	84.79
S&P PHARMACEUTICALS	95.49	96.59	107.69	99.24	84.85

71

Item 6. Selected Financial Data

The following tables set forth selected historical consolidated financial data for our company. The information in the following tables should be read in conjunction with our Consolidated Financial Statements and the notes thereto in Item 8—“Financial Statements and Supplementary Data” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The selected consolidated financial data presented below under the captions “Balance Sheet Data” and “Income Statement Data” reflect the correction of immaterial errors in our prior period consolidated financial statements, as more fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

In March 2009, our Board approved management’s decision to market for sale PDI, our specialty materials segment. As a result of this decision, we have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented.

BALANCE SHEET DATA

	March 31,
	2009		2008 (c)		2007 (d)		2006 (d)		2005 (d)
	(in thousands)
Cash, cash equivalents and marketable securities	$	75,730	$	129,041	$	242,565	$	207,469	$	206,127
Other current assets(a)		154,673		269,609		207,037		152,426		141,385
Property and equipment, net		188,212		187,492		181,227		173,768		129,073
Total assets		657,331		890,447		720,308		625,644		566,096
Current liabilities		225,229		308,515		77,983		57,065		52,605
Long-term debt(b)		200,725		68,674		239,452		241,319		209,767
Shareholders’ equity		139,528		453,617		360,440		298,080		283,520

(a) We classified ARS of $66.0 million and $81.5 million as of March 31, 2009 and 2008, respectively, as non-current assets to reflect the current lack of liquidity in these investments. In previous years, these investments were classified as marketable securities.

(b) We believe that we are not currently in compliance with one or more of the requirements of the mortgage loan documentation. Accordingly, the $37.4 million that remained outstanding under the mortgage arrangement as of March 31, 2009 was classified as a current liability as of March 31, 2009. Also, holders of our Notes had the right to require us to repurchase all or a portion of our Notes on May 16, 2008 and, accordingly, we classified the Notes as a current liability as of March 31, 2008. Since no holders required us to repurchase all or a portion of our Notes on this date and because the next occasion holders may require us to repurchase all or a portion of our Notes is May 16, 2013, the Notes were classified as a long-term liability as of March 31, 2009.

(c) The balance sheet data as of March 31, 2008 has been revised to reflect the correction of certain immaterial errors in our prior period financial statements as more fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(d) The balance sheet data as of March 31, 2007, 2006 and 2005 have been revised to reflect the correction of certain immaterial errors in our prior period financial statements.

72

INCOME STATEMENT DATA

	Years ended March 31,
	2009			2008 (g)		2007 (g)		2006 (h)		2005 (h)
	(in thousands, except per share data)
Net revenues	$	312,327		$	577,623	$	424,307	$	349,730	$	284,211
Cost of sales(a)		232,383			174,987		133,047		113,488		95,657
Operating expenses(b)(c)(d)(f)		431,442			282,499		205,663		204,143		142,656
Income (loss) from continuing operations(a)(b)(c)(e)		(318,594	)		82,593		54,646		8,734		27,595
Income from discontinued operations		4,967			3,845		1,937		719		1,839
Net income (loss)(a)(b)(c)(d)(e)(f)		(313,627	)		86,438		58,559		9,453		29,434
Earnings (loss) from continuing operations per share:
Diluted—Class A common	$	(6.41	)	$	1.47	$	0.99	$	0.17	$	0.54
Diluted—Class B common		(6.41	)		1.27		0.86		0.15		0.47
Shares used in per share calculation:
Diluted—Class A common		49,689			59,144		58,953		49,997		58,633
Diluted—Class B common		12,082			12,281		12,489		13,113		15,072
Preferred stock dividends	$	70		$	70	$	70	$	70	$	70

(a) Cost of sales in fiscal year 2009 included provisions for obsolete inventory of $74.2 million to primarily cover inventory losses for all work-in-process and finished goods inventories we had on hand at November 30, 2008 and a write-off in the fourth quarter of fiscal year 2009 for certain raw materials that had no potential use in drug products to be manufactured in the future (see Note 9—“Inventories” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

(b) Operating expenses in fiscal year 2009 included charges of $36.6 million related to impairment of intangible assets, $10.4 million of severance benefits, $15.5 million of expense for administrative costs associated with product recalls, $50.0 million of litigation expense related to actual and probable legal settlements, and $2.0 million of purchased in-process research and development expenses related to a milestone payment made in accordance with the Gestiva^™ acquisition (see Note 11—“Intangible Assets and Goodwill,” Note 13—“Accrued Liabilities” and Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

(c) The loss from continuing operations and the net loss in fiscal year 2009 included the impact of a $82.4 million valuation allowance that was charged to income tax expense during the year ended March 31, 2009 for deferred tax assets that we determined would not be realized as tax deductions in the future.

(d) Operating expenses in fiscal year 2008 included purchased in-process research and development expenses of $10.0 million and $7.5 million recorded in connection with the Evamist^™ and Gestiva^™ acquisitions, respectively (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

(e) Net income in fiscal year 2007 included $2.0 million, net of tax, related to the cumulative effect of a change in accounting principle for the adoption of SFAS 123R.

(f) Operating expenses in fiscal year 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.

(g) The income statement data for the years ended March 31, 2008 and 2007 have been revised to reflect the correction of certain immaterial errors in our prior period financial statements as more fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(h) The income statement data for the years ended March 31, 2006 and 2005 have been revised to reflect the correction of certain immaterial errors in our prior period financial statements.

73

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 Annual Report on Form 10-K and specifically under the captions “Cautionary Note Regarding Forward-Looking Statements” and Item 1A—“Risk Factors.” In addition, the following discussion and analysis of the financial condition and results of operations, which gives effect to the correction of immaterial errors in our prior period consolidated financial statements as more fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, should be read in conjunction with Item 6—“Selected Financial Data” and our Consolidated Financial Statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K. Also, for purposes of the following discussion, please note that, in March 2009, the Board approved management’s decision to market for sale PDI, our specialty materials segment. As a result of the decision to sell PDI, we identified the assets and liabilities of PDI as held for sale at March 31, 2009 and we have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented.

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 manufacturing 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 PDI, we develop, manufacture and market technologically advanced, value-added raw material products for the pharmaceutical industry and other markets.

We have a diverse portfolio of drug delivery technologies which we have utilized in our brand name and specialty generic products. We have developed and patented drug delivery and formulation technologies primarily in four principal areas: SITE RELEASE^®, 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.

See Item 1—“Business—(b) Significant Recent Developments” for information on recent business developments related to our company, including product recalls (and certain related financial information), the consent decree with the FDA, the plea agreement with the Department of Justice and the suspension of manufacturing and shipping of our products.

Revenue Recognition

During fiscal year 2009, we announced six separate voluntary recalls of certain tablet-form generic products as a precaution due to the potential existence of oversized tablets. Beginning in December 2008, we determined that we were not able to reasonably estimate future product returns at the time our drug products were shipped because of uncertainties associated with the risk of additional product recalls. As a result, revenue on shipments of our drug products was deferred until such uncertainties were resolved, which occurred on the earlier of the consumption by the end user or when these products were no longer subject to recall. We estimated the amount of time for a product to be consumed by the end user after it was originally shipped to be approximately two months. In December 2008, we determined that we were not able to establish the recoverability of production related inventory costs because of uncertainties associated with the risk of additional product recalls. As a result,

74

beginning in December 2008, production and overhead costs were recognized directly into cost of sales rather than capitalized into inventory.

Product shipments that are recorded as deferred revenue are reflected as a liability on the consolidated balance sheet. For shipments where revenue recognition is deferred, we record revenue when the uncertainties leading to deferral are resolved. Since we suspended all shipments of our approved drug products in tablet form in December 2008 and suspended the manufacturing and shipment of the remainder of our drug products in January 2009, we did not have any deferred revenue recorded on our consolidated balance sheet at March 31, 2009.

Results of Operations

Net revenues in fiscal year 2009 decreased $265.3 million, or 45.9%, as compared to fiscal year 2008. Our operations generated $50.1 million of net revenues in the last six months of fiscal year 2009, compared to net revenues of $301.0 million for the corresponding six-month period of fiscal year 2008. This decrease resulted primarily from the impact of the nationwide recalls we initiated in the fourth quarter of fiscal year 2009 and the shipment suspensions we initiated of all approved tablet-form products in December 2008 and all other drug products in January 2009. Gross profit was further affected by the $38.8 million write-off of all work-in-process and finished goods inventories on hand at November 30, 2008, a $18.1 million provision that we recorded in the fourth quarter of fiscal year 2009 to primarily cover a write-off of certain raw materials that had no future use, and the immediate recognition of all production and overhead costs into cost of sales that began in December 2008. The increase of $148.9 million in operating expenses in fiscal year 2009 compared to fiscal year 2008 was primarily due to increases in research and development expense, legal and consulting fees, branded marketing and promotions expense, litigation expense related to actual and probable legal settlements, restructuring charges and charges recorded for impairment of intangible assets. Our results of operations in fiscal year 2009 also included the impact of a $82.4 million valuation allowance that was charged to income tax expense during the year ended March 31, 2009 for deferred tax assets that we determined would not be realized as tax deductions in the future. Because of these factors, we incurred a net loss of $313.6 million in fiscal year 2009.

FISCAL YEAR 2009 COMPARED TO FISCAL YEAR 2008

Net Revenues by Segment

	Years Ended March 31,						Change
	2009			2008			$			%
	($ in thousands)
Branded products	$	114,771		$	212,281		$	(97,510	)	(45.9	)%
as % of net revenues		36.7	%		36.8	%
Specialty generics/non-branded		197,175			364,191			(167,016	)	(45.9	)%
as % of net revenues		63.1	%		63.1	%
Other		381			1,151			(770	)	(66.9	)%
Total net revenues	$	312,327		$	577,623		$	(265,296	)	(45.9	)%

The decrease in net revenues for fiscal year 2009 was primarily due to our operations generating $50.1 million of net revenues in the last six months of fiscal year 2009, compared to net revenues of $301.0 million for the corresponding six-month period of fiscal year 2008. This decrease resulted primarily from the impact of the nationwide recalls we initiated in January 2009 and the shipment suspensions of all approved tablet-form products in December 2008 and all other drug products in January 2009. Because of the requirements of the consent decree (see Item 1—“Business—(b) Significant Recent Developments” for information on the consent decree with the FDA), we do not expect to generate any significant revenues from products that we manufacture until we resume shipping certain or many of our approved products, which is not expected to occur until the fourth quarter of calendar year 2010 at the earliest. Net revenues for fiscal year 2009 were positively

75

impacted by $36.7 million of incremental sales of the 25 mg and 50 mg strengths of metoprolol, which were approved by the FDA in March 2008 and May 2008, respectively. However, net revenues for fiscal year 2009 were negatively impacted by a $37.6 million reduction in sales from our generic cough/cold product line. During most of fiscal year 2008, we marketed approximately 30 products in our generic/non-branded respiratory line, which consisted primarily of cough/cold products. As a result of the Missouri Department of Health and Senior Services’ embargo placed on our inventory of certain unapproved generic/non-branded products in March 2008, we marketed only one FDA-approved generic cough/cold product during fiscal year 2009.

Gross Profit by Segment

	Years Ended March 31,						Change
	2009			2008			$			%
	($ in thousands)
Branded products	$	98,853		$	190,083		$	(91,230	)	(48.0	)%
as % of net revenues		86.1	%		89.5	%
Specialty generics/non-branded		87,099			228,511			(141,412	)	(61.9	)%
as % of net revenues		44.2	%		62.7	%
Other		(106,008	)		(15,958	)		(90,050	)	(564.3	)%
Total gross profit	$	79,944		$	402,636		$	(322,692	)	(80.1	)%
As % of total net revenues		25.6	%		69.7	%

The decreases we experienced in net revenues at our branded products and specialty generics/non-branded segments resulted in corresponding decreases to each segments’ gross profit in fiscal year 2009. The decline in the gross profit percentage at our specialty generic/non-branded segment was primarily due to the impact of the January 2009 recall of all drug products manufactured by us, price differences recorded with respect to customer orders of generic products we were not able to fulfill, and normal and expected price reductions on the 100 and 200 mg dosage strengths of metoprolol because the 180-day exclusivity period granted under the Hatch-Waxman Act on these products ended in January 2008. The “Other” category above includes gross profit from contract manufacturing revenues, purchase price and production variances from standard costs, and changes to inventory reserves associated with production. The change in the “Other” category was primarily due to the write-off of all work-in-process and finished goods inventories we had on hand at November 30, 2008 and the write-off we recorded in the fourth quarter of fiscal year 2009 for certain raw materials. Because of the effects of the consent decree we entered into with the FDA in March 2009, we completed an assessment of our raw materials inventory and identified certain raw materials that had no potential use in products we expect to manufacture in the future. These events were the primary factors that resulted in a provision for obsolete inventory of $74.2 million that was recorded as a component of cost of sales in fiscal year 2009. The “Other” category was further affected, beginning December 2008, by the recognition of all production and overhead costs directly to cost of sales as they were incurred.

Research and Development

	Years Ended March 31,						Change
	2009			2008			$		%
	($ in thousands)
Research and development	$	69,841		$	48,873		$	20,968	42.9	%
as % of net revenues		22.4	%		8.5	%

Research and development expenses consist mainly of personnel-related costs and costs from bioequivalency studies for proposed generic products, laboratory and preclinical tests for proposed branded products, clinical studies to determine the safety and efficacy of proposed branded products, and material used in research and development activities. The increase in research and development expense was due primarily to the following:

• $6.2 million increase in salaries and benefits due to the growth of our research and development staff prior to the reduction of our workforce in February 2009 as part of a realignment of our cost structure.

76

• $10.7 million increase in costs associated with the testing of drugs under development due to an increased level of bioequivalency studies and clinical trials prior to the impact of restrictions under the consent decree. The consent decree precludes us from testing any new drugs manufactured in our facilities. However, the development process for Gestiva™ is able to continue because the related NDA is owned by Hologic.

• $2.5 million increase in material costs due to increased development activity prior to the impact of restrictions under the consent decree coupled with the write-off of inventory used for research and development activities that did not have multiple or alternative future uses.

• $1.0 million of costs incurred by Nesher Solutions, Inc., our subsidiary based in Israel, which serves to enhance the development efforts of our generic pipeline.

Purchased In-Process Research and Development

	Years Ended March 31,				Change
	2009		2008		$			%
	($ in thousands)
Purchased in-process research and development	$	2,000	$	17,500	$	(15,500	)	(88.6	)%

We entered into a definitive asset purchase agreement with Hologic to acquire the U.S. and worldwide rights to Gestiva^™ upon approval of the pending Gestiva NDA under review by the FDA. The asset purchase agreement was subsequently amended in January 2010. In accordance with the original asset purchase agreement, we made a $7.5 million cash payment on February 20, 2008, the initial closing date, and a $2.0 million cash payment in May 2008 when Hologic received an acknowledgement from the FDA that Hologic’s response to the FDA’s October 20, 2006 “approvable” letter was sufficient for the FDA to proceed with its review of the Gestiva NDA. Because the product had not yet obtained FDA approval when these payments were made, we recorded in-process research and development charges of $2.0 million and $7.5 million in fiscal years 2009 and 2008, respectively. See Item I—“Business—(d) Narrative Description Of Business—Ther-Rx—History of Our Branded Products Segment” and Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the original asset purchase agreement and related amendment with Hologic and matters related to Gestiva™.

In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights to Evamist^™, a transdermal estrogen therapy (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Under the terms of the asset purchase agreement for Evamist, we paid $10.0 million in cash at closing and made an additional cash payment of $141.5 million upon final approval of the product by the FDA in July 2007. Since the product had not yet obtained FDA approval when the initial payment was made at closing, we recorded a $10.0 million in-process research and development charge during fiscal year 2008.

Selling and Administrative

	Years Ended March 31,						Change
	2009			2008			$		%
	($ in thousands)
Selling and administrative	$	248,410		$	203,495		$	44,915	22.1	%
as % of net revenues		79.5	%		35.2	%

The increase in selling and administrative expense resulted from the net impact of the following:

• $29.3 million increase in legal, professional and consulting fees due to an increase in litigation activity coupled with the steps taken by us in connection with the FDA’s inspectional activities, the consent decree, litigation and governmental inquiries, and the investigation conducted by the Audit Committee.

77

• $12.8 million increase in branded marketing expense due primarily to marketing and promotions expenses related to the launch of Evamist^™.

• $9.5 million increase in salaries and benefits due to increases in management, sales and other personnel that occurred prior to the reduction of our workforce in February 2009 as part of a realignment of our cost structure.

• $2.5 million increase in losses recognized on disposals of property and equipment related primarily to the discontinuation of various liquid-form product lines.

• On January 28, 2009, we initiated a nationwide voluntary recall affecting most of our products. The recall was subsequently expanded on February 3, 2009. This recall affected multiple lots of over 150 branded and generic/non-branded products for which we recorded increased processing fees and other administrative expenses of $15.0 million in fiscal year 2009.

• $9.6 million decrease in incentive bonuses due to the termination in fiscal year 2009 of incentive bonus plans for our executives in connection with the events described in Item 1—“Business—(b) Significant Recent Developments” of this Annual Report on Form 10-K.

• $10.8 million decrease in compensation expense due to the reversal of a previously recorded accrual associated with the former Chief Executive Officer’s retirement benefits as a result of the termination “for cause” of the former Chief Executive Officer’s employment agreement by the Board. Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.

• $6.1 million decrease in compensation expense that was recorded during fiscal year 2009 due primarily to the reversal of an accrual for payroll related withholding taxes on disqualified incentive stock options that resulted from a settlement with the IRS for calendar years 2004 to 2007 (see Note 18—“Income Taxes” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

Amortization of Intangible Assets

	Years Ended March 31,						Change
	2009			2008			$		%
	($ in thousands)
Amortization of intangible assets	$	14,221		$	11,491		$	2,730	23.8	%
as % of net revenues		4.6	%		2.0	%

The increase in amortization of intangible assets was due primarily to the purchase of Evamist^™ in May 2007 and the impact of a full year’s amortization of the intangible assets we recorded thereon (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Under the terms of the purchase agreement, we paid $141.5 million after final approval of the product was received from the FDA on July 27, 2007. The final purchase price allocation was completed during the first quarter of fiscal year 2009 and resulted in estimated identifiable intangible assets of $44.1 million for product rights; $12.8 million for trademark rights; $82.5 million for rights under a sublicense agreement; and $2.1 million for a covenant not to compete. In conjunction with the FDA’s approval of Evamist^™ on July 27, 2008, we began amortizing the product rights, trademark rights and rights under the sublicense agreement over 15 years and the covenant not to compete over nine years.

Impairment of Intangible Assets

	Years Ended March 31,						Change
	2009			2008			$		%
	($ in thousands)
Impairment of intangible assets	$	36,618		$	1,140		$	35,478	3,112.1	%
as % of net revenues		11.7	%		0.2	%

78

We evaluate our intangible assets for impairment at least annually or whenever events or changes in circumstances indicate an intangible asset’s carrying amount may not be recoverable. Because of events that occurred beginning in the third quarter of fiscal year 2009, which included four voluntary recalls involving 25 generic products and the suspension of all shipments of our FDA-approved tablet-form products, we completed an evaluation of each of our intangible assets. Based upon management’s analysis, it was determined the following intangible assets were impaired:

• Pursuant to the terms of the consent decree, we agreed not to distribute our unapproved products, including our prenatal vitamins and hematinic products, unless we obtain approval through the FDA’s ANDA or NDA processes. Since such products are unable to generate any revenues and are not approved by the FDA, we recorded $34.1 million during fiscal year 2009 as an impairment charge to write-off the net book value of the intangible assets related to our branded prenatal vitamins and hematinic products.

• During fiscal year 2009, we recognized an impairment charge of $2.5 million for the intangible assets related to a product we had under development to treat endometriosis. It was determined at the end of our Phase II study that this product was not effective because its efficacy was not better than that of a placebo. As a result, we decided to abandon development of the product in fiscal year 2009 and wrote-off the related intangible assets.

• During fiscal year 2008, we recognized an impairment charge of $1.1 million for the intangible asset related to a product right licensed under an external development agreement. Price erosion on the product eliminated the economic benefits of marketing the product. The entire balance of the intangible asset was written-off as the product was no longer expected to generate positive future cash flows.

With respect to the intangible assets related to Evamist^™, we had approximately $125.5 million of unamortized costs and remaining useful lives of 9 to 13 years as of March 31, 2009. To test impairment of these assets, we performed a cash flow analysis, which incorporates a number of significant assumptions and estimates that are subject to change as actual results become known. The sum of the projected undiscounted cash flows, which extend over the useful life assigned to the assets, slightly exceeds the carrying amount of the intangible assets as of March 31, 2009 and we concluded that the asset is not impaired as of that date. However, any significant differences in actual future results versus estimates used to prepare the cash flow analysis, such as lower sales, increases in production costs or technological changes, could result in impairment of these intangible assets at a future date.

Litigation and Governmental Inquiries

	Years Ended March 31,				Change
	2009		2008		$		%
	($ in thousands)
Litigation and governmental inquiries	$	49,996	$	—	$	49,996	N/A

We have been named as defendants in certain cases alleging that we reported improper or fraudulent pricing information under the Medicaid rebate program. During fiscal year 2009, we recorded $6.5 million of litigation expense for settlements and to cover our exposure under similar Medicaid cases that are still pending because settlement was determined to be probable and the related amount reasonably estimable.

We have been named as defendant in various product liability actions related to the voluntary product recalls initiated by the Company in calendar year 2008 and early 2009 and alleged damages as a result of the ingestion of purportedly oversized tablets allegedly distributed in 2007 and 2008. (See Note 13—“Accrued Liabilities” and Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) Based on our product liability insurance coverage and the number of product liability actions that are pending, that have been settled and that we expect will occur, we recorded product liability expense of $14.4 million in fiscal year 2009.

79

In May 2009, we entered into a global confidential settlement agreement with Axcan ScandiPharm, Inc. (“Axcan”) to dismiss a suit Axcan had filed against us in June 2007. The settlement agreement required us to pay Axcan in three installments, $3.5 million of which was paid in May 2009. Subsequent to May 2009, the original agreement with Axcan was revised and we made a payment of $2.0 million to settle the remaining two payments due to Axcan. At March 31, 2009, we had recorded a settlement liability of $5.5 million in accrued liabilities.

Pursuant to the plea agreement that ETHEX entered into with the Department of Justice on March 2, 2010, ETHEX agreed to pay criminal fines, restitution to the Medicare and Medicaid programs and an administrative forfeiture in the aggregate amount of $27.6 million (see Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” in this Annual Report on Form 10-K). The plea agreement requires us to pay the criminal fines in five installment payments beginning March 6, 2010 and ending July 11, 2012. For fiscal 2009, we recorded litigation expense of $23.6 million for the present value of the administrative forfeiture and the five expected installment payments related to the criminal fines and reduced net revenues by $2.3 million for the restitution payments made to the Medicare and Medicaid programs on March 6, 2010. We used risk-free interest rates averaging 2.16% to determine the present value of the installment payments due under the plea agreement.

See Note 16—“Commitments and Contingencies—Litigation and Governmental Inquiries” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information.

Restructuring Charges

	Years Ended March 31,				Change
	2009		2008		$		%
	($ in thousands)
Restructuring charges	$	10,356	$	—	$	10,356	N/A

On February 5, 2009, we commenced a substantial reduction of our workforce as part of an ongoing realignment of our cost structure. Employee headcount, through a combination of terminations and layoffs, was reduced by approximately 1,000 employees. We recorded expense of $10.4 million in fiscal year 2009 for severance benefits related to these terminations.

Interest Expense

	Years Ended March 31,				Change
	2009		2008		$			%
	($ in thousands)
Interest expense	$	9,312	$	10,463	$	(1,151	)	(11.0)%

The decrease in interest expense resulted primarily from a decline in amortization of deferred financing costs related to the issuance of the convertible notes that became fully amortized during the first quarter of fiscal year 2009. Also contributing to the decrease in interest expense was a reduction in the interest rate and the repayment in February 2009 of borrowings under our credit facility.

Interest and Other Expense (Income)

	Years Ended March 31,					Change
	2009		2008			$			%
	($ in thousands)
Interest and other expense (income)	$	6,280	$	(12,524	)	$	(18,804	)	(150.1)%

The increase in interest and other expense (income) consisted of the following:

• $6.2 million decline in interest income due primarily to a decrease in short-term interest rates.

• $3.5 million increase in foreign currency transaction losses on an investment denominated in the Indian Rupee.

80

• $10.5 million of other-than-temporary impairment recognized into earnings during fiscal year 2009 on our ARS, offset in part by a $1.3 million gain recognized in connection with a settlement agreement with our broker for a $10.0 million ARS (see Note 7—“Investment Securities” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

Income Tax Expense (Benefit)

	Years Ended March 31,						Change
	2009			2008			$			%
	($ in thousands)
Income tax expense (benefit)	$	(48,496	)	$	39,605		$	(88,101	)	(222.4	)%
effective tax rate		13.8	%		32.4	%

The income tax benefit recorded in fiscal year 2009 was the result of a pretax loss for the year. The lower-than-expected tax rate in fiscal year 2009 resulted from the impact of valuation allowances in the amount of $82.4 million that were charged to income tax expense during the year ended March 31, 2009 for deferred tax assets that we determined that more likely than not would not be realized as future tax deductions. The lower-than-expected tax rate in fiscal year 2008 resulted from the reversal of certain tax liabilities associated with tax positions from previous years that were determined to no longer be necessary, as the relevant statute of limitations had expired.

Income from Discontinued Operations

	Years Ended March 31,				Change
	2009		2008		$		%
	($ in thousands)
Income from discontinued operations	$	4,967	$	3,845	$	1,122	29.2	%

During the fourth quarter of fiscal year 2009, our Board authorized management to sell PDI, our specialty materials segment. We are in the process of marketing PDI for sale and have retained an advisor to assist us in the divestiture of PDI. Therefore, we have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented. (See Note 5—“Discontinued Operations” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) The increase in income from discontinued operations was primarily due to an increase in PDI’s net revenues.

FISCAL YEAR 2008 COMPARED TO FISCAL YEAR 2007

Net Revenues by Segment

	Years Ended March 31,						Change
	2008			2007			$			%
	($ in thousands)
Branded products	$	212,281		$	188,050		$	24,231		12.9	%
as % of net revenues		36.8%			44.3%
Specialty generics/non-branded		364,191			234,341			129,850		55.4	%
as % of net revenues		63.1	%		55.2	%
Other		1,151			1,916			(765	)	(39.9	)%
Total net revenues	$	577,623		$	424,307		$	153,316		36.1	%

The increase in branded product sales was due primarily to continued sales growth of our anti-infective brand, Clindesse^®, coupled with increased sales from our prescription prenatal and hematinic product lines. Sales

81

of Clindesse^® increased 25.9% to $40.0 million during fiscal year 2008 due to an increase in prescription volume of 27.4% coupled with the impact of price increases over fiscal year 2008. Sales from our PreCare^® product line increased 12.3% to $81.5 million during fiscal year 2008. This increase was primarily due to sales growth experienced by PrimaCare ONE^® and PreCare Premier^®, coupled with product line price increases. Specifically, sales of PrimaCare ONE^® increased $12.6 million, or 28.8%, to $56.3 million in fiscal year 2008. This increase reflected the impact of price increases over the past 12 months coupled with continued market share gains as PrimaCare ONE^®’s share of the prescription prenatal vitamin market increased to 27.2% at the end of the fiscal year 2008, up from 23.1% at the end of fiscal year 2007. Sales of our hematinic products increased 10.3% to $53.2 million in fiscal year 2008, which primarily reflected sales growth of Repliva 21/7^®. Sales of Gynazole-1^®, our vaginal antifungal cream product, declined 3.9% to $23.7 million during fiscal year 2008. The fluctuation in Gynazole-1^® sales reflected the impact of a decline in market share, offset in part by price increases that occurred during fiscal year 2008. Branded product sales were also impacted by the introduction of Evamist^™ at the end of fiscal year 2008. Evamist^™, a transdermal estrogen therapy, was acquired in May 2007 and received FDA approval in July 2007. We began shipping this new product at the end of March 2008 and generated fiscal year 2008 sales of $1.9 million.

The growth in specialty generic/non-branded sales resulted primarily from the launch in July 2007 of the 100 mg and 200 mg strengths of metoprolol, the generic version of Toprol-XL^® (marketed by AstraZeneca). In fiscal year 2006, we received a favorable court ruling in a patent infringement action filed against us by AstraZeneca based on our ANDA submissions to market the 100 mg and 200 mg dosage strengths. Because we were the first company to submit an ANDA for these dosage strengths and challenge the Toprol-XL^® patents, we received a 180-day exclusivity period during which no other generic version of the product could be approved. We began shipping the 100 mg and 200 mg dosage strengths in July 2007 and they generated net revenues of $119.1 million during fiscal year 2008. We received FDA approval to market the 25 mg strength of metoprolol, and subsequently began shipping this product, in March 2008. Sales of this product totaled $0.9 million in fiscal year 2008. In addition, we received FDA approval to market the 50 mg strength of metoprolol, and subsequently began shipping this product, in May 2008. Our specialty generic sales for the year were also favorably impacted by sales of six strengths of Diltiazem HCI ER Capsules (AB rated to Tiazac^®) which we launched in September 2006. These products generated net revenues of $22.1 million in fiscal year 2008, an increase of $10.5 million over the prior year.

Gross Profit by Segment

	Years Ended March 31,						Change
	2008			2007			$			%
	($ in thousands)
Branded products	$	190,083		$	167,233		$	22,850		13.7	%
as % of net revenues		89.5%			88.9%
Specialty generics/non-branded		228,511			137,019			91,492		66.8	%
as % of net revenues		62.7	%		58.5	%
Other		(15,958	)		(12,992	)		(2,966	)	(22.8	)%
Total gross profit	$	402,636		$	291,260		$	111,376		38.2	%
as % of total net revenues		69.7	%		68.6	%

The increase in gross profit was primarily due to the sales growth experienced by our specialty generics and branded products segments. The increase in specialty generic sales resulted primarily from the launch in July 2007 of the 100 mg and 200 mg strengths of metoprolol, which along with the 25 mg strength approved and launched in March 2008, generated net revenues of $120.0 million in fiscal year 2008. Because we were the first company that submitted an ANDA for the 100 mg and 200 mg dosage strengths and challenge the Toprol-XL^® patents, we received a 180-day exclusivity period during which no other generic version of the product could be approved. The gross profit percentages at our specialty generic/non-branded segment and on a consolidated basis

82

increased over the prior year because the 180-day exclusivity period allowed us to offer the 100 mg and 200 mg strengths of metoprolol at relatively higher margins than our other generic/non-branded products. Impacting the “Other” category are contract manufacturing revenues, pricing and production variances, and changes to inventory reserves associated with production. Any inventory reserve changes associated with finished goods are reflected in the applicable segment. During fiscal year 2008, the provision for obsolete inventory increased to $18.8 million, compared to $12.0 million in fiscal year 2007. The increase in the provision for obsolete inventory was primarily due to the impact of the FDA hold on certain unapproved specialty generic products that occurred in March 2008. We included in the reserve for obsolete inventory $5.5 million for all of the unapproved specialty generic products subject to the FDA hold, including the raw materials used to manufacture the products and work-in-process inventories that we had on hand at March 31, 2008.

Research and Development

	Years Ended March 31,						Change
	2008			2007			$		%
	($ in thousands)
Research and development	$	48,873		$	31,638		$	17,235	54.5%
as % of net revenues		8.5	%		7.5	%

The increase in research and development expense was primarily due to a growing product development pipeline, continued active development of various branded and generic/non-brand products in our internal and external pipelines, and increased personnel expenses related to the growth of our research and development staff.

Purchased In-Process Research and Development

	Years Ended March 31,				Change
	2008		2007		$		%
	($ in thousands)
Purchased in-process research and development	$	17,500	$	—	$	17,500	N/A

In May 2007, we acquired from VIVUS, Inc the U.S. marketing rights to Evamist^™, a transdermal estrogen therapy (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Under the terms of the asset purchase agreement for Evamist, we paid $10.0 million in cash at closing and made an additional cash payment of $141.5 million upon final approval of the product by the FDA in July 2007. Since the product had not yet obtained FDA approval when the initial payment was made at closing, we recorded a $10.0 million purchased in-process research and development charge in fiscal year 2008.

In January 2008, we entered into a definitive asset purchase agreement with Hologic to acquire the U.S. and worldwide rights to Gestiva™. In accordance with the asset purchase agreement, we made a $7.5 million cash payment on the initial closing date in February 2008. Since the product had not yet obtained FDA approval when the initial payment was made, we recorded an in-process research and development charge of $7.5 million during fiscal year 2008.

Selling and Administrative

	Years Ended March 31,						Change
	2008			2007			$		%
	($ in thousands)
Selling and administrative	$	203,495		$	171,623		$	31,872	18.6%
as % of net revenues		35.2	%		40.4	%

83

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

• $16.5 million increase in personnel costs due to increases in management, sales and other personnel.

• $8.5 million increase in branded marketing and promotions expense.

• $2.3 million increase in travel and auto leasing costs at our branded products segment.

• $2.1 million increase in legal and professional expense commensurate with an increase in litigation activity.

Amortization of Intangible Assets

	Years Ended March 31,						Change
	2008			2007			$		%
	($ in thousands)
Amortization of intangible assets	$	11,491		$	4,810		$	6,681	138.9%
as % of net revenues		2.0	%		1.1	%

The increase in the amortization of intangible assets was primarily due to the purchase of Evamist^™ in May 2007 and the impact of intangible assets that we recorded thereon (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Under the terms of the purchase agreement, we made two cash payments: $10.0 million was paid in May 2007 and expensed as in-process research and development and $141.5 million was paid in July 2007 when final approval of the product was received from the FDA. Upon FDA approval in July 2007, we began amortizing the product rights, trademark rights and rights under the sublicense agreement over 15 years and the covenant not to compete over nine years.

Impairment of Intangible Assets

	Years Ended March 31,				Change
	2008		2007		$		%
	($ in thousands)
Impairment of intangible assets	$	1,140	$	—	$	1,140	N/A

During the fiscal year ended March 31, 2008, we recognized an impairment charge of $1.1 million for the intangible asset related to a product right acquired under an external development agreement. Price erosion on the product eliminated the economic benefits of marketing the product. The entire balance of the intangible asset was written-off as the product is no longer expected to generate positive future cash flows.

Operating Income

	Years Ended March 31,				Change
	2008		2007		$		%
	($ in thousands)
Operating income	$	120,137	$	85,597	$	34,540	40.4%

The improvement in operating income was primarily due to sales of the 100 mg and 200 mg strengths of metoprolol succinate extended-release tablets. We began shipping these two products in July 2007 and they generated net revenues of $119.1 million during the year. The related increase in gross profit of $111.4 million was offset in part by a $76.8 million increase in operating expenses, which included purchased in-process research and development expenses of $10.0 million and $7.5 million recorded in connection with the Evamist^™

84

and Gestiva^™ acquisitions, respectively (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

Interest Expense

	Years Ended March 31,				Change
	2008		2007		$		%
	($ in thousands)
Interest expense	$	10,463	$	8,985	$	1,478	16.4	%

The increase in interest expense was primarily the result of interest incurred on the $50.0 million of borrowings made under our credit facility in August 2007. The advance against our credit facility was used, along with cash on hand, to fund the $141.5 million payment for the purchase of Evamist^™. We repaid $20.0 million of the borrowing against our credit facility in November 2007.

Interest and Other Expense (Income)

	Years Ended March 31,						Change
	2008			2007			$		%
	($ in thousands)
Interest and other expense (income)	$	(12,524	)	$	(10,255	)	$	2,269	22.1	%

The increase in interest and other income resulted primarily from a $1.7 million increase in interest income due to an increase in the weighted average interest rate earned on short-term investments. The increase in the weighted average interest rate resulted principally from a restructuring of the investment portfolio in the prior year from short-term tax-exempt securities to short-term taxable securities. Interest and other income was also favorably impacted by a $0.5 million increase in foreign currency transaction gains on an investment denominated in the Indian Rupee.

Income Tax Expense

	Years Ended March 31,						Change
	2008			2007			$		%
	($ in thousands)
Income tax expense	$	39,605		$	32,221		$	7,384	22.9	%
effective tax rate		32.4	%		37.1	%

The lower effective tax rate in fiscal year 2008 resulted primarily from the reversal of certain tax liabilities associated with tax positions from previous years that were determined to no longer be necessary as the relevant statute of limitations had expired. The effective tax rates for both the current and prior periods were favorably impacted by the domestic manufacturer’s deduction and the use of business credits. (See Note 18—“Income Taxes” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) The fiscal year 2007 tax rate was adversely affected by the recording of additional liabilities associated with tax positions claimed on filed tax returns.

Income from Discontinued Operations

	Years Ended March 31,				Change
	2008		2007		$		%
	($ in thousands)
Income from discontinued operations	$	3,845	$	1,937	$	1,908	98.5	%

85

During the fourth quarter of fiscal year 2009, our Board authorized management to sell PDI, our specialty materials segment. Therefore, we have segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented. (See Note 5—“Discontinued Operations” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.) The increase in income from discontinued operations was primarily due to an increase in PDI’s net revenues.

Liquidity and Capital Resources

Cash and cash equivalents and working capital were $75.7 million and $18.0 million, respectively, at March 31, 2009, compared to $88.5 million and $90.1 million, respectively, at March 31, 2008. Working capital is defined as total current assets minus total current liabilities. Our Notes contain conversion terms that impact whether they are classified as current or long-term liabilities and consequently affect our working capital position. The $200.0 million principal amount of Notes were classified as a current liability as of March 31, 2008 due to the holders having the right to require us to repurchase all or a portion of their Notes on May 16, 2008. Since no holders required us to repurchase all or a portion of their Notes on that date and because the next date on which holders may require us to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability as of March 31, 2009.

The following table summarizes the components of working capital at March 31, 2009 and March 31, 2008:

	2009		2008		Increase (Decrease)
	$ in thousands
Current assets:
Cash and cash equivalents	$	75,730	$	88,493	$	(12,763	)
Marketable securities		—		40,548		(40,548	)
Receivables		19,235		131,776		(112,541	)
Inventories		22,186		94,330		(72,144	)
Prepaid and other assets		16,609		8,366		8,243
Income taxes receivable		81,031		11,015		70,016
Current assets held for sale		6,770		—		6,770
Deferred tax asset		8,842		24,122		(15,280	)
Total current assets	$	230,403	$	398,650	$	(168,247	)
Current liabilities:
Accounts payable	$	35,975	$	32,020	$	3,955
Accrued liabilities		150,863		73,996		76,867
Current maturities of long-term debt		37,824		202,499		(164,675	)
Current liabilities associated with assets held for sale		567		—		567
Total current liabilities	$	225,229	$	308,515	$	(83,286	)

The decrease in marketable securities at March 31, 2009 was due to the sale of these securities in August 2008. The reduction in receivables at March 31, 2009 was primarily due to the impact of the shipment suspensions we initiated in December 2008 for all approved tablet-form products and in January 2009 for all other drug products. As a result, we generated minimal shipments in the fourth quarter of fiscal year 2009 and our receivables were reduced accordingly. The decrease in inventories was primarily the result of our cost of sales including provisions for obsolete inventory of $74.2 million to primarily cover inventory losses for all work-in-process and finished goods inventories we had on hand at November 30, 2008 and a write-off in the fourth quarter of fiscal year 2009 for certain raw materials that had no potential use in products to be manufactured by us in the future. Inventory was further affected, beginning December 2008, by the recognition of all production and overhead costs directly to cost of sales as they were incurred. The increase in income taxes receivable was due to the net loss realized in fiscal year 2009 and the related income tax benefit we recorded

86

thereon. The decrease in deferred tax assets was due to valuation allowances that we recorded in fiscal year 2009 for deferred tax assets that we determined would not be realized as tax deductions in the future. The increase in accrued liabilities was primarily due to unpaid product recall liabilities we accrued during fiscal year 2009, unpaid failure to supply claims that we accrued during fiscal year 2009, unpaid severance payments related to the workforce reductions that occurred during fiscal year 2009 and accrued litigation expenses we recorded during fiscal year 2009. The decrease in current maturities of long-term debt was due to the classification of the Notes as a current liability at March 31, 2008 and a long-term liability at March 31, 2009.

Net cash provided by operating activities generally represents income from sales of our products, offset by the timing of receipts and payments in the ordinary course of business. Net cash flow provided by operating activities was $123.1 million in fiscal year 2008. For fiscal year 2009, however, we had net cash flow used in operating activities of $2.3 million. In fiscal year 2009, net cash flow used in operations consisted of a net loss of $313.6 million, impacted by non-cash items, which included depreciation, amortization and impairment charges, and changes in receivables, inventories, income taxes receivable, and accrued liabilities. In fiscal year 2008, net cash flow from operations resulted primarily from net income adjusted for non-cash items.

Net cash flow from investing activities included capital expenditures of $23.6 million in fiscal year 2009, compared to $24.2 million in fiscal year 2008. Other investing activities in fiscal year 2009 included $0.6 million and $52.1 million of purchases and sales, respectively, of investment securities classified as available for sale and $2.0 million of milestone payments we made, which related to the Gestiva^™ acquisition (see Note 6—“Acquisitions” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Also, we paid $3.0 million during fiscal year 2009 to acquire assets associated with the pharmaceutical division of LycoRed Natural Products Industries Ltd., a product development company located in Israel. Investing activities in fiscal year 2008 included two cash payments made under the Evamist^™ purchase agreement: $10.0 million was paid in May 2007 and expensed as in-process research and development and $141.5 million was paid and recorded as an intangible asset in July 2007 when final approval of the product was received from the FDA. In addition, we paid $7.5 million in January 2008 when the Original Agreement for Gestiva^™ was closed. This amount was expensed as in-process research and development. Other investing activities in fiscal year 2008 also included purchases and sales of investment securities classified as available for sale of $125.4 million and $158.8 million, respectively.

At March 31, 2009, we had invested $72.8 million in principal amount of ARS. Consistent with our investment policy guidelines, the ARS held by us were AAA rated securities with long-term nominal maturities secured by student loans which are guaranteed by the U.S. Government. Liquidity for the ARS is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, typically between seven to 35 days. However, with the liquidity issues experienced in global credit and capital markets, the ARS experienced failed auctions beginning in February 2008 and throughout fiscal year 2009. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. The securities for which auctions have failed continue to accrue interest at the contractual rate and continue to be auctioned every seven, 14, 28 or 35 days, as the case may be, until the auction succeeds, the issuer calls the securities, or they mature.

On February 25, 2009, we initiated legal action against Citigroup Global Markets Inc. (“CGMI”), through which we acquired the ARS we held at that time, in the District Court for the Eastern District of Missouri. On January 21, 2010, we entered into a Purchase and Release Agreement with CGMI pursuant to which CGMI agreed to purchase the ARS for an aggregate purchase price of approximately $61.7 million. We also received a two-year option (which expires on January 21, 2012) to reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further payments in the event any ARS are redeemed prior to the expiration of the option. We agreed to release CGMI from any liability or claim arising from our investment in ARS sold by CGMI, and we agreed with CGMI to take all necessary steps to dismiss with prejudice all claims asserted by us against CGMI regarding the ARS, including the legal action referred to above.

87

(See Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the settlement agreement and the proceeds received in connection therewith.)

Because of events discussed in Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” included in this Annual Report on Form 10-K that occurred beginning in December 2008, we face significant liquidity concerns and determined we could no longer support our previous assertion that we had the ability to hold impaired securities until their forecasted recovery. As a result, we concluded that the ARS became other-than-temporarily impaired during December 2008 and we recorded a loss of $9.1 million into current period earnings during the quarter ended December 31, 2008. This adjustment reduced the carrying value of the ARS to $63.7 million. The carrying value at March 31, 2009 was increased to $63.8 million after recording discount accretion on the ARS. The estimated fair value of our ARS holdings at March 31, 2009 was $66.0 million as compared to a principal amount of $72.8 million as of the same date (see Note 7—“Investment Securities” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of our investment in ARS and other-than-temporary impairment charges recorded during fiscal year 2009). The $2.2 million difference in fair value of the ARS at March 31, 2009 compared to the corresponding carrying value was recorded in accumulated other comprehensive income as an unrealized gain of $1.4 million, net of tax.

Our debt balance, including current maturities, was $238.5 million at March 31, 2009, compared to $271.2 million at March 31, 2008. In February 2009, we repaid the $30.0 million of borrowings outstanding under our credit facility. Subsequent to repayment of the outstanding borrowings under the credit facility, we were notified by our lenders that our $320.0 million revolving line of credit had been terminated.

In June 2007, we entered into an installment payment agreement with a financial institution for the purchase of software products and the right to receive consulting or other services from the seller. Upon delivery of the products and services, the financial institution will pay the seller amounts owed for the software products and services. As a result of the installment payment agreement, we recorded debt in the amount of $1.7 million, which will be paid ratably over 16 consecutive quarters to the financial institution. Also, in August 2007, we entered into another agreement with the same financial institution for the payment of additional consulting services that will be provided on a time and material basis. In exchange for the institution paying the seller for fees owed, we have recorded additional debt in the amount of $0.3 million, which will be paid to the financial institution ratably over 16 consecutive quarters. The two installment payment agreements were discounted using an imputed annual interest rate that approximated our company’s borrowing rate for similar debt instruments at the time of the borrowings.

In March 2006, we entered into a $43.0 million mortgage loan arrangement 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, which is secured by three of our buildings, bears interest at a rate of 5.91% (and a default rate of 10.905%) and matures on April 1, 2021. We believe that we are currently not in compliance with one or more of the requirements of the mortgage loan arrangement as of March 31, 2009. If we are unable to comply with the requirements of the mortgage loan arrangement or otherwise receive a waiver from the mortgage lender for any non-compliance, the mortgage debt obligation could become immediately due and payable. Accordingly, the $37.4 million that remained outstanding under the mortgage arrangement as of March 31, 2009 was classified as a current liability as of March 31, 2009.

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

88

2007, the average trading price of the Notes reached the threshold for the applicable five-day trading period, which resulted in the payment of contingent interest and beginning November 16, 2007 the Notes began to bear interest at a rate of 3.00% per annum. In May 2008, the average trading price of the Notes fell below the contingent interest threshold for the five-day trading period and beginning May 16, 2008 the Notes began to pay interest at a rate of 2.50% per annum. We may redeem some or all of the Notes at any time on or after May 21, 2006, at a redemption price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of redemption. Holders may require us to repurchase all or a portion of their Notes on May 16, 2013, 2018, 2023 and 2028, or upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of repurchase, payable in cash. Holders had the right to require us to repurchase all or a portion of their Notes on May 16, 2008 and, accordingly, we classified the Notes as a current liability as of March 31, 2008. Additionally, if an acceleration of the mortgage debt obligation were to occur as described above, and we are unable to pay it in full, an event of default could also be deemed to have occurred on the Notes. If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest on the Notes could also become immediately due and payable. Since no holders required us to repurchase all or a portion of their Notes on May 16, 2008 and because the next date holders may require us to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability as of March 31, 2009. The Notes are subordinate to all of our existing and future senior obligations.

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 15—“Taxable Industrial Revenue Bonds” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Up to $135.5 million of industrial revenue bonds could have been issued to us by St. Louis County relative to capital improvements made through December 31, 2009. This agreement provides that 50% of the real and personal property taxes on up to $135.5 million of capital improvements will be abated for a period of ten years subsequent to the property being placed in service. Industrial revenue bonds totaling $129.9 million were outstanding at March 31, 2009. 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):

	Payments due by period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Obligations at March 31, 2009
Long-term debt obligations(1)	$	238,549	$	37,824	$	725	$	200,000	$	—
Scheduled interest obligations(2)		138,059		20,510		10,049		10,000		97,500
Operating lease obligations		7,463		2,087		3,119		1,363		894
Total contractual cash obligations(3)(4)		384,071		60,421		13,893		211,363		98,394

(1) Holders of the $200.0 million aggregate principal amount of Notes had the right to require us to repurchase them for an amount equal to the unpaid principal amount in May 2008. No bonds were tendered to us by the holders. The next date holders may require us to repurchase all or a portion of their Notes is May 16, 2013.

89

(2) Scheduled interest payments represent the estimated interest payments on the building mortgages, the software financing arrangement and the Notes.

(3) Excluded from the contractual obligations table is the liability for unrecognized tax benefits totaling $6.4 million. This liability for unrecognized tax benefits has been excluded because we cannot make a reliable estimate of the period in which the unrecognized tax benefits will be realized.

(4) The terms of the Evamist^™ asset purchase agreement provide for two future payments upon achievement of certain net sales milestones. If Evamist^™ 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 addition, we made a payment of $70.0 million upon entering into an amendment to the Gestiva^™ asset purchase agreement in January 2010. We are also obligated to make a series of additional future scheduled cash payments in the aggregate amount of $120 million upon successful completion of agreed upon milestones, the last of which payments is due no later than 21 months after the FDA approves the Gestiva NDA, provided that the Transfer Date has already occurred. (See Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information related to the amendment to the Gestiva^™ asset purchase agreement.) Such obligations for additional payments are not reflected in the table set forth above, as the amendment was entered into after the end of fiscal year 2009. Hologic informed us in January 2009 that the FDA, in a complete response letter, (1) indicated it would not approve Gestiva^™ until additional data and information are submitted to and accepted by the FDA and (2) requested Hologic to initiate a confirmatory clinical study and enroll a certain number of patients. Pursuant to the terms of the asset purchase agreement, we are funding the confirmatory study being conducted by a clinical research organization secured by Hologic. We project that spending for this study will be between $7.0 million and $9.0 million in fiscal year 2010, which is dependent on the timing of patient enrollment and the geographical locations of the enrolled patients. During fiscal years 2011 through 2015, we project continued financial obligations to fund the study to be between $15.0 million and $20.0 million.

In August 2008, we entered into an expanded licensing arrangement with Acrux DDS PTY Ltd. (“Acrux”) for use of their transdermal spray technology (which is currently incorporated in Evamist^™) in up to six additional branded products. Under the agreement, we were required to make milestone payments and pay royalties to Acrux when the products were marketed. Although the agreement with Acrux is still in place, we presently do not intend to market the six branded products identified in the agreement.

Ability to Continue as a Going Concern

There is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included in this Annual Report on Form 10-K are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The historical consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The assessment of our ability to continue as a going concern was made by management considering, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. Our assessment was further affected by our fiscal year 2009 net loss of $313.6 million and the outstanding balance of cash, cash equivalents and short-term marketable securities of $75.7 million as of March 31, 2009. For periods subsequent to March 31, 2009, we expect losses to continue because we are unable to generate any significant revenues from our own manufactured products until we are able to resume shipping certain or many of our approved products, which currently is not expected to

90

occur until the fourth quarter of calendar year 2010 at the earliest. In addition, we must meet ongoing operating costs as well as costs related to the steps we are currently taking to prepare for reintroducing our approved products to the market. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about our ability to continue as a going concern.

We believe that we are not in compliance with one or more of the requirements of our mortgage loan arrangement as of March 31, 2009 (see Note 14—“Long-Term Debt” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Failure by us to comply with the requirements of the mortgage loan arrangement or to otherwise receive a waiver from the mortgage lender for any noncompliance could result in our outstanding mortgage debt obligation accelerating and immediately becoming due and payable. If the acceleration occurs and the mortgage debt is not immediately paid in full, an event of default could also be deemed to have occurred under the $200 million principal amount of 2.5% Contingent Convertible Subordinated Notes. If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest could also become immediately due and payable. The acceleration of these outstanding debt obligations would materially adversely affect our business, financial condition and cash flows.

Based on current financial projections, we believe the continuation of our company as a going concern is primarily dependent on our ability to address, among other factors: (i) our need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by us and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K; and (v) our ability to comply with debt covenants. While we address these matters, we must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with reintroducing our approved products to the market (such as costs related to our employees, facilities and FDA compliance), remaining payments associated with the acquisition of the rights to Gestiva™ (see Note 6—“Acquisitions” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K), the financial obligations pursuant to the plea agreement (see Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” included in this Annual Report on Form 10-K), as well as the significant costs, such as legal and consulting fees, associated with the steps taken by us in connection with the consent decree and the litigation and governmental inquiries. If we are not able to obtain the FDA’s clearance to resume manufacturing and distribution of our approved products in a timely manner and at a reasonable cost, and/or if we experience adverse outcomes with respect to any of the governmental inquiries or litigation described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, our financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. See Item 1A—“Risk Factors” included in this Annual Report on Form 10-K regarding additional risks we face with respect to these matters.

In the near term, we are focused on meeting the requirements of the consent decree, which will allow our approved products to be reintroduced to the market, and are pursuing various means to increase cash. Since March 31, 2009, we have generated non-recurring cash proceeds to support our on-going operating and compliance requirements from the receipt of tax refunds, the monetization of our ARS and the sale of certain other assets (see Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the cash received). We also generated cash from the sale of certain products not manufactured by us under the distribution and supply agreement with Purdue (see Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). While these cash proceeds were sufficient to meet near-term cash requirements, we are pursuing ongoing efforts to increase cash including the continued implementation of cost savings, divestiture of PDI and other assets and the return of certain or many of our approved products to market

91

in a timely manner. In addition, in order to continue to meet the expected near-term obligations described above, we will still need to obtain additional capital through additional asset sales. Based on our continuing assessment and identification of assets for future sale and the results of the currently proposed asset sales, we may elect to engage in external financing efforts. We currently do not anticipate issuing equity securities to raise additional capital. However, we continue to evaluate our capital needs and availability of financing to assess and identify the best available external financing alternatives. We cannot provide assurance that we will be able to realize the cost reductions we anticipate from reducing our operations or our employee base, that some or many of our approved products can be returned to the market in a timely manner, that our higher profit approved products will return to the market in the near term, that we can obtain additional cash through asset sales, or that external financing can be obtained when needed, under acceptable terms or in the amounts required. If we are unsuccessful in our efforts to sell assets and raise additional capital in the near term, we will be required to further reduce our operations, including further reductions of our employee base, or we may be required to cease operations in order to offset the lack of available funding.

Our ability to obtain capital has been and continues to be materially and negatively affected by a number of factors. The current and evolving credit market condition and general adverse economic conditions have caused the cost of prospective debt and equity financings to increase considerably. These circumstances have materially adversely affected liquidity in the financial markets, making terms for certain financings unattractive, and in some cases have resulted in the unavailability of financing. We also anticipate that the uncertainty created by the ongoing governmental inquiries and litigation described in Note 16—“Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, steps taken by us in connection with the nationwide recall and suspension of shipment of all drug products manufactured by us, the consent decree and the uncertainty with respect to when we will resume shipment of our products, if at all, will affect our ability to obtain capital on a timely basis, or at all. In light of the factors described above, we may not be able to obtain additional capital. Even if we are able to obtain additional financing or issue debt securities under these circumstances, the cost to us likely will be high and the terms and conditions are likely to be onerous. In addition, if we were to issue equity securities, such securities likely would be priced at or below the current market price for our securities. As a result, sales of equity securities at or below current market prices likely would result in substantial dilution for current shareholders who purchased our equity securities at or above current market prices.

We continue to evaluate the sale of certain of our assets, including the planned sale of our PDI subsidiary. However, due to the general economic slowdown, we will likely be exposed to risks related to the overall macro-economic environment, including a lower rate of return than we have historically experienced on our invested assets and being limited in our ability to sell assets. In addition, we cannot provide any assurance that we will be successful in finding suitable purchasers for the sale of such assets. Even if we are able to find purchasers, we may not be able to obtain attractive terms and conditions for such sales, including attractive pricing. In addition, divestitures of businesses such as PDI may also involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues and earnings associated with the divested business, and the disruption of operations in the affected business. In addition, divestitures potentially involve significant post-closing separation activities, which could involve the expenditure of significant financial and employee resources. Inability to consummate identified asset sales or manage the post-separation transition arrangements could adversely affect our business, financial condition, results of operations and cash flows.

Current and Anticipated Liquidity Position

At February 28, 2010, we had approximately $78.6 million in cash, cash equivalents and short-term investment securities. We realized approximately $125.3 million of cash during the third quarter of fiscal year 2010 as a result of entering into a distribution and supply agreement with Purdue that allowed us to sell limited quantities of oxycodone hydrochloride tablets manufactured by them (see Note 16—“Commitments and Contingencies” and Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the litigation with Purdue and

92

descriptions of the settlement agreement, the patent license agreement and the distribution and supply agreement). We also received tax refunds of approximately $81.9 million during the first two quarters of fiscal year 2010 and an additional tax refund of approximately $23.8 million during the fourth quarter of fiscal year 2010. We received an additional $61.7 million related to the settlement agreement on our ARS during the fourth quarter of fiscal year 2010 (see Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the settlement agreement entered into on the ARS and the proceeds received thereon).

At February 28, 2010, we had $236.2 million of outstanding debt, consisting of $200.0 million principal amount of Notes, the remaining principal balance of a $43.0 million mortgage loan and the remaining portion of a $2.0 million software financing arrangement. See discussion above in this section for more information on our indebtedness.

We currently project that during the quarter ending March 31, 2010, our cash operating expenditures are approximately $122 million to $134 million. Of this amount, $70 million relates to a payment to Hologic, which payment was made in January 2010, in connection with the amendment to the asset purchase agreement entered into in January 2010 to secure the rights to Gestiva™, approximately $34 million to $38 million relates to on-going operating expenses, approximately $5 million relate to financial obligations pursuant to the plea agreement and approximately $9 million to $13 million relate to debt service payments, inventory build and capital expenditures. The remainder of the projected cash expenditures totaling approximately $4 million to $8 million relates to costs related to our FDA compliance consultants and other costs.

We currently project that during the quarter ending June 30, 2010, our cash operating expenditures will be approximately $54 million to $66 million. Of this amount, approximately $36 million to $40 million relate to on-going operating expenses, approximately $7 million to $10 million relate to debt service payments and inventory build and approximately $7 million to $10 million relate to legal and customer settlement payments. The remainder of the projected cash expenditures totaling approximately $4 million to $6 million relates to costs related to our FDA compliance consultants and other costs.

We are continuously reviewing our projected cash expenditures and are evaluating measures to reduce expenditures on an ongoing basis. In addition, our top priority is to maintain and attempt to increase our limited cash and financial resources. As a result, if we determine that our current goal of meeting the consent decree’s requirements and returning our approved products to market is likely to be significantly delayed, we may decide to further reduce our operations, including further reductions of our employee base, and to significantly curtail some or all of our efforts to meet the consent decree’s requirements and return our approved products to market. Such decision would be made based on our ability to manage our near-term cash obligations, to obtain additional capital through asset sales and/or external financing and to expeditiously meet the consent decree’s requirements and return our approved products to market. If such decision were to be made, we currently anticipate that we would focus our efforts on developing product candidates in our development portfolio that we believe have the highest potential return on investment, which we currently believe to be primarily Gestiva™ (17-alphahydroxyprogesterone caproate). We also expect to evaluate other alternatives available to us in order to increase our cash balance.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet financing arrangements, other than a financing arrangement with St. Louis County, Missouri related to the expansion of our operations in St. Louis County (see Note 15—“Taxable Industrial Revenue Bonds” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

93

Inflation

Inflation may apply upward pressure on the cost of goods and services used by us in the future. However, we believe that the net effect of inflation on our operations during the past three years has been minimal. In addition, changes in the mix of products sold and the effects of competition have 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—“Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Certain of our accounting policies are particularly important to the presentation of our financial condition and results of operations and require the application of significant judgment by our management. As a result, amounts determined under these policies are subject to an inherent degree of uncertainty. In applying these policies, we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on historical experience, the terms of existing contracts, observance of trends in the industry, information that is obtained from customers and outside sources, and on various other assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from our estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operations and/or financial condition. Our critical accounting estimates are described below.

Revenue Recognition and Provisions for Estimated Reductions to Gross Revenues

Revenue is generally realized or realizable and earned when persuasive evidence of an arrangement exists, the customer’s payment ability has been reasonably assured, title and risk of ownership have been transferred to the customer, and the seller’s price to the buyer is fixed or reasonably determinable.

During fiscal year 2009, we announced six separate voluntary recalls of certain tablet-form generic products as a precaution due to the potential existence of oversized tablets. Beginning in December 2008, we determined that we were not able to reasonably estimate future product returns at the time our drug products were shipped because of uncertainties associated with the risk of additional product recalls. As a result, revenue on shipments of our drug products was deferred until such uncertainties were resolved, which occurred on the earlier of the consumption by the end user or when these products were no longer subject to recall. We estimated the amount of time for a product to be consumed by the end user after it was originally shipped to be approximately two months.

Product shipments that are recorded as deferred revenue are reflected as a liability on the consolidated balance sheet. For shipments where revenue recognition is deferred, we record revenue when the uncertainties leading to deferral are resolved. Since we suspended all shipments of our approved drug products in tablet form in December 2008 and suspended the manufacturing and shipment of the remainder of our drug products in January 2009, we did not have any deferred revenue recorded on our consolidated balance sheet at March 31, 2009.

Concurrently with the recognition or deferral of revenue, we record estimated provisions for product returns, sales rebates, payment discounts, chargebacks, and other sales allowances. When the occurrence of product recalls becomes probable, we record liabilities for product returns related to recalls. We record failure to supply claims when they are probable and reasonably estimable. These 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 and failure to supply arrangements, current sales terms with wholesale and indirect customers and subsequent payment activity.

94

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 as shipments 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. Shipments made as a result of allowances offered on our specialty generic/non-branded product line in conjunction with trade shows sponsored by our major wholesale customers and for other promotional programs accounted for 18.3% and 10.4% of total gross revenues for fiscal years 2009 and 2008, respectively.

In addition, certain of our wholesale customers have anticipated the timing of price increases and have made 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 through an internal analysis that considers, among other things, wholesaler purchases, wholesaler contract sales, available end consumer prescription information and inventory data received from our three largest wholesale customers. We believe that our evaluation of wholesaler inventory levels allows us to make reasonable estimates of our reserve balances. Further, our products are typically sold with adequate shelf life to permit sufficient time for our wholesaler customers to sell our products in their inventory to the end consumer.

The following table reflects the fiscal year 2009 activity for each accounts receivable reserve:

	Beginning Balance		Current Provision Related to Shipments Made in the Current Period		Current Provision Related to Sales Made in Prior Periods and Other Additions		Actual Returns or Credits in the Current Period			Ending Balance
	(in thousands)
Year ended March 31, 2009
Accounts Receivable Reserves:
Chargebacks	$	18,103	$	145,043	$	—	$	(160,302	)	$	2,844
Cash discounts and other allowances		3,848		13,606		—		(16,419	)		1,035
Liabilities:
Sales rebates		12,585		45,819		2,528		(52,668	)		8,264
Sales returns		3,950		21,965		—		(13,906	)		12,009
Medicaid rebates		7,953		11,220		—		(12,861	)		6,312
Medicare and Medicaid restitution		—		—		2,275		—			2,275
Product recall returns		346		2,050		52,245		(13,946	)		40,695
Failure to supply claims		—		21,798		—		(4,697	)		17,101
Other		6,120		26,341		—		(29,506	)		2,955
Total	$	52,905	$	287,842	$	57,048	$	(304,305	)	$	93,490

We use a variety of methods to assess the adequacy of our reserves to ensure our financial statements are fairly stated. These include reviews of customer inventory data, customer contract programs and product pricing trends to analyze and validate the reserves.

95

The $2.3 million for Medicare and Medicaid restitution relates to the amount paid to these two programs in March 2010 pursuant to the plea agreement that ETHEX entered into with the Department of Justice on March 2, 2010 (see Item 1—“Business—(b) Significant Recent Developments—Plea Agreement with the U.S. Department of Justice” in this Annual Report on Form 10-K).

The decrease in reserves for chargebacks and cash discounts and other allowances and the liabilities for sales rebates, Medicaid rebates and other resulted from the voluntary suspension in December 2008 of all shipments of our approved drug products in tablet form and the voluntary suspension in January 2009 of all shipments of our remaining products. As a result, we generated minimal shipments in the fourth quarter of fiscal year 2009 and our accounts receivable reserves were reduced accordingly. Included as “Other Additions” above is $52.2 million for the January 2009 nationwide recall that was recorded as an increase to the liability for product recall returns with a corresponding decrease to deferred revenue. Also, based on the specific terms of certain customer arrangements and considering we had given these customers due notice of products cancelled or discontinued, we recorded reductions to net revenues in fiscal year 2009 of $21.8 million for amounts owed to these customers for price differences they incurred for procuring products we were unable to supply.

The current provision related to sales made in prior periods reflects the impact of the settlement of a disputed customer claim received during the year for sales rebates related to sales of new products launched in the prior fiscal year. We had interpreted the rebate agreement with the customer to exclude certain new product sales that the customer claimed should have been included. Since there were interpretive differences as to the intent of the language in the rebate agreement relative to the inclusion of new products, we decided to settle the claim with the customer.

The following table reflects the fiscal year 2008 activity for each accounts receivable reserve:

	Beginning Balance		Current Provision Related to Sales Made in the Current Period		Current Provision Related to Sales Made In Prior Periods		Actual Returns or Credits in the Current Period			Ending Balance
	(in thousands)
Year ended March 31, 2008
Accounts Receivable Reserves:
Chargebacks	$	13,479	$	136,594	$	—	$	(131,970	)	$	18,103
Cash discounts and other allowances		2,745		16,645		—		(15,542	)		3,848
Liabilities:
Sales rebates		5,391		36,581		—		(29,387	)		12,585
Sales returns		2,876		15,278		—		(14,204	)		3,950
Medicaid rebates		8,081		10,297		—		(10,425	)		7,953
Product recall returns		—		346		—		—			346
Other		1,036		24,832		—		(19,748	)		6,120
Total	$	33,608	$	240,573	$	—	$	(221,276	)	$	52,905

The increase in the reserve for chargebacks at March 31, 2008 was primarily due to chargeback reserves established on the 100 mg and 200 mg strengths of metoprolol succinate extended-release tablets, the generic version of Toprol-XL^® (marketed by AstraZeneca). We began shipping these two products in July 2007, and along with the approval and launch of the 25 mg strength in March 2008, they generated net revenues of $120.0 million in fiscal year 2008. The increases in the liability for sales rebates and cash discounts and other allowances at March 31, 2008 were also primarily due to the impact of sales associated with the two strengths of metoprolol succinate extended-release tablets. We received FDA approval to market the 25 mg strength of metoprolol succinate extended-release tablets in March 2008 and began shipping this product at that time. Sales of this product near year-end and wholesaler inventory levels of such at March 31, 2008 increased the reserves for chargebacks and sales rebates as well. The increase in the liability for sales returns resulted primarily from

96

the discontinuance of certain cardiovascular products late in fiscal year 2008, coupled with higher returns of two pain management products in fiscal year 2008.

The provisions for the reserves for chargebacks and sales returns are primarily a function of the estimated amount of inventory in the applicable distribution channel (wholesale or retail) at the balance sheet date. We determine the amounts of these reserves at each balance sheet date based on customer inventory levels and record the provisions as appropriate based on changes in the inventory balances. With the exception of sales rebates in fiscal year 2009 as discussed above, there are no other current provisions related to sales made in prior periods for fiscal years 2009 and 2008 because of information constraints in the distribution channel, which have made it impractical for us to capture and quantify the impact of current versus prior year activity on the chargebacks or returns provision. Information constraints within the distribution channel primarily relate to our inability to track product through the channel on a unit or specific lot basis. The lack of information on a specific lot basis precludes us from tracking actual chargeback and return activity to the period of our initial sale.

We have not found it necessary to determine which specific lot a product sale originated from in estimating the provision for chargebacks or returns because these reserves are based on the quantity of inventory held in the wholesale distribution channel at the balance sheet date. We assume the customers relieve their inventory on a first-in, first-out basis, so that the quantities in inventory reflect their most recent purchases. For example, in determining the provision for chargebacks, we first estimate the reserve required at period end based on customer inventory balances and certain assumptions (described above), add to that requirement the credits actually issued during the period and then subtract the beginning reserve balance, which is determined on the same basis as the ending balance.

The reserves for sales rebates and cash discounts and other allowances are typically determined based on a contractually defined percentage of sales. The majority of our rebate agreements are either based on monthly or quarterly sales depending on when the rebate will be paid. As a result, prior period sales would not be expected to have any impact on their reserves.

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/non-branded business segment. During fiscal years 2009 and 2008, the chargeback provision reduced the gross sales of our specialty generics segment by $144.1 million and $135.4 million, respectively. These amounts accounted for 99.4% and 99.3% of the total chargeback provisions recorded in fiscal years 2009 and 2008, respectively.

The provision for chargebacks has historically been the most significant and complex estimate used in the recognition of revenue. At March 31, 2009, given the limited amount of sales recorded in the fourth quarter of fiscal year 2009, we evaluated the reserve for chargebacks by comparing it against the amount of credits issued subsequent to March 31, 2009.

Prior to March 31, 2009, we generally validated the chargeback accrual quarterly through a review of the inventory reports from our largest wholesale customers. This customer inventory information was used to verify

97

the estimated liability for future chargeback claims based on historical contract and chargeback rates. We continually monitored pricing trends and sales to our indirect customers through the wholesale distribution channel and wholesale inventory levels. Specifically, to ensure the liability for future chargebacks was fairly stated, each of the primary factors we considered in developing and evaluating the reserve for chargebacks, as described above, was validated on a quarterly basis as follows:

• Inventory in the wholesale distribution channel was validated through a review of reports of actual inventory on-hand at the end of a given quarter received from our three major wholesale customers. These customers have historically accounted for approximately 85% of chargebacks processed annually.

• The percentage of sales to our wholesale customers that resulted in chargebacks was validated through an analysis of actual chargebacks received on a product specific basis from all wholesale customers relative to their purchases from us over various historical timeframes.

• Contract pricing and the resultant chargeback per unit was validated through an analysis of actual contract pricing on a product specific basis to our indirect and wholesale customers in the current period and over various historical timeframes.

We believe the chargeback data available to us as used in the validation process has been sufficient to allow us to reasonably estimate the level of chargebacks expected from current period sales activities.

Shelf-Stock Adjustments—These adjustments represent credits issued to our wholesale customers that result from a decrease in our wholesale acquisition cost (“WAC”). Decreases in our invoice prices are discretionary decisions we make to reflect market conditions. These credits are customary in the industry and are intended to reduce a wholesale customer’s inventory cost to better reflect current market prices. Generally, we provide credits to customers at the time the price reduction occurs based on the inventory that is owned by them on the effective date of the price reduction. Since a reduction in WAC reduces the chargeback per unit, or the difference between WAC and the contract price, shelf-stock adjustments are typically included as part of the reserve for chargebacks because the price reduction credits act essentially as accelerated chargebacks. Although we have contractually agreed to provide price adjustment credits to our major wholesale customers at the time they occur, the impact of any such price reductions not included in the reserve for chargebacks is immaterial to the amount of revenue recognized in any given period. As a result of WAC decreases to certain specialty generic/non-branded products, we paid shelf-stock adjustments of $8.4 million to our wholesale customers during fiscal year 2009.

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 generic/non-branded business segments. Upon recognition or deferral of revenue from product shipments 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. At March 31, 2009, given the limited amount of shipments recorded in the fourth quarter of fiscal year 2009, we evaluated the reserve for sales returns by comparing it against the amount of credits issued subsequent to year-end. Prior to March 31, 2009, we have historically evaluated 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 were 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 utilized actual inventory information from our major wholesale customers and estimated the inventory positions of the remaining wholesalers based on historical buying patterns. For inventory held by our non-wholesale customers, we used the last two months of sales to the direct buying chains and the indirect buying retailers as an estimate.

Medicaid Rebates—Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its pharmaceuticals that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program. Medicaid rebates apply to both our branded and specialty generic/non-branded segments.

98

Individual states invoice us for Medicaid rebates on a quarterly basis using statutorily determined rates: for noninnovator products, in general generic drugs marketed under ANDAs, the rebate amount is 11% of the Average Manufacturer Price (“AMP”) for the quarter; for innovator products, in general brand-name products marketed under NDAs, the rebate amount is the greater of 15.1% of the AMP for the quarter or the difference between such AMP and the best price for that same quarter. An additional rebate for innovator products is payable in the amount by which, if any, the product’s AMP has increased at a rate faster than inflation. The total rebate amount for each particular product is its Unit Rebate Amount, or “URA.” The amount owed is based on the number of units paid for by each state Medicaid program in a quarter extended by the URA. At March 31, 2009, we evaluated the liability for Medicaid rebates by comparing it against the amount of payments made subsequent to year-end. In fiscal years prior to 2009, we based the liability for Medicaid rebates on expected payments, which were affected by patient usage and estimated inventory in the distribution channel. We estimated patient usage by calculating a payment rate as a percentage of net sales, which was 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.

Liabilities for Product Returns Related to Recalls—During fiscal year 2009, we announced six separate voluntary recalls of certain tablet-form products as a precaution due to the potential existence of oversized tablets. In January 2009, we initiated a nationwide voluntary recall that affected most of our products. Liabilities for product returns related to recalls are based on estimated and actual customer inventory levels at the time of the recall and actual contract pricing.

Liabilities for Failure to Supply Claims—We have historically entered into product purchase arrangements with certain customers that include a provision that requires us to reimburse these customers for price differences on product orders that we are unable to fulfill. We are able to estimate provisions for supply failures based on the specific terms in each arrangement. We incurred failure to supply claims in fiscal year 2009 due primarily to us not manufacturing or shipping any of our drug products during the fourth quarter of fiscal year 2009.

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.

Inventories also include costs related to certain products that are pending regulatory approval. From time to time, we capitalize inventory costs associated with products prior to regulatory approval based on management’s judgment of probable future regulatory approval, commercial success and realizable value. Such judgment incorporates our knowledge and best estimate of where the product is in the regulatory review process, our required investment in the product, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, we revise our estimates and judgments about the recoverability of the capitalized costs and, where required, provide reserves for such inventory in the period those estimates and judgments change.

During fiscal year 2009, we announced six separate voluntary recalls of certain tablet-form generic products as a precaution due to the potential existence of oversized tablets. Beginning in December 2008, we determined that we were not able to establish the recoverability of production related inventory costs because of uncertainties associated with the risk of additional product recalls. As a result, production and overhead costs were recognized directly into cost of sales rather than capitalized into inventory.

99

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

When we determine that the carrying value of an intangible or other long-lived 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 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 asset, an impairment loss is recognized based on the excess of the carrying amount over the estimated fair value of the asset.

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

Income Taxes  Our deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. If all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made.

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

100

Management regularly evaluates our 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 regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The recorded tax liabilities are based on estimates and assumptions that have been deemed reasonable by management. However, if our estimates are not representative of actual outcomes, recorded tax liabilities could be materially impacted.

Contingencies  We are involved in various legal proceedings, some of which involve claims for substantial amounts. An estimate is made to accrue for a loss contingency relating to any of these legal proceedings if 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 condition or results of operations, such estimates are considered to be critical accounting estimates. We have reviewed and determined that at March 31, 2009, there were certain legal proceedings in which we are involved that met the conditions described above. Accordingly, we have accrued a loss contingency relating to such legal proceedings. See Note 13—“Accrued Liabilities” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Recently Issued Accounting Standards

Effective April 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for all financial assets and liabilities and any other assets and liabilities that are recognized or disclosed at fair value on a recurring basis. This pronouncement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability, provides a framework for measuring fair value under GAAP and expands disclosure requirements about fair value measurements. Although our adoption of SFAS 157 did not have a material effect on our financial condition, results of operations or cash flows, additional disclosures were required (see Note 8—“Fair Value Measures” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

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

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

In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“Issue 06-10”). Issue 06-10 requires companies with collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods to recognize a liability for future benefits based on the substantive agreement with the employee. The provisions of Issue 06-10 also require an employer to recognize and measure the asset in a collateral assignment split-dollar life insurance

101

arrangement based on the nature and substance of the arrangement. We adopted the provisions of Issue 06-10 effective April 1, 2008. As a result of the adoption, we recognized a liability of $5.6 million which represented the present value of the future premium payments to be made under the existing policies. We also recognized a decrease in the related asset of $2.3 million based on the nature and substance of the arrangements. In accordance with the transition provisions of EITF No. 06-10, a direct decrease of $7.9 million was recorded to retained earnings, effective April 1, 2008.

In June 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-3, “Accounting for Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“Issue 07-3”), which is effective for fiscal years beginning after December 15, 2007 and is applied prospectively for new contracts entered into on or after the effective date. Issue 07-3 addresses nonrefundable advance payments for goods or services for use in future research and development activities. Issue 07-3 requires that 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. Our adoption of Issue 07-3 at the beginning of fiscal year 2009 did not have a material effect on our financial condition, results of operations or cash flows.

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141 but retains the fundamental concept of purchase method of accounting in a business combination and improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and any non-controlling interest at the acquisition date at their fair value as of that date. This statement requires measuring a non-controlling interest in the acquiree at fair value which will result in recognizing the goodwill attributable to the non-controlling interest in addition to that attributable to the acquirer. This statement also requires the recognition of assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition date fair values. In April 2009, the FASB issued FSP FAS 141(R)-1 to further clarify the guidance provided by SFAS 141(R) on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after

102

December 15, 2008 and earlier adoption is prohibited. We plan to adopt SFAS 141(R) at the beginning of fiscal year 2010 and are evaluating the impact of SFAS 141(R) on our 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. We plan to adopt SFAS 160 at the beginning of fiscal year 2010 and are evaluating the impact of SFAS 160 on our financial condition and results of operations.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” Under the new rules for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity is required to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the new rules is that the equity component is included in the paid-in capital section of shareholders’ equity on an entity’s consolidated balance sheet and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of convertible debt. The FSP is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. Early adoption is not permitted. We are currently evaluating the new rules and the impact on our financial condition and results of operations.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” and also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact the adoption of FSP 142-3 will have on our financial condition and results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This is accomplished by authorizing the Codification to become the single source of authoritative U.S. accounting and reporting standards, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification is now non-authoritative. SFAS No. 168 is effective for fiscal years, and interim periods within those fiscal years, beginning after September 15, 2009. We are in the process of analyzing the impact of this standard on future filings, which will be adopted by us at the beginning of the third quarter of fiscal year 2010.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

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

As of March 31, 2009, we had invested $72.8 million principal amount in ARS consisting of high quality (AAA rated) bonds secured by student loans which are guaranteed by the U.S. Government. The rates on these securities reset at pre-determined intervals up to 35 days. The maturity of these securities is greater than 10 years,

103

but the rates on these securities were to reset at predetermined intervals up to 35 days. During the fourth quarter of fiscal year 2008, certain developments in the capital and credit markets adversely affected the market for auction rate securities, which has resulted in a loss of liquidity for these investments. We have evaluated these securities to determine if other-than-temporary impairment of the carrying value of the securities has occurred due to the loss of liquidity. Because of events discussed previously (See Item 1—“Business—(b) Significant Recent Developments” for information on recent business developments related to our company, including product recalls and the consent decree with the FDA) that occurred beginning in December 2008, we face significant liquidity concerns and determined we could no longer support our previous assertion that we had the ability to hold impaired securities until their forecasted recovery. As a result, we concluded that the ARS became other-than-temporarily impaired during December 2008 and we recorded a loss of $9.1 million into current period earnings. This adjustment reduced the carrying value of the ARS to $63.7 million at December 31, 2008. During the quarter ended March 31, 2009, we recorded discount accretion of $0.1 million on the ARS. The estimated fair value of our ARS holdings at March 31, 2009 was $66.0 million. The $2.2 million difference in fair value of the ARS at March 31, 2009 compared to the corresponding carrying value was recorded in accumulated other comprehensive income as an unrealized gain of $1.4 million, net of tax (see Note 7—“Investment Securities” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). See Note 26—“Subsequent Events” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding a settlement agreement we entered into regarding the ARS and the proceeds received in connection therewith.

The favorable impact on our pre-tax income as a result of each 25 basis point (where 100 basis points equals 1%) increase in short-term interest rates would be approximately $0.5 million annually based on our average cash, cash equivalents and short-term marketable investment balances during the fiscal year ended March 31, 2009.

In May 2003, we issued $200.0 million principal amount of Convertible Subordinated Notes. The interest rate on the Notes is fixed at 2.50% and therefore not subject to interest rate changes. Beginning May 16, 2006, we became obligated to pay contingent interest at a rate equal to 0.5% per annum during any six-month period, if the average trading price of the Notes per $1,000 principal amount for the five-trading day period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. In November 2007, the average trading price of the Notes reached the threshold for the applicable five-day trading period which resulted in the payment of contingent interest and beginning November 16, 2007 the Notes began to bear interest at a rate of 3.00% per annum. In May 2008, the average trading price of the Notes fell below the contingent interest threshold for the five-day trading period and beginning May 16, 2008 the Notes began to pay interest at a rate of 2.50% per annum. Holders may require us to repurchase all or a portion of their Notes on May 16, 2013, 2018, 2023 and 2028, or upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of repurchase, payable in cash. Holders had the right to require us to repurchase all or a portion of their Notes on May 16, 2008 and, accordingly, we classified the Notes as a current liability as of March 31, 2008. Since no holders required us to repurchase all or a portion of their Notes on that date and because the next occasion holders may require us to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability as of March 31, 2009.

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 a default rate of 10.905% per annum) and not subject to market interest rate changes.

During fiscal year 2008, we entered into two installment payment agreements related to the purchase of software products and the right to receive consulting or other services from the seller. For the two agreements, we recorded debt in the amount of $2.0 million which will be paid ratably over 16 consecutive quarters. The two installment payment agreements were discounted using an imputed annual interest rate that approximated our borrowing rate for the similar debt instruments at the time of the borrowings.

104

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, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedule II. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suspended the shipment of all products manufactured by the Company and must comply with a consent decree with the FDA before approved products can be reintroduced to the market. Significant negative impacts on operating results and cash flows from these actions including the potential inability of the Company to raise capital; suspension of manufacturing; significant uncertainties related to litigation and governmental inquiries; and debt covenant violations raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), K-V Pharmaceutical Company’s internal control over financial reporting as of March 31, 2009, 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, 2010 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

(signed) KPMG LLP

St. Louis, Missouri

March 25, 2010

105

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31,
	2009			2008(a)
ASSETS
Current Assets:
Cash and cash equivalents	$	75,730		$	88,493
Marketable securities		—			40,548
Receivables, less allowance for doubtful accounts of $0 and $867 in 2009 and 2008, respectively		19,235			131,776
Inventories, net		22,186			94,330
Prepaid and other assets		16,609			8,366
Income taxes receivable		81,031			11,015
Deferred tax asset		8,842			24,122
Current assets held for sale		6,770			—
Total Current Assets		230,403			398,650
Property and equipment, less accumulated depreciation		188,212			187,492
Investment securities		65,971			81,516
Intangible assets and goodwill, net		148,399			198,784
Other assets		22,730			24,005
Non-current assets held for sale		1,616			—
Total Assets	$	657,331		$	890,447
LIABILITIES
Current Liabilities:
Accounts payable	$	35,975		$	32,020
Accrued liabilities		150,863			73,996
Current maturities of long-term debt		37,824			202,499
Current liabilities associated with assets held for sale		567			—
Total Current Liabilities		225,229			308,515
Long-term debt		200,725			68,674
Other long-term liabilities		44,045			22,519
Deferred tax liability		47,804			37,122
Total Liabilities		517,803			436,830
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, 2009 and 2008 (convertible into Class A shares on a 8.4375 to one basis)		—			—
Class A and Class B Common Stock, $.01 par value; 150,000,000 and 75,000,000 shares authorized, respectively;
Class A—issued 41,065,529 and 40,764,603 at March 31, 2009 and 2008, respectively		411			407
Class B—issued 12,206,684 and 12,170,172 at March 31, 2009 and 2008, respectively (convertible into Class A shares on a one-for-one basis)		122			122
Additional paid-in capital		165,427			159,443
Retained earnings		29,772			351,348
Accumulated other comprehensive (loss) income		845			(1,543	)
Less: Treasury stock, 3,365,218 shares of Class A and 94,572 share of Class B Common Stock at March 31, 2009, and 3,289,324 shares of Class A and 92,902 shares of Class B Common Stock at March 31, 2008, at cost		(57,049	)		(56,160	)
Total Shareholders’ Equity		139,528			453,617
Total Liabilities and Shareholders’ Equity	$	657,331		$	890,447

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4— “Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

See Accompanying Notes to Consolidated Financial Statements.

106

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years ended March 31,
	2009			2008(a)			2007(a)
Net revenues	$	312,327		$	577,623		$	424,307
Cost of sales		232,383			174,987			133,047
Gross profit		79,944			402,636			291,260
Operating expenses:
Research and development		69,841			48,873			31,638
Selling and administrative		248,410			203,495			171,623
Amortization of intangible assets		14,221			11,491			4,810
Impairment of intangible assets		36,618			1,140			—
Acquired in-process research and development		2,000			17,500			—
Litigation and governmental inquiries		49,996			—			(2,408	)
Restructuring		10,356			—			—
Total operating expenses		431,442			282,499			205,663
Operating income (loss)		(351,498	)		120,137			85,597
Other expense (income):
Interest expense		9,312			10,463			8,985
Interest and other expense (income)		6,280			(12,524	)		(10,255	)
Total other expense (income), net		15,592			(2,061	)		(1,270	)
Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle		(367,090	)		122,198			86,867
Income tax provision (benefit)		(48,496	)		39,605			32,221
Income (loss) from continuing operations before cumulative effect of change in accounting principle		(318,594	)		82,593			54,646
Income from discontinued operations, (net of taxes of $2,899, $2,041 and $846)		4,967			3,845			1,937
Income (loss) before cumulative effect of change in accounting principle		(313,627	)		86,438			56,583
Cumulative effect of change in accounting principle (net of $670 in taxes)		—			—			1,976
Net income (loss)	$	(313,627	)	$	86,438		$	58,559

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

107

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

(In thousands, except per share data)

	Years ended March 31,
	2009			2008(a)		2007(a)
Earnings (loss) per share from continuing operations before cumulative effect of change in accounting principle:
Basic—Class A common	$	(6.41	)	$	1.75	$	1.16
Basic—Class B common		(6.41	)		1.45		0.96
Diluted—Class A common		(6.41	)		1.47		0.99
Diluted—Class B common		(6.41	)		1.27		0.86
Earnings per share from discontinued operations before cumulative effect of change in accounting principle:
Basic—Class A common		0.10			0.08		0.04
Basic—Class B common		0.10			0.07		0.03
Diluted—Class A common		0.10			0.07		0.03
Diluted—Class B common		0.10			0.06		0.03
Per share effect of cumulative effect of change in accounting principle:
Basic—Class A common	$	—		$	—	$	0.04
Basic—Class B common		—			—		0.04
Diluted—Class A common		—			—		0.04
Diluted—Class B common		—			—		0.03
Earnings (loss) per share:
Basic—Class A common	$	(6.31	)	$	1.83	$	1.24
Basic—Class B common		(6.31	)		1.52		1.03
Diluted—Class A common		(6.31	)		1.54		1.06
Diluted—Class B common		(6.31	)		1.33		0.92
Shares used in per share calculation:
Basic—Class A common		37,607			37,150		36,813
Basic—Class B common		12,082			12,198		12,390
Diluted—Class A common		49,689			59,144		58,953
Diluted—Class B common		12,082			12,281		12,489

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

See Accompanying Notes to Consolidated Financial Statements.

108

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Years ended March 31,
	2009			2008(a)			2007(a)
Net income (loss)	$	(313,627	)	$	86,438		$	58,559
Unrealized gain (loss) on available for sale securities:
Unrealized holding gain (loss) during the period		(5,853	)		(2,424	)		100
Reclassification of losses included in net income		10,447			—			270
Tax impact related to unrealized holding gain (loss) and reclassification of losses		(1,636	)		848			(126	)
Foreign currency translation adjustment		(570	)		—			—
Total other comprehensive income (loss)		2,388			(1,576	)		244
Total comprehensive income (loss)	$	(311,239	)	$	84,862		$	58,803

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

See Accompanying Notes to Consolidated Financial Statements.

109

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands)

	Years Ended March 31, 2009, 2008 and 2007
	Preferred Stock		Class A Common Stock		Class B Common Stock			Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at March 31, 2006(a)	$	—	$	397	$	127		$	145,180		$	(53,904	)	$	206,491		$	(211	)	$	298,080
Net income		—		—		—			—			—			58,559			—			58,559
Dividends paid on preferred stock		—		—		—			—			—			(70	)		—			(70	)
Conversion of 441,341 Class B shares to Class A shares		—		4		(4	)		—			—			—			—			—
Stock-based compensation		—		—		—			4,047			—			—			—			4,047
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(a)		—		403		124			150,881			(55,981	)		264,980			33			360,440
Net income		—		—		—			—			—			86,438			—			86,438
Dividends paid on preferred stock		—		—		—			—			—			(70	)		—			(70	)
Conversion of 234,528 Class B shares to Class A shares		—		2		(2	)		—			—			—			—			—
Stock-based compensation		—		—		—			5,843			—			—			—			5,843
Purchase of common stock for treasury		—		—		—			—			(179	)		—			—			(179	)
Stock options exercised—174,813 shares of Class A and 9,427 shares of Class B		—		2		—			1,343			—			—			—			1,345
Excess income tax benefits from stock option exercises		—		—		—			1,376			—			—			—			1,376
Reimbursement payment received from CEO—45,531 shares of Class A Common Stock		—		—		—			—			—			—			—			—
Other comprehensive loss		—		—		—			—			—			—			(1,576	)		(1,576	)
Balance at March 31, 2008(a)		—		407		122			159,443			(56,160	)		351,348			(1,543	)		453,617
Net loss		—		—		—			—			—			(313,627	)		—			(313,627	)
Dividends paid on preferred stock		—		—		—			—			—			(70	)		—			(70	)
Conversion of 49,668 Class B shares to Class A shares		—		—		—			—			—			—			—			—
Stock-based compensation		—		—		—			3,506			—			—			—			3,506
Purchase of common stock for treasury		—		—		—			—			(889	)		—			—			(889	)
Stock options exercised—251,258 shares of Class A and 86,180 shares of Class B		—		4		—			2,478			—			—			—			2,482
Cumulative effect of change in accounting principle		—		—		—			—			—			(7,879	)		—			(7,879	)
Other comprehensive income		—		—		—			—			—			—			2,388			2,388
Balance at March 31, 2009	$	—	$	411	$	122		$	165,427		$	(57,049	)	$	29,772		$	845		$	139,528

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

See Accompanying Notes to Consolidated Financial Statements.

110

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years ended March 31,
	2009			2008(a)			2007(a)
Operating Activities:
Net income (loss)	$	(313,627	)	$	86,438		$	58,559
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Acquired in-process research and development		2,000			17,500			—
Cumulative effect of change in accounting principle		—			—			(1,976	)
Depreciation and amortization		35,876			32,374			23,412
Loss on property and equipment		2,928			384			1,025
Impairment of intangible assets		36,618			1,140			—
Loss on investment securities		9,434			—			—
Deferred income tax (benefit) provision		24,326			(7,047	)		7,772
Deferred compensation		(8,551	)		2,232			877
Stock-based compensation		3,506			5,843			4,047
Excess tax benefits associated with stock options		—			(1,376	)		(683	)
Other		—			—			270
Changes in operating assets and liabilities:
Receivables, net		109,540			(37,870	)		(28,820	)
Inventories		68,375			(3,000	)		(22,427	)
Income taxes		(77,540	)		(2,966	)		5,431
Accounts payable and accrued liabilities		83,700			35,548			15,310
Other assets and liabilities, net		21,140			(6,051	)		(2,833	)
Net cash provided by (used in) operating activities		(2,275	)		123,149			59,964
Investing Activities:
Purchase of property and equipment		(23,633	)		(24,159	)		(25,716	)
Purchase of marketable securities		(559	)		(125,426	)		(178,949	)
Sale of marketable securities		52,111			158,750			128,000
Purchase of preferred stock		—			—			(400	)
Product acquisitions		(2,000	)		(159,000	)		—
Cash paid for acquired assets, net of cash		(3,000	)		—			—
Net cash provided by (used in) investing activities		22,919			(149,835	)		(77,065	)
Financing Activities:
Principal payment on long-term debt		(2,624	)		(2,215	)		(1,652	)
Proceeds from borrowing on line of credit		—			50,000			—
Repayment of borrowing on line of credit		(30,000	)		(20,000	)		—
Dividends paid on preferred stock		(70	)		(70	)		(70	)
Purchase of common stock for treasury		(889	)		(179	)		(2,077	)
Excess tax benefits associated with stock options		—			1,376			683
Cash deposits received for stock options		746			1,514			4,264
Net cash provided by (used in) financing activities		(32,837	)		30,426			1,148
Effect of foreign exchange rate changes on cash		(570	)		—			—
Increase (decrease) in cash and cash equivalents		(12,763	)		3,740			(15,953	)
Cash and cash equivalents:
Beginning of year		88,493			84,753			100,706
End of year	$	75,730		$	88,493		$	84,753
Non-cash investing and financing activities:
Stock options exercised (at expiration of two-year forfeiture period)	$	2,478		$	1,345		$	3,620
Software financing arrangement		—			2,039			—

(a) This financial statement reflects the correction of certain immaterial errors, as fully described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

See Accompanying Notes to Consolidated Financial Statements.

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1. Description of Business

K-V Pharmaceutical Company was incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. K-V Pharmaceutical Company and its wholly-owned subsidiaries, including Ther-Rx Corporation (“Ther-Rx”), ETHEX Corporation (“ETHEX”) and Particle Dynamics, Inc. (“PDI”), are referred to in the following Notes to the Consolidated Financial Statements as “KV” or the “Company.” The Company has been engaged 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. It has developed and patented a wide variety of drug delivery and formulation technologies that are primarily focused in four principal areas: SITE RELEASE^®; tastemasking; oral controlled release; and oral quick dissolving tablets. KV incorporates these technologies in the products it markets to control and improve the absorption and utilization of active pharmaceutical compounds. In 1990, the Company established a generic, non-branded marketing capability through its wholly-owned subsidiary, ETHEX. In 1999, KV established a wholly-owned subsidiary, Ther-Rx, to market proprietary branded pharmaceuticals directly to physicians.

The Company’s wholly-owned subsidiary, PDI, was acquired in 1972. Through PDI, KV develops and markets specialty value-added raw materials, including drugs, directly compressible and microencapsulated products, and other products used in the pharmaceutical, industry and other markets.

During fiscal year 2009, the Company announced six separate voluntary recalls of certain tablet form generic products as a precaution due to the potential existence of oversized tablets. In December 2008, the U.S. Food and Drug Administration (the “FDA”) began an inspection of the Company’s facilities. The Company suspended shipments of all approved tablet-form products in December 2008 and of all other drug products in January 2009. Also, in January 2009, the Company initiated a nationwide voluntary recall affecting most of its products. In March 2009, the Company entered into a consent decree with the FDA regarding its drug manufacturing and distribution. As part of the consent decree, the Company has agreed not to directly or indirectly do or cause the manufacture, processing, packing, labeling, holding, introduction or delivery for introduction into interstate commerce at or from any of its facilities of any drug, until it has satisfied certain requirements designed to demonstrate compliance with the FDA’s regulations. These actions and the requirements under the consent decree have had, and are expected to continue to have, a material adverse effect on the Company’s liquidity position and its results of operations. The Company does not expect to generate any significant revenues until it resumes shipping certain or many of its approved products (see Note 3—“Going Concern and Liquidity Considerations”).

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. Certain reclassifications, none of which affected net income or retained earnings, have been made to prior year amounts to conform to the current year presentation.

As a result of the decision by the Company to sell PDI, the Company has identified the assets and liabilities of PDI as held for sale in the Company’s consolidated balance sheet at March 31, 2009 and has segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented.

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

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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 and other long-lived 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.

Correction of Immaterial Errors

In accordance with the guidance of Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”) and Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the accompanying fiscal year 2008 and 2007 consolidated financial statements reflect the correction of immaterial errors related to the following: reserves for chargebacks, inventory variances, R&D raw material inventory, and property and equipment. A summary and discussion of the adjustments recorded to revise the Company’s previously issued consolidated financial statements are contained in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

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.

Investment Securities

The Company’s investment securities consist of mutual funds comprised of U.S. government guaranteed investments and auction rate securities (“ARS”). The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires certain securities to be categorized as trading, available-for-sale or held-to-maturity. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, recorded within other comprehensive income (loss) as a separate component of shareholders’ equity. The Company has no trading or held-to-maturity securities. The cost of investment securities sold is determined by the specific identification method. Dividend and interest income are accrued as earned. The Company reviews its investments quarterly for declines in fair value that are other-than-temporary. Investments that have declined in market value that are determined to be other-than-temporary are charged to other income (expense), net, by writing that investment down to fair value.

ARS 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 the ability to liquidate them through a Dutch auction process that occurs at pre-determined intervals of up to 35 days. The Company classified these securities as non-current investment securities at March 31, 2009 and 2008 to reflect the current lack of liquidity in these investments (see Note 7—“Investment Securities”). See Note 26—“Subsequent Events” for information regarding a settlement agreement the Company entered into regarding its holdings of ARS and the proceeds received in connection therewith.

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

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

for obsolete, excess or slow-moving inventory are established by management based on evaluation of inventory levels, forecasted demand and market conditions.

Inventories also include costs related to certain products that are pending regulatory approval. From time to time, the Company capitalizes inventory costs associated with products prior to regulatory approval based on management’s judgment of probable future regulatory approval, commercial success and realizable value. Such judgment incorporates the Company’s knowledge and best estimate of where the product is in the regulatory review process, the Company’s required investment in the product, market conditions, competing products and the Company’s economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. If final regulatory approval for such products is denied or delayed, the Company revises its estimates and judgments about the recoverability of the capitalized costs and, where required, provides reserves for such inventory in the period those estimates and judgments change.

During fiscal year 2009, the Company announced six separate voluntary recalls of certain tablet-form generic products as a precaution due to the potential existence of oversized tablets. Beginning in December 2008, the Company determined that it was not able to establish the recoverability of production related inventory costs because of uncertainties associated with the risk of additional product recalls. As a result, production and overhead costs were recognized directly into cost of sales rather than capitalized into inventory.

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.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived 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. Because of the product recalls, shipment suspension and the consent decree entered into with the FDA, asset groups were reviewed for recoverability by comparing the assets’ carrying amounts to undiscounted expected future cash flows. Carrying values were determined to be fully recoverable, and no impairment loss was recognized. The recoverability analysis reflected the terms of the consent decree entered into with the FDA and the current expectation of when the Company will return to market certain or many of its approved products.

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 ranging from 9 to 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

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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. Because of the product recalls, the suspension of shipments and the consent decree entered into with the FDA, the Company completed an evaluation of each of its intangible assets. Based upon management’s analysis, it was determined that certain intangible assets were impaired. (See Note 11—“Intangible Assets and Goodwill.”)

In accordance with 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.

Non-marketable Equity Investments

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 the cost method. Such investments are included in “Other assets” in the accompanying consolidated balance sheets and relate primarily to the Company’s $9,408 investment at March 31, 2009 in the preferred stock of Strides Arcolab Limited.

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, the customer’s payment ability has been reasonably assured, title and risk of ownership have been transferred to the customer, and the seller’s price to the buyer is fixed or reasonably determinable. The Company also enters into long-term agreements under which it assigns marketing rights for products it has developed to pharmaceutical markets. Royalties under these arrangements are earned based on the sale of products.

Beginning in December 2008, the Company determined it was not able to reasonably estimate future product returns at the time its drug products were shipped because of uncertainties associated with the risk of additional product recalls. As a result, revenue on shipments of its drug products was deferred until such uncertainties were resolved, which occurred on the earlier of the consumption by the end user or when these products were no longer subject to recall.

Product shipments that are recorded as deferred revenue are reflected as a current liability on the consolidated balance sheet. For shipments where revenue recognition is deferred, the Company records revenue when the uncertainties leading to deferral are resolved. Since the Company suspended all shipments of its approved drug products in tablet form in December 2008 and suspended the manufacturing and shipment of the remainder of its products in January 2009, the product recall became probable and estimable in the quarter ended March 31, 2009. Thus, the Company determined that the uncertainties leading to deferral were resolved, and it did not have any deferred revenue recorded on its consolidated balance sheet at March 31, 2009.

Concurrently with the recognition or deferral of revenue, the Company records estimated provisions for product returns, sales rebates, payment discounts, chargebacks, and other sales allowances. When the occurrence

115

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

of product recalls becomes probable, the Company also records estimated liabilities for product returns related to recalls. The Company records failure to supply claims when they are probable and reasonably estimable. 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 and failure to supply arrangements, current contract sales terms with wholesale and indirect customers, and subsequent payment activity. The following briefly describes each provision and how such provisions are estimated.

• Cash Discounts—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—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.

• Sales Revenues—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.

• Chargebacks—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. Provisions for estimated chargebacks are calculated primarily using historical chargeback experience, actual contract pricing, estimated and actual wholesaler inventory levels, and subsequent payment activity.

• Price Protection—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.

• Medicaid Rebates—Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its pharmaceuticals that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program. The provision for Medicaid rebates is based

116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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.

• Product Recall Returns—Liabilities for product returns related to recalls are based on estimated and actual customer inventory levels at the time of the recall and actual contract pricing.

• Failure to Supply—The Company has entered into purchase agreements with certain customers that include a provision whereby the Company is required to reimburse these customers for price differences on product orders that the Company is unable to fulfill. Based on the nature of this contractual term, the Company is able to estimate provisions for supply failures based on the specific terms in each agreement.

Actual product returns, chargebacks and other sales allowances incurred are dependent upon future events and may be different from 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.

The provisions discussed above are presented in the consolidated financial statements as reductions to gross revenues or deferred revenue and a decrease to accounts receivable or an increase to accrued liabilities. Provisions totaled $292,645, $240,573 and $150,646 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

The reserve balances related to the provisions are included in “Receivables, less allowance for doubtful accounts” or “Accrued liabilities” in the accompanying consolidated balance sheets. A summary of fiscal year 2009 changes for each reserve or liability follows:

	Beginning Balance		Additions		Reductions			Ending Balance
	(in thousands)
Year Ended March 31, 2009
Accounts Receivable Reserves:
Chargebacks	$	18,103	$	145,043	$	(160,302	)	$	2,844
Cash discounts and other allowances		3,848		13,606		(16,419	)		1,035
Liabilities:
Sales rebates		12,585		48,347		(52,668	)		8,264
Sales returns		3,950		21,965		(13,906	)		12,009
Medicaid rebates		7,953		11,220		(12,861	)		6,312
Medicare and Medicaid restitution		—		2,275		—			2,275
Product recall returns		346		54,295		(13,946	)		40,695
Failure to supply claims		—		21,798		(4,697	)		17,101
Other		6,120		26,341		(29,506	)		2,955
Total	$	52,905	$	344,890	$	(304,305	)	$	93,490

Beginning in December 2008, accruals for returns related to product recalls were recorded as an addition to the liability for product recall returns and a reduction to deferred revenue. In January 2009, the Company initiated a nationwide recall that affected most of its drug products. As a result, the liability for product recall returns was increased and deferred revenue decreased by $52,245.

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Concentration of Credit Risk

The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the U.S. 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 32.7%, 18.8% and 17.1%, and 31.0%, 28.6% and 9.0% of gross receivables at March 31, 2009 and 2008, respectively.

For the fiscal year ended March 31, 2009, the Company’s three largest customers accounted for 26.9%, 26.5% and 10.4% of gross revenues. For the fiscal years ended March 31, 2008 and 2007, the Company’s three largest customers accounted for gross revenues of 23.9%, 24.6% and 9.8% and 25.7%, 21.1% and 14.4%, respectively.

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

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 $33,347, $27,487 and $21,875

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

for the years ended March 31, 2009, 2008 and 2007, respectively. Advertising expense includes the cost of product samples given to physicians.

Litigation

The Company is subject to litigation in the ordinary course of business and to certain other contingencies (see Note 16—“Commitments and Contingencies”). 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 estimable.

Deferred Financing Costs

Deferred financing costs of $5,835 were incurred in connection with the issuance of convertible debt (see Note 14—“Long-Term Debt”). These costs were being amortized into interest expense on a straight-line basis over the five-year period that ended on May 16, 2008, the first date the debt was puttable by the holders to the Company. Accumulated amortization totaled $5,835 and $5,635 at March 31, 2009 and 2008, respectively. Deferred financing costs, net of accumulated amortization, are included in “Other Assets” in the accompanying consolidated balance sheets.

Earnings Per Share

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

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

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

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 amount of existing assets and liabilities and the respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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 evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include historical cumulative losses, the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company accounts for uncertain tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

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.

Comprehensive Income (Loss)

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 and the foreign currency translation adjustments recorded as result of translating Nesher Solutions, Ltd. transactions from Israeli shekels to U.S. dollars.

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 arrangement. 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

120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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.

Based on a valuation analysis, the Company’s investments in ARS of $72,800 had a fair value of $65,971 at March 31, 2009 (see Note 8—“Fair Value Measures”). The Company’s investment in the preferred stock of Strides Arcolab Limited of $11,892, including accrued but unpaid dividends, had a fair value of $11,592 at March 31, 2009 based on a valuation analysis. Based on quoted market rates, the Company’s convertible debt had a fair value of $54,000 and $228,360 at March 31, 2009 and 2008, respectively. The carrying amount of the mortgage loan arrangement 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, 2009, 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).

Foreign Currency

For the Company’s sole foreign operating entity, Nesher Solutions, Ltd. (see Note 6—“Acquisitions”), the local currency is the functional currency. The Company translates asset and liability balances at exchange rates in effect at the end of the period and income and expense transactions at the average exchange rates in effect during the period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income included in shareholders’ equity. Gains and losses from foreign currency transactions are included in the consolidated statements of operations. The amount of foreign currency gains (losses) included in the Company’s consolidated statement of operations was $(2,584), $878 and $354 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

SFAS No. 95, “Statement of Cash Flows” requires that the effect of exchange rate changes on cash held in foreign currencies be reported as a separate item in the reconciliation of beginning and ending cash and cash equivalents. All other foreign currency cash flows are reported in the applicable line of the consolidated statement of cash flows using an approximation of the exchange rate in effect at the time of the cash flows.

New Accounting Pronouncements

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

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which defers the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at

121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

fair value in the financial statements on at least an annual basis, to fiscal years beginning after November 15, 2008. The Company has adopted the deferral of SFAS 157 with respect to the items listed in FSP 157-2. The Company does not expect that the remaining provisions of this statement will have a material effect on its financial statements.

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

In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“Issue 06-10”). Issue 06-10 requires companies with collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods to recognize a liability for future benefits based on the substantive agreement with the employee. The provisions of Issue 06-10 also require an employer to recognize and measure the asset in a collateral assignment split-dollar life insurance arrangement based on the nature and substance of the arrangement. The Company adopted the provisions of Issue 06-10 effective April 1, 2008. As a result of the adoption, the Company recognized a liability of $5,551 which represented the present value of the future premium payments to be made under the existing policies. The Company also recognized a decrease in the related asset of $2,328 based on the nature and substance of the arrangements. In accordance with the transition provisions of EITF No. 06-10, a direct decrease of $7,879 was recorded to retained earnings, effective April 1, 2008.

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

In September 2007, the EITF reached a consensus on Issue No. 07-1 (“Issue 07-1”), “Accounting for Collaborative Arrangements.” The scope of Issue 07-1 is limited to collaborative arrangements where no separate legal entity exists and in which the parties are active participants and are exposed to significant risks and rewards that depend on the success of the activity. The EITF concluded that revenue transactions with third parties and associated costs incurred should be reported in the appropriate line item in each company’s financial statements pursuant to the guidance in Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The EITF also concluded that the equity method of accounting under Accounting Principles Board Opinion 18, “The Equity Method of Accounting for Investments in Common Stock,” should not be applied to arrangements that are not conducted through a separate legal entity. The EITF also concluded that the income statement classification of payments made between the parties in an arrangement should be based on a consideration of the following factors: the nature and terms of the arrangement; the nature of the entities’ operations; and whether the partners’

122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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 year 2010 and is evaluating the impact of the adoption of Issue 07-1 on its financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141 but retains the fundamental concept of purchase method of accounting in a business combination and improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and any non-controlling interest at the acquisition date at their fair value as of that date. This statement requires measuring a non-controlling interest in the acquiree at fair value which will result in recognizing the goodwill attributable to the non-controlling interest in addition to that attributable to the acquirer. This statement also requires the recognition of assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition date fair values. In April 2009, the FASB issued FSP FAS 141(R)-1 to further clarify the guidance provided by SFAS 141(R) on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and earlier adoption is prohibited. The Company plans to adopt SFAS 141(R) at the beginning of fiscal year 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 them to 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 year 2010 and is evaluating the impact of SFAS 160 on its financial condition and results of operations.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” Under the new rules for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity is required to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the new rules is that the equity component is included in the paid-in capital section of shareholders’ equity on an entity’s consolidated balance sheet and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of convertible debt. The FSP is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. Early adoption is not permitted. The Company is currently evaluating the new rules and the impact on its financial condition and results of operations.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal

123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” and also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact the adoption of FSP 142-3 will have on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification^™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP). This is accomplished by authorizing the Codification to become the single source of authoritative U.S. accounting and reporting standards, except for rules and interpretive releases of the Securities and Exchange Commission (the “SEC”) under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification is now non-authoritative. SFAS No. 168 is effective for fiscal years, and interim periods within those fiscal years, beginning after September 15, 2009. The Company is in the process of analyzing the impact of this standard on future filings, which will be adopted by the Company at the beginning of the third quarter of fiscal year 2010.

3. Going Concern and Liquidity Considerations

The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The accompanying historical consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The assessment of the Company’s ability to continue as a going concern was made by management considering, among other factors: (i) the Company’s need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by the Company and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies”; and (v) the Company’s ability to comply with debt covenants. The Company’s assessment was further affected by the Company’s fiscal year 2009 net loss of $313,627 and the outstanding balance of cash, cash equivalents and short-term marketable securities of $75,730 as of March 31, 2009. For periods subsequent to March 31, 2009, the Company expects losses to continue because the Company is unable to generate any significant revenues from its own manufactured products until the Company is able to resume shipping certain or many of its approved products. In addition, the Company must meet ongoing operating costs as well as costs related to the steps the Company is currently taking to prepare for reintroducing its approved products to the market. If the Company is not able to obtain the FDA’s clearance to resume manufacturing and distribution of its approved products in a timely manner and at a reasonable cost, the Company’s financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company believes that it is not in compliance with one or more of the requirements of the Company’s mortgage loan arrangement as of March 31, 2009 (see Note 14—“Long-Term Debt”). Failure by the Company to comply with the requirements of the mortgage loan arrangement or to otherwise receive a waiver from the mortgage lender for any noncompliance could result in the Company’s outstanding mortgage debt obligation

124

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

accelerating and immediately becoming due and payable. If the acceleration occurs and the mortgage debt is not immediately paid in full an event of default could also be deemed to have occurred under the $200,000 principal amount of 2.5% Contingent Convertible Subordinated Notes (the “Notes”). If an event of default is deemed to have occurred on the Notes, the principal amount plus any accrued and unpaid interest could also become immediately due and payable. The acceleration of these outstanding debt obligations would materially adversely affect the Company’s business, financial condition and cash flows.

Based on current financial projections, the Company believes the continuation of the Company as a going concern is primarily dependent on its ability to address, among other factors: (i) the Company’s need to obtain additional capital; (ii) the suspension of shipment of all products manufactured by the Company and the requirements under the consent decree with the FDA; (iii) the timing and number of approved products that will be reintroduced to the market and the related costs; (iv) the potential outcome with respect to the governmental inquiries, litigation or other matters described in Note 16—“Commitments and Contingencies”; and (v) the Company’s ability to comply with debt covenants. While the Company addresses these matters, it must continue to meet expected near-term obligations, including normal course operating cash requirements and costs associated with reintroducing its approved products to the market (such as costs related to its employees, facilities and FDA compliance), remaining payments associated with the acquisition of the rights to Gestiva™ (see Note 6—“Acquisitions” and Note 26—“Subsequent Events”), the financial obligations pursuant to the plea agreement with the U.S. Department of Justice (see Note 26—“Subsequent Events”), as well as the significant costs, such as legal and consulting fees, associated with the steps taken by the Company in connection with the consent decree and the litigation and governmental inquiries described in Note 16—“Commitments and Contingencies”. If the Company is not able to obtain the FDA’s clearance to resume manufacturing and distribution of its approved products in a timely manner and at a reasonable cost, and/or if the Company experiences adverse outcomes with respect to any of the governmental inquiries or litigation described in Note 16—“Commitments and Contingencies”, the Company’s financial position, results of operations, cash flows and liquidity will continue to be materially adversely affected.

In the near term, the Company is focused on meeting the requirements of the consent decree, which will allow its approved products to be reintroduced to the market, and is pursuing various means to increase cash. Since March 31, 2009 the Company has generated non-recurring cash proceeds to support its on-going operating and compliance requirement from the receipt of tax refunds, the monetization of its ARS and the sale of certain other assets (see Note 26—“Subsequent Events” for more information regarding the cash received). The Company also generated cash from the sale of certain products not manufactured by the Company under the distribution and supply agreement with Purdue (see Note 16—“Commitments and Contingencies”). While these cash proceeds were sufficient to meet near term cash requirements, the Company is pursuing ongoing efforts to increase cash including the continued implementation of cost savings, divestiture of PDI and other assets and the return of certain or many of the Company’s approved products to market in a timely manner. In addition, in order to continue to meet the expected near-term obligations described above, the Company will still need to obtain additional capital through additional asset sales. Based on the Company’s continuing assessment and identification of assets for future sale and the results of the currently proposed asset sales, the Company may elect to engage in external financing efforts. The Company currently does not anticipate issuing equity securities to raise additional capital. However, the Company continues to evaluate its capital needs and availability of financing to assess and identify the best available external financing alternatives. The Company cannot provide assurance that it will be able to realize the cost reductions it anticipates from reducing its operations or its employee base, that some or many of its approved products can be returned to the market in a timely manner, that its higher profit approved products will return to the market in the near term, that the Company can obtain additional cash through asset sales, or that external financing can be obtained when needed, under acceptable terms or in the amounts required. If the Company is unsuccessful in its efforts to sell assets and raise additional

125

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

capital in the near term, the Company will be required to further reduce its operations, including further reductions of its employee base, or the Company may be required to cease operations in order to offset the lack of available funding.

The Company’s ability to obtain capital has been and continues to be materially and negatively affected by a number of factors. The current and evolving credit market condition and general adverse economic conditions have caused the cost of prospective debt and equity financings to increase considerably. These circumstances have materially adversely affected liquidity in the financial markets, making terms for certain financings unattractive, and in some cases have resulted in the unavailability of financing. The Company also anticipates that the uncertainty created by the ongoing governmental inquiries and litigation, steps taken by the Company in connection with the nationwide recall and suspension of shipment of all drug products manufactured by the Company, the consent decree and the uncertainty with respect to when it will resume shipment of its products, if at all, will affect the Company’s ability to obtain capital on a timely basis, or at all. In light of the factors described above, the Company may not be able to obtain additional capital. Even if it is able to obtain additional financing or issue debt securities under these circumstances, the cost to the Company likely will be high and the terms and conditions are likely to be onerous. In addition, if the Company were to issue equity securities, such securities likely would be priced at or below the current market price for the Company’s securities. As a result, sales of equity securities at or below current market prices likely would result in substantial dilution for current shareholders who purchased the Company’s equity securities at or above current market prices.

4. Correction of Immaterial Errors in Prior Period Consolidated Financial Statements

The Company has determined that certain of its previously filed financial statements contained certain errors. In order to assess materiality with respect to these errors, it applied the concepts set forth in SAB 99 and SAB 108 and determined that the impact of these errors on prior period consolidated financial statements was immaterial. Accordingly, the accompanying consolidated balance sheet as of March 31, 2008 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the fiscal years ended March 31, 2008 and 2007 reflect the correction of these immaterial errors. The accompanying notes have also been revised as necessary. The impact of correcting these immaterial errors resulted in a reduction of net revenues, operating income and income from continuing operations of $6,253, $4,347 and $1,916, respectively, for the fiscal year ended March 31, 2008 and an increase in operating income and income from continuing operations of $224 and $469, respectively, and a decrease in net revenues of $1,883 for the fiscal year ended March 31, 2007. The Company’s consolidated retained earnings as of March 31, 2006 reflects a decrease of $4,919 to correct all of the errors identified in the prior period consolidated financial statements.

The following is a description of the areas in which corrections of these immaterial errors were made.

• Reserve for chargebacks:  The Company conducted a comprehensive review of the accounting method used to estimate the reserve for chargebacks. The review determined that a customer deposit was inappropriately applied in prior periods as an offset to the estimated chargeback reserve requirement. The identification of this and other immaterial errors resulted in revisions to prior period consolidated financial statements that impacted receivables and net revenues.

• Inventory variances:  In prior periods, the Company did not appropriately capitalize production related inventory variances. For fiscal year 2009, the Company corrected the error by transferring all production related variances to inventory and then recognizing them into cost of sales based on average inventory turns. The revisions to prior period consolidated financial statements resulted in corrections to inventory and cost of sales.

126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

• R&D raw material inventory:  In prior periods, the Company did not appropriately record costs for materials used in research and development activities and incorrectly capitalized materials that should have been expensed. The Company identified revisions to prior period consolidated financial statements that generally decreased inventory and increased research and development expense for raw materials that did not meet the criteria for capitalization.

• Stock-based compensation:  The Company determined that its calculation of stock-based compensation for options issued to retiree eligible employees was not correct. As a result, the Company identified revisions to prior period consolidated financial statements that resulted in decreases to both stock-based compensation and additional paid-in capital. Also, the Company determined that its calculation of stock-based compensation for options issued to employees who ceased being employees of the Company and instead worked for the Company as consultants during fiscal year 2008 was not correct. As a result, the Company recorded an adjustment to the fiscal year 2008 consolidated financial statements to decrease stock-based compensation and additional paid-in capital.

• Property and equipment:  The Company determined that its policies and procedures were inadequate to ensure that maintenance and repairs of equipment were expensed as incurred, all asset costs were appropriately capitalized, depreciation expense was appropriately calculated and that the selection of useful lives of property and equipment was appropriately and consistently applied. As a result, the Company identified revisions to prior period consolidated financial statements that generally resulted in decreases to property and equipment, net and increases to both cost of sales and selling and administrative expense.

• Software financing arrangement:  The Company determined that an agreement to purchase various software licenses and products by means of a third party financing arrangement was not recorded. The Company has corrected this error by capitalizing the assets purchased and amortizing them over the service life. The Company also has recorded the corresponding liability with the financing company as debt that matures in fiscal year 2012 and recognized interest expense thereon.

• Other:  The Company identified certain other immaterial errors not applicable to the above categories that resulted in revisions to prior period consolidated financial statements.

• Income taxes:  Income tax adjustments were recorded to correct the Company’s income tax expense and the applicable income tax liabilities for the impact of the immaterial errors discussed above and other immaterial errors detected in the tax provision calculation.

127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The combined effect of recording the correction of the immaterial errors on the consolidated balance sheet at March 31, 2008 is presented in the following table:

	2008
	As Reported		As Revised
Cash and cash equivalents	$	86,345	$	88,493
Receivables, net		107,070		131,776
Inventories, net		94,980		94,330
Prepaid and other assets		7,792		8,366
Income taxes receivable		9,872		11,015
Deferred tax asset		22,812		24,122
Total current assets		369,419		398,650
Property and equipment, net		196,200		187,492
Other assets		23,108		24,005
Total assets		869,027		890,447
Accounts payable		32,119		32,020
Accrued liabilities		46,516		73,996
Current maturities of long-term debt		202,020		202,499
Total current liabilities		280,655		308,515
Long-term debt		67,432		68,674
Other long-term liabilities		22,359		22,519
Deferred tax liability		39,299		37,122
Total liabilities		409,745		436,830
Additional paid-in capital		158,742		159,443
Retained earnings		357,714		351,348
Total shareholders’ equity		459,282		453,617
Total liabilities and shareholders’ equity		869,027		890,447

128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The combined effect of recording the correction of the immaterial errors in the Company’s consolidated statements of operations for the fiscal years ended March 31, 2008 and 2007 is presented in the following tables:

	2008
	As Reported		As Reported Excluding Discontinued Operation		As Revised
Net revenues	$	601,896	$	583,876	$	577,623
Cost of sales		186,555		175,692		174,987
Gross profit		415,341		408,184		402,636
Research and development expense		46,634		46,457		48,873
Selling and administrative expense		208,206		207,112		203,495
Operating income		130,370		124,484		120,137
Interest expense		10,353		10,353		10,463
Interest and other income		11,646		11,646		12,524
Income from continuing operations before income taxes		131,663		125,777		122,198
Provision for income taxes		43,309		41,268		39,605
Income from continuing operations		88,354		84,509		82,593
Net income		88,354		84,509		86,438
Earnings per share:
Basic—Class A common	$	1.87	$	1.78	$	1.75
Basic—Class B common		1.55		1.49		1.45
Diluted—Class A common		1.57		1.50		1.47
Diluted—Class B common		1.35		1.30		1.27
	2007
	As Reported		As Reported Excluding Discontinued Operation		As Revised
Net revenues	$	443,627	$	426,190	$	424,307
Cost of sales		147,263		135,818		133,047
Gross profit		296,364		290,372		291,260
Research and development expense		31,462		30,400		31,638
Selling and administrative expense		174,344		172,197		171,623
Operating income		88,156		85,373		85,597
Interest and other income		9,901		9,901		10,255
Income from continuing operations before income taxes		89,072		86,289		86,867
Provision for income taxes		32,958		32,112		32,221
Income from continuing operations		56,114		54,177		54,646
Net income		58,090		56,153		58,559
Earnings per share:
Basic—Class A common	$	1.19	$	1.15	$	1.16
Basic—Class B common		0.99		0.96		0.96
Diluted—Class A common		1.02		0.98		0.99
Diluted—Class B common		0.88		0.85		0.86

129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The combined effect of recording the correction of the immaterial errors in the Company’s consolidated statements of cash flows for the fiscal years ended March 31, 2008 and 2007 is presented in the following table:

	2008						2007
	As Reported			As Revised			As Reported			As Revised
Net income	$	88,354		$	86,438		$	58,090		$	58,559
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,120			32,374			22,388			23,412
Loss on property and equipment		—			384			—			1,025
Deferred income tax provision		(6,308	)		(7,047	)		7,698			7,772
Stock-based compensation		5,205			5,843			3,984			4,047
Changes in operating assets and liabilities:
Receivables, net		(28,436	)		(37,870	)		(25,063	)		(28,820	)
Inventories, net		(3,465	)		(3,000	)		(20,349	)		(22,427	)
Income taxes		(1,622	)		(2,966	)		2,413			5,431
Accounts payable and accrued liabilities		24,157			35,548			12,257			15,310
Other assets and liabilities, net		(6,443	)		(6,051	)		(2,771	)		(2,833	)
Net cash provided by operating activities		122,358			123,149			57,135			59,964
Purchase of property and equipment, net		(23,656	)		(24,159	)		(25,066	)		(25,716	)
Net cash used in investing activities		(149,332	)		(149,835	)		(76,415	)		(77,065	)
Principal payments on long-term debt		(1,896	)		(2,215	)		(1,652	)		(1,652	)
Net cash provided by financing activities		30,745			30,426			1,148			1,148
Increase (decrease) in cash and cash equivalents		3,771			3,740			(18,132	)		(15,953	)
Cash and cash equivalents:
Beginning of year		82,574			84,753			100,706			100,706
End of year		86,345			88,493			82,574			84,753

5. Discontinued Operations

In March 2009, because of liquidity concerns and the Company’s expected near-term cash requirements, the Company’s Board approved management’s decision to market PDI for sale. PDI, a wholly owned subsidiary of the Company, develops and markets specialty value-added raw materials, including drugs, directly compressible and microencapsulated products, and other products used in the pharmaceutical industry and other markets. As a result of the decision to sell PDI, the Company has identified the assets and liabilities of PDI as held for sale at March 31, 2009 and has segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented.

The tables below reflect the operating results of PDI for the fiscal years ended March 31, 2009, 2008, and 2007 and its net assets as of March 31, 2009.

130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Operating Results

	Years ended March 31,
	2009		2008		2007
Net revenues	$	20,657	$	18,020	$	17,437
Cost of sales		11,969		10,863		11,445
Gross profit		8,688		7,157		5,992
Operating expenses:
Research and development		36		177		1,062
Selling and administrative		786		1,094		2,147
Total operating expenses		822		1,271		3,209
Operating income		7,866		5,886		2,783
Provision for income taxes		2,899		2,041		846
Net income	$	4,967	$	3,845	$	1,937

Net Assets

	March 31, 2009
Cash and cash equivalents	$	—
Receivables		3,001
Inventories, net		3,769
Total current assets held for sale		6,770
Property and equipment, less accumulated depreciation		1,060
Intangible assets and goodwill, net		557
Total assets held for sale	$	8,387
Accounts payable	$	567
Total liabilities associated with assets held for sale	$	567

6. Acquisitions

In September 2008, the Company acquired assets from the pharmaceutical division of LycoRed Natural Products Industries Ltd. (“LycoRed”), an Israeli company. Under the terms of the asset purchase agreement, the Company paid $3,000 for tangible assets and an assembled workforce. The acquirer of these assets is Nesher Solutions, Ltd., an Israeli entity that is 100% owned by Nesher Solutions USA, Inc., a wholly-owned KV company. The purpose of the acquisition was to expand the Company’s expertise in the area of controlled-release products as well as enhance its generic pipeline development capacity. The results of operations are included in the consolidated statement of operations since the date of acquisition.

The Company on January 16, 2008, entered into an Asset Purchase Agreement (the “Original Gestiva Agreement”) with Cytyc Prenatal Products Corp. and Hologic, Inc. (Cytyc Prenatal Products Corp. and Hologic, Inc. are referred to collectively as “Hologic”). On January 8, 2010, the Company and Hologic entered into an Amendment (the “Gestiva Amendment”) to the Original Gestiva Agreement.

131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The Original Gestiva Agreement provided for, among other things, the following:

• The Company would acquire the U.S. and worldwide rights to Gestiva™ (17-alpha hydroxyprogesterone caproate) and certain related assets (the “Purchased Assets”) upon approval of the pending New Drug Application for Gestiva™ (the “Gestiva NDA”) under review by the FDA.

• The Purchased Assets would be transferred and sold to the Company free and clear of all encumbrances on the transfer date (the “Transfer Date”), which is to occur no later than five business days after the satisfaction of certain conditions, including, among other things, (1) the approval of the Gestiva NDA by the FDA (as more fully described in the Original Gestiva Agreement) and (2) the delivery by the Company of the Additional Purchase Price Amount (as defined below). As previously disclosed by the Company, the FDA has not yet approved the Gestiva NDA and the Transfer Date has not yet occurred.

• The Company agreed to pay Hologic a total of $82,000 for the Purchased Assets, in the following increments:

• A $7,500 cash payment (the “Initial Purchase Price”) on the initial closing date. The Company made such payment in February 2008.

• A $2,000 cash payment (the “NDA Milestone Payment”) upon receipt by Hologic of an acknowledgement from the FDA that Hologic’s response to the FDA’s October 20, 2006 “approvable” letter was sufficient for the FDA to proceed with its review of the Gestiva NDA. The Company made such payment in May 2008.

• A $72,500 cash payment (the “Additional Purchase Price Amount”) to be paid on the Transfer Date.

• The Company and Hologic each had the right to terminate the Original Gestiva Agreement in the event that the Transfer Date did not occur by February 19, 2010, the second anniversary of the initial closing date (the “February 2010 Termination Right”).

The following is a description of the material terms by which the Gestiva Amendment modifies the Original Gestiva Agreement (as amended, the “Amended Gestiva Agreement”):

• Hologic is no longer entitled to receive the Additional Purchase Price Amount. Instead, the Company agrees to pay the following:

• A $70,000 cash payment (the “Amendment Payment”) upon execution of the Gestiva Amendment. The Company made such payment on January 8, 2010.

• Upon successful completion of agreed upon milestones, a series of additional future scheduled cash payments in the aggregate amount of $120,000, the first of which payments is due on the Transfer Date (which will occur after, among other things, the FDA approves the Gestiva NDA) and the last of which payments is due no later than 21 months after the FDA approves the Gestiva NDA, provided that the Transfer Date has already occurred. The Company has the right to prepay any such amounts at any time. In addition, if the Company is unable to obtain sufficient quantities of Gestiva™ for a period of time (not to exceed 12 months) under certain specified circumstances set forth in the Amended Gestiva Agreement, then the due date of the next following scheduled cash payment will be delayed for such period of time. The date on which the Company makes the final cash payment is referred to as the “Final Payment Date.”

• If, prior to the Final Payment Date, the Company fails to timely pay a scheduled payment, the Company is obligated to transfer back to Hologic ownership of the Purchased Assets, including certain improvements made thereto by the Company, as well as other after-acquired assets and rights used by the Company in connection with the Gestiva™ business (the “Retransfer”). Certain liabilities

132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

associated with the foregoing are to be transferred to Hologic in connection with any Retransfer, subject to Hologic’s rights to reject the assumption of certain liabilities.

• The termination provisions set forth in the Original Gestiva Agreement have been modified to include the following to the existing termination rights set forth in the Original Gestiva Agreement:

• The February 2010 Termination Right has been eliminated.

• Hologic has the right to terminate the Amended Gestiva Agreement if the Company fails to deliver the cash payment due on the Transfer Date (as described above) within 10 days of receipt of notice from the Seller that all conditions related to the Transfer Date have been met.

Hologic informed the Company in January 2009 that the FDA, in a complete response letter, (1) indicated it would not approve Gestiva^™ until additional data and information are submitted to and accepted by the FDA and (2) requested Hologic to initiate a confirmatory clinical study and enroll a certain number of patients. The Company currently is working with Hologic to achieve the required patient enrollment and to submit the additional data and information in order to obtain FDA approval of the Gestiva NDA.

In May 2007, the Company acquired the U.S. marketing rights to Evamist^™, a transdermal estrogen therapy from VIVUS, Inc. Under the terms of the asset purchase agreement for Evamist^™, the Company paid $10,000 in cash at closing and agreed to make an additional cash payment of $141,500 upon final approval of the product by the FDA. The agreement also provides for two future payments upon achievement of certain net sales milestones. If Evamist^™ achieves $100,000 of net sales in a fiscal year, a one-time payment of $10,000 will be made, and if net sales levels reach $200,000 in a fiscal year, a one-time payment of up to $20,000 will be made. Because the product had not obtained FDA approval when the initial payment was made at closing, the Company recorded $10,000 of in-process research and development expense during the year ended March 31, 2008. In July 2007, FDA approval for Evamist^™ was received and a payment of $141,500 was made to VIVUS, Inc. The final purchase price allocation completed during the fiscal year ended March 31, 2009 resulted in estimated identifiable intangible assets of $44,078 for product rights; $12,774 for trademark rights; $82,542 for rights under a sublicense agreement; and $2,106 for a covenant not to compete. Upon FDA approval in July 2007, the Company began amortizing the product rights, trademark rights and rights under the sublicense agreement over 15 years and the covenant not to compete over nine years.

7. Investment Securities

The carrying amount of available-for-sale securities and their approximate fair values at March 31, 2009 and 2008 were as follows.

	March 31, 2009
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Non-current auction rate securities	$	63,752		2,219		—		$	65,971
	March 31, 2008
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term marketable securities	$	40,538	$	10	$	—		$	40,548
Non-current auction rate securities		83,900		—		(2,384	)		81,516
Total	$	124,438	$	10	$	(2,384	)	$	122,064

133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The Company’s short-term marketable securities at March 31, 2008 were recorded at fair value based on quoted market prices using the specific identification method and consisted of mutual funds comprised of U.S. government investments. During the fiscal year ended March 31, 2009, a realized loss of $86 was recognized upon sale of these securities. For the fiscal year ended March 31, 2007, a realized loss of $270 was recognized when the Company determined that its unrealized loss on marketable 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 fiscal year ended March 31, 2008.

At March 31, 2009 and 2008, the Company also had $72,800 and $83,900, respectively, of principal invested in auction rate securities (“ARS”). These securities all have a maturity in excess of 10 years. The Company’s investments in ARS primarily represent interests in collateralized debt obligations supported by pools of student loans, the principal of which is guaranteed by the U.S. Government. ARS backed by student loans are viewed as having low default risk and therefore very low risk of credit downgrade. The ARS held by the Company are AAA rated securities with long-term nominal maturities for which the interest rates are reset through a Dutch auction process that occurs at pre-determined intervals of up to 35 days. The auctions historically have provided a liquid market for these securities.

ARS have historically been classified as short-term marketable securities in the Company’s consolidated balance sheet. With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at March 31, 2009 and 2008 experienced multiple failed auctions beginning in February 2008 as the amount of securities submitted for sale exceeded the amount of purchase orders. Accordingly, the $65,971 and $81,516 of ARS at March 31, 2009 and 2008, respectively, were classified as non-current assets and are included in the line item “Investment securities” in the accompanying Consolidated Balance Sheets.

In November 2008, the Company accepted a settlement offer from Bank of America for the $10,000 ARS held in an account with them. The Company’s acceptance of the offer from Bank of America entitled the Company to receive benefits from an enforceable settlement agreement which met the definition of a firm commitment (as defined in SFAS 133). The enforceability of the agreement resulted in a put option that the Company recognized as a free standing asset separate from the ARS. Upon acceptance of the offer from Bank of America, the Company recorded $1,335 as the fair value of the put option asset with a corresponding credit recognized in current-period earnings. Because the put option was a separate free standing asset, the related ARS continued to be accounted for separately in accordance with Statement 115. The Company had previously concluded that impairment on this security was temporary because of the Company’s positive intent and ability to hold this security until its forecasted recovery. However, upon exercise of the put option, this assertion was no longer valid for this security. As a result, the Company concluded that this security became other-than-temporarily impaired during November 2008 and recorded a loss of $1,335 into current period earnings.

On February 25, 2009, the Company initiated legal action against Citigroup Global Markets Inc. (“CGMI”), through which it acquired the ARS the Company held at that time, in the District Court for the Eastern District of Missouri. On January 21, 2010, the Company and CGMI entered into a Purchase and Release Agreement pursuant to which CGMI agreed to purchase the Company’s remaining ARS for an aggregate purchase price of approximately $61,707. The Company also received a two-year option (which expires on January 21, 2012) to reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further payments in the event any ARS are redeemed prior to the expiration of the option.

The Company faces significant liquidity concerns as discussed in Note 3—“Going Concern and Liquidity Considerations.” As a result, the Company determined it could no longer support its previous assertion that it had the ability to hold impaired securities until their forecasted recovery. Accordingly, the Company concluded that

134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

the ARS became other-than-temporarily impaired during December 2008 and recorded a loss of $9,122 into current period earnings. This adjustment reduced the carrying value of the ARS to $63,678 at December 31, 2008. During the quarter ended March 31, 2009, the Company recorded discount accretion of $74 on the ARS. The estimated fair value of the Company’s ARS holdings at March 31, 2009 was $65,971. The $2,219 difference in fair value of the ARS at March 31, 2009 compared to the corresponding carrying value was recorded in accumulated other comprehensive income as an unrealized gain of $1,415, net of tax. (See Note 26—“Subsequent Events.”)

The estimated fair value of the Company’s ARS holdings at March 31, 2008 was $81,516, which reflected a $2,384 difference from the principal value of $83,900. Although the ARS continued to pay interest according to their stated terms, the Company recorded an unrealized loss of $1,550, net of tax, as a reduction to shareholders’ equity in accumulated other comprehensive loss, reflecting adjustments to the ARS holdings that the Company concluded had a temporary decline in value.

The ARS are valued based on a discounted cash flow model that considers, among other factors, the time to work out the market disruption in the traditional trading mechanism, the stream of cash flows (coupons) earned until maturity, the prevailing risk free yield curve, credit spreads applicable to a portfolio of student loans with various tenures and ratings and an illiquidity premium. These factors were used in a Monte Carlo simulation based methodology to derive the estimated fair value of the ARS.

8. Fair Value Measures

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

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

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

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

135

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The following table presents the Company’s fair value hierarchy as of March 31, 2009 for those financial assets measured at fair value on a recurring basis:

	Fair Value Measurements at March 31, 2009
	Total		Level 1		Level 2		Level 3
Non-current ARS	$	65,971	$	—	$	—	$	65,971

The Company’s investments in non-current ARS primarily represent interests in collateralized debt obligations supported by pools of student loans, the principal of which is guaranteed by the U.S. Government. The ARS held by the Company are AAA-rated securities with long-term nominal maturities for which the interest rates are reset through a Dutch auction process that occurs at pre-determined intervals of up to 35 days. Due to the lack of observable market quotes and an illiquid market for the Company’s ARS portfolio that existed as of March 31, 2009, the Company utilized a valuation model that relied exclusively on Level 3 inputs, including those that are based on expected cash flow streams and collateral values (see Note 7—“Investment Securities”).

The contingent interest feature of the $200,000 principal amount of Contingent Convertible Subordinated Notes (see Note 14—“Long-Term Debt”) meets the criteria of and qualifies as an embedded derivative. Although this conversion feature represents an embedded derivative financial instrument, based on its de minimis value at the time of issuance and at March 31, 2009, no value has been assigned to this embedded derivative.

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

	Non-Current ARS (Level 3)
Balance at April 1, 2008	$	81,516
Realized losses resulting from ARS being deemed other-than-temporarily impaired		(10,457	)
Unrealized gains included in other comprehensive loss		4,677
Sales of ARS securities		(9,765	)
Balance at March 31, 2009	$	65,971

9. Inventories

Inventories as of March 31 consisted of:

	2009		2008
Raw materials	$	20,208	$	42,939
Finished goods		1,978		36,187
Work-in-process		—		15,204
	$	22,186	$	94,330

Reserves for obsolete inventory are deducted from the related inventory balances. The activity in the Company’s reserve for obsolete inventory is summarized as follows:

	2009			2008			2007
Balance at beginning of year	$	19,948		$	12,385		$	4,152
Provisions for obsolete inventory		74,212			18,849			11,979
Amounts charged to reserves		(42,186	)		(11,286	)		(3,746	)
Balance at end of year	$	51,974		$	19,948		$	12,385

136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Inventories included $3,825 and $2,846 of raw materials as of March 31, 2009 and 2008, respectively, that will be used in research and development activities.

10. Property and Equipment

Property and equipment as of March 31 consisted of:

	2009			2008
Buildings and building improvements	$	121,268		$	108,880
Machinery and equipment		89,015			85,735
Office furniture and equipment		35,379			31,595
Leasehold improvements		22,316			21,057
Land and improvements		6,253			6,253
Construction-in-progress		3,815			12,504
Property and equipment held for sale		8,619			—
		286,665			266,024
Less accumulated depreciation		(98,453	)		(78,532	)
Net property and equipment	$	188,212			187,492

Capital additions to property and equipment were $23,633, $24,159 and $25,716 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively. Depreciation of property and equipment was $20,423, $18,824 and $17,058 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

The Company recorded a reserve in the amount of $1,880 for the fiscal year ended March 31, 2009 primarily relating to the impairment of property and equipment held for sale. The related loss provision is recorded as selling and administrative expense in the consolidated statement of operations.

Property and equipment projects classified as construction-in-progress at March 31, 2009 are projected to be completed during the next 12 months at an estimated cost of $4,654.

137

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

11. Intangible Assets and Goodwill

Intangible assets and goodwill as of March 31 consisted of:

	2009					2008
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Product rights acquired:
Micro-K®	$	36,140	$	(18,145	)	$	36,140	$	(16,318	)
PreCare®		—		—			8,433		(3,654	)
Evamist™		44,078		(4,937	)		52,446		(2,378	)
Trademarks acquired:
Niferex®		—		—			14,834		(3,709	)
Chromagen®/StrongStart®		—		—			27,642		(6,910	)
Evamist™		12,774		(1,431	)		15,166		(688	)
License agreements:
Evamist™		82,542		(9,245	)		66,417		(3,011	)
Other		375		—			2,300		—
Covenants not to compete:
Evamist™		2,106		(393	)		7,471		(565	)
Other		—		—			375		(109	)
Trademarks and patents		5,129		(1,135	)		5,317		(972	)
Assembled workforce		612		(71	)		—		—
Total intangible assets	$	183,756	$	(35,357	)	$	236,541	$	(38,314	)
Goodwill		—		—			557		—
Total	$	183,756	$	(35,357	)	$	237,098	$	(38,314	)

As of March 31, 2009, the Company’s intangible assets have a weighted average useful life of approximately 16 years. Also, as of March 31, 2009, the Company’s product rights acquired, trademark rights acquired, license agreements, covenants not to compete, trademarks and patents, and the assembled workforce have weighted average useful lives of approximately 17 years, 15 years, 15 years, 9 years, 13 years, and 5 years, respectively. Amortization of intangible assets was $14,221, $11,491 and $4,810 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

The Company evaluates its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate an intangible asset’s carrying amount may not be recoverable. Because of events that occurred beginning in the third quarter of fiscal year 2009, the Company completed an evaluation of each of its intangible assets. Based upon management’s analysis, it was determined the following intangible assets were impaired:

• Pursuant to the terms of the consent decree with the FDA, the Company agreed not to distribute its unapproved products, including its branded prenatal vitamins and hematinic products, until they are approved through the FDA’s Abbreviated New Drug Application (“ANDA”) or New Drug Application (“NDA”) processes. Since such products are unable to generate any revenues and are not approved by the FDA, the Company recorded $34,090 during the fiscal year ended March 31, 2009 as an impairment charge to write-off the net book value of the intangible assets related to its branded prenatal vitamins and hematinic products.

138

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

• In January 2009, the Company decided to no longer pursue approval of an acquired product to treat endometriosis. As a result, the Company recorded $2,528 during the fiscal year ended March 31, 2009 to write-off the net book value of intangible assets related to this product.

With respect to the intangible assets related to Evamist™, the Company had approximately $125,494 of unamortized costs and remaining useful lives of 9 to 13 years as of March 31, 2009. To test impairment of these assets, the Company performed a cash flow analysis, which incorporates a number of significant assumptions and estimates that are subject to change as actual results become known. The sum of the projected undiscounted cash flows, which extend over the useful life assigned to the assets, slightly exceeds the carrying amount of the intangible assets as of March 31, 2009 and the Company concluded that the asset is not impaired as of that date. However, any significant differences in actual future results versus estimates used to prepare the cash flow analysis, such as lower sales, increases in production costs or technological changes, could result in impairment of these intangible assets at a future date.

During the fiscal year ended March 31, 2008, the Company recognized an impairment charge of $1,140 for the intangible asset related to a product right acquired under an external development agreement. Price erosion on the product eliminated the economic benefits of marketing the product. The entire balance of the intangible asset was written-off as the product is no longer expected to generate positive future cash flows.

Assuming no other 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 $12,000 in each of the five succeeding fiscal years.

12. Other Assets

Other assets as of March 31 consisted of:

	2009		2008
Prepaid and other	$	558	$	919
Life insurance receivable		2,012		4,300
Preferred stock investments		9,808		12,684
Accrued dividends on preferred stock		2,184		2,027
Deferred financing costs, net		273		859
Deposits		7,895		3,216
	$	22,730	$	24,005

139

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

13. Accrued Liabilities

Accrued liabilities as of March 31 consisted of:

	2009		2008
Salaries, wages, incentives and benefits	$	9,161	$	30,512
Accrued severance		10,002		—
Accrued interest payable		2,174		2,830
Professional fees		11,226		4,838
Promotion expenses		—		632
Stock option deposits		993		2,729
Liability for failure to supply claims		17,101		—
Liability for product recalls		50,745		906
Accrued litigation and governmental inquiries		18,473		—
Liability for Medicaid rebates		6,312		7,956
Liability for sales returns		12,009		3,950
Liability for sales rebates		8,264		12,589
Other		4,403		7,054
	$	150,863	$	73,996

The liability for product recalls includes the impact of products expected to be returned, the estimated unpaid cost of processing fees and other administrative expenses associated with the recalls. The estimated liability for product returns related to recalls was based on estimated and actual customer inventory levels and actual contract pricing.

Accrued severance consists primarily of severance benefits owed to employees that were terminated as part of an ongoing realignment of the Company’s cost structure that was necessitated by the product recalls and the impact of the requirements under the consent decree. Severance expense recognized in the fiscal year ended March 31, 2009 in relation to the ongoing realignment of the Company’s cost structure was recorded in part to restructuring charges and in part to cost of sales in the Consolidated Statement of Operations. The activity in accrued severance is summarized as follows:

	2009
Balance at beginning of year	$	—
Provision for severance benefits		12,270
Amounts charged to accrual		(2,268	)
Balance at end of year	$	10,002

Accrued litigation consists of settlement obligations as well as loss contingencies recognized by the Company because settlement was determined to be probable and the related payouts were reasonably estimable. For the fiscal year ended March 31, 2009, the Company recorded litigation expense in the amount of $49,732, $6,536 of which was recorded for certain multi-defendant cases alleging that the Company reported improper or fraudulent pharmaceutical pricing information under the Medicaid rebate program (see Note 16—“Commitments and Contingencies”). The Company also recorded an accrual for product liability actions related to the voluntary product recalls initiated by the Company in calendar year 2008 and early 2009 and alleged damages as a result of the ingestion of purportedly oversized tablets allegedly distributed by the Company (see Note 16—“Commitments and Contingencies”). Based on the Company’s product liability insurance coverage and the number of product liability actions that are pending, that have been settled and that the Company expects will occur, the Company recorded expense in the amount of $14,364 for the fiscal year ended March 31, 2009.

140

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

In May 2009, the Company entered into a global confidential settlement agreement with Axcan to dismiss a suit Axcan filed against the Company in June 2007 (see Note 16—“Commitments and Contingencies”). The settlement agreement required the Company to pay Axcan in three installments, $3,500 of which was paid in May 2009. Subsequent to May 2009, the original agreement with Axcan was revised and the Company made a payment of $1,950 to settle the remaining two payments due to Axcan. At March 31, 2009, the Company recorded a settlement liability of $5,450 in accrued liabilities.

Pursuant to the plea agreement that ETHEX entered into with the Department of Justice on March 2, 2010, ETHEX agreed to pay criminal fines, restitution to the Medicare and Medicaid programs and an administrative forfeiture in the aggregate amount of $27,569 (see Note 16—“Commitments and Contingencies”). The plea agreement requires the Company to pay the criminal fines in five installment payments beginning March 6, 2010 and ending July 11, 2012. For fiscal 2009, the Company recorded litigation expense of $23,623 for the present value of the administrative forfeiture and five expected installment payments related to the criminal fines and reduced net revenues by $2,275 for the restitution payments made to the Medicare and Medicaid programs on March 6, 2010. At March 31, 2009, $4,601 of the aggregate plea agreement amount was recorded in accrued liabilities and $21,597 was recorded in other long-term liabilities.

14. Long-Term Debt

Long-term debt as of March 31 consisted of:

	2009			2008
Convertible notes	$	200,000		$	200,000
Building mortgages		37,432			39,452
Software financing arrangement		1,117			1,721
Line of credit		—			30,000
		238,549			271,173
Less current portion		(37,824	)		(202,499	)
	$	200,725		$	68,674

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

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

141

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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. Holders had the right to require the Company to repurchase all or a portion of their Notes on May 16, 2008 and, accordingly, the Company classified the Notes as a current liability as of March 31, 2008. Since no holders required the Company to repurchase all or a portion of their Notes on this date and because the next occasion holders may require the Company to repurchase all or a portion of their Notes is May 16, 2013, the Notes were classified as a long-term liability as of March 31, 2009. The Notes are subordinate to all of the Company’s existing and future senior obligations.

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

• during any quarter commencing after June 30, 2003, if the closing sale price of the Company’s Class A Common Stock over a specified number of trading days during the previous quarter is more than 120% of the conversion price of the Notes on the last trading day of the previous quarter. The Notes are initially convertible at a conversion price of $23.01 per share, which is equal to a conversion rate of approximately 43.4594 shares per $1,000 principal amount of Notes;

• if the Company has called the Notes for redemption;

• during the five trading day period immediately following any nine consecutive trading day period in which the trading price of the Notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of our Class A Common Stock on that day multiplied by the number of shares of our Class A Common Stock issuable upon conversion of $1,000 principal amount of the Notes; or

• upon the occurrence of specified corporate transactions.

The Company has reserved 8,691,880 shares of Class A Common Stock for issuance in the event the Notes are converted.

The Notes, which are unsecured, do not contain any restrictions on the payment of dividends, the incurrence of additional indebtedness or the repurchase of the Company’s securities, and do not contain any financial covenants. However, a failure by the Company or any of its subsidiaries to pay any indebtedness or any final non-appealable judgments in excess of $750 constitutes an event of default under the indenture. An event of default would permit the trustee under the indenture or the holders of at least 25% of the Notes to declare all amounts owing to be immediately due and payable and exercise other remedies.

In March 2006, the Company entered into a $43,000 mortgage loan arrangement 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 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. The Company is current in all its financial payment obligations under the mortgage loan arrangement. However, the Company believes that at March 31, 2009 it was not in compliance with one or more of the requirements of the mortgage loan documentation. Accordingly, the $37,432 that remained outstanding under the mortgage arrangement as of March 31, 2009 was classified as a current liability as of March 31, 2009.

In June 2007, the Company entered into an installment payment agreement with a financial institution for the purchase of software products and the right to receive consulting or other services from the seller. Upon delivery of the products and services, the financial institution will pay the seller amounts owed for the software products and services. As a result, the Company recorded debt in the amount of $1,733 which will be paid ratably over 16 consecutive quarters to the financial institution. In August 2007, the Company entered into another agreement with the same financial institution for the payment of additional consulting services that will be

142

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

provided on a time and material basis. In exchange for the institution paying the seller for fees owed, the Company has recorded additional debt in the amount of $306 which will be paid to the financial institution ratably over 16 consecutive quarters. The two installment payment agreements were discounted using an imputed annual interest rate that approximated the Company’s borrowing rate for similar debt instruments at the time of the borrowings.

In June 2006, the Company entered into a credit agreement with ten banks that provided for a revolving line of credit for borrowing up to $320,000. This credit facility also included a provision for increasing the revolving commitment, at the lenders’ sole discretion, by up to an additional $50,000. The credit agreement was unsecured unless the Company, under certain specified circumstances, utilized the facility to redeem part or all of its outstanding Notes. Interest was charged under the credit facility at the lower of the prime rate or LIBOR plus 62.5 to 150 basis points, depending on the ratio of senior debt to EBITDA. The credit facility had a five-year term expiring in June 2011. The credit agreement contained financial covenants that imposed limits on dividend payments, required minimum equity, a maximum senior leverage ratio and a minimum fixed charge coverage ratio. In February 2009, the Company repaid $30,000 of borrowings outstanding under the credit facility and deposited $10,900 with Bank of America to support certain letters of credit that were outstanding at March 31, 2009. Subsequent to paying off the outstanding credit line in February 2009, the Company was notified by its lenders that the credit agreement had been terminated. As a result of the termination, the Company wrote off $266 of unamortized deferred financing costs associated with the revolving line of credit. At March 31, 2008, the Company had $942 in open letters of credit issued under the revolving credit line and $30,000 of cash borrowings outstanding under the facility.

The aggregate maturities of long-term debt as of March 31, 2009 were as follows:

Due in one year	$	37,824
Due in two years		561
Due in three years		164
Due in four years		200,000
	$	238,549

The Company paid interest of $9,115, $8,758 and $7,316 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

15. 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 could have been 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 $129,907 were outstanding at March 31, 2009. 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

143

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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.

16. Commitments and Contingencies

Leases

The Company leases manufacturing, office and warehouse facilities, equipment and automobiles under operating leases expiring through fiscal year 2023. Total rent expense for the fiscal years ended March 31, 2009, 2008 and 2007 was $5,101, $4,418 and $4,364, respectively.

Facility leases with free rent periods or rent escalation clauses are expensed on a straight-line basis over the life of the lease commencing at lease inception.

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

2010	$	2,087
2011		1,643
2012		1,476
2013		969
2014		394
Thereafter		894

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 the matters it currently faces, individually or in the aggregate, could have a material adverse effect on its financial condition or operations and liquidity.

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 $8,095.

On January 8, 2010, the Company and Hologic entered into an amendment to the original Gestiva™ asset purchase agreement. See Note 6—“Acquisitions” for more information about the Amended Agreement.

On December 5, 2008, the Board terminated the employment agreement of Marc S. Hermelin, the Chief Executive Officer of the Company at that time, “for cause” (as that term is defined in such employment agreement). In addition, the Board removed Mr. M. Hermelin as Chairman of the Board and as the Chief Executive Officer, effective December 5, 2008. In accordance with the termination provisions of his employment agreement, the Company determined that Mr. M. Hermelin would not be entitled to any severance benefits. In addition, as a result of Mr. M. Hermelin’s termination “for cause,” the Company determined it was no longer obligated for the retirement benefits specified in the employment agreement. However, Mr. M. Hermelin informed the Company that he believed he effectively retired from his employment with the Company prior to

144

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

the termination of his employment agreement on December 5, 2008 by the Board. If it is determined that Mr. M. Hermelin did effectively retire prior to December 5, 2008, the actuarially determined present value of the retirement benefits due to him would total $36,900. Mr. M. Hermelin remains a member of the Board.

Litigation and Governmental Inquiries

Resolution of one or more of the matters discussed below could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. The Company intends to vigorously defend its interests in the matters described below while cooperating in governmental inquiries.

The Company and its subsidiaries Drugtech Corporation and Ther-Rx Corporation were named as defendants in a declaratory judgment case filed in the U.S. District Court for the District of Delaware by Lannett Company, Inc. on June 6, 2008 and styled Lannett Company Inc. v. KV Pharmaceuticals et al. The action sought a declaratory judgment of patent invalidity, patent non-infringement, and patent unenforceability for inequitable conduct with respect to five patents owned by, and two patents licensed to, the Company or its subsidiaries and pertaining to the PrimaCare ONE^® product marketed by Ther-Rx Corporation; unfair competition; deceptive trade practices; and antitrust violations. On June 17, 2008, the Company filed suit against Lannett in the form of a counterclaim, asserting infringement of three of the Company’s patents, infringement of its trademarks (PrimaCare^® and PrimaCare ONE^®), and various other claims. On March 23, 2009 a Consent Judgment was entered by the U.S. District Court of Delaware, in which the patents were not found invalid or unenforceable, and the manufacture, sale, use, importation, and offer for sale of the Lannett Products Multivitamin with Minerals and OB-Natal ONE was found to infringe the patents. Judgment was also entered in favor of the Company on its claim for trademark infringement based on Lannett’s marketing of Multivitamin with Minerals in bottles. Unless permitted by license, Lannett, its officers, directors, agents, and others in active concert and participation with them are permanently enjoined and restrained from infringing on these patents during the terms of such patents, by making, using, selling, offering for sale, or importing the products or mere colorable variations thereof; and unless permitted by license, Lannett is permanently enjoined and restrained from infringing the trademark PrimaCare ONE. All other claims and counterclaims have been dismissed with prejudice. On March 17, 2009, the Company and Lannett entered into a settlement and license agreement pursuant to which Lannett may continue to market its prenatal products under the Company’s U.S. Patent Nos. 6,258,846 (the “846 Patent”), 6,576,666 (the “666 Patent”) and 7,112,609 (the “609 Patent”) until the later of (1) October 17, 2009, or (2) 45 days after the Company notifies Lannett in writing that the Company has received regulatory approval to return PrimaCare ONE or a successor product to the market or that the Company has entered into an agreement with a third party that intends to introduce a product under the PrimaCare marks evidenced by U.S. Trademark Registrations 2,582,817 and 3,414,475. In consideration for the foregoing, Lannett has agreed to pay the Company a royalty fee equal to (1) 20% of Lannett’s net sales of its prenatal products using the license set forth in the settlement and license agreement on or before October 17, 2009 and (2) 15% of such net sales after October 17, 2009.

The Company is named as a defendant in a patent infringement case filed in the U.S. District Court for the District of Delaware by UCB, Inc. and Celltech Manufacturing CA, Inc. (collectively, “UCB”) on April 21, 2008 and styled UCB, Inc. et al. v. KV Pharmaceutical Company. After the Company filed an ANDA with the FDA seeking permission to market a generic version of the 40mg, 50mg and 60mg strengths of Metadate CD^® methylphenidate hydrochloride extended-release capsules, UCB filed this lawsuit under a patent owned by Celltech. In a Paragraph IV certification accompanying the ANDA, KV contended that its proposed 40mg generic formulation would not infringe Celltech’s patent. Because the patent was not listed in the Orange Book for the 50mg and 60mg dosages, a Paragraph I certification was filed with respect to them. The Company has filed an answer, asserted certain affirmative defenses (including that Plaintiffs are estopped to assert infringement of the 50mg and 60mg dosages due to their not listing the Celltech patent in the Orange Book for these dosages),

145

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

and has asserted a counterclaim in which it seeks a declaratory judgment of invalidity and non-infringement of the claims in the Celltech patent, and an award of attorney’s fees and costs. A motion for summary judgment was filed on January 19, 2010 and is currently pending the Court’s decision.

The Company was named as a defendant in two related patent infringement cases filed on December 14, 2007 in the U.S. District Courts in New Jersey and Delaware by Janssen, L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil Neurologics, Inc. (collectively, “Janssen”) and styled Janssen, L.P. et al. v. KV Pharmaceutical Company. After the Company filed an ANDA with the FDA seeking permission to market a generic version of the 8mg and 16mg strengths of Razadyne^® ER (formerly Reminyl^®) Galantamine Hydrobromide Extended Release Capsules, Janssen filed these lawsuits for patent infringement under the provisions of the Hatch-Waxman Act with respect to its U.S. Patent No. 7,160,599 (the “‘559 patent”) under a patent owned by Janssen. In the Company’s Paragraph IV certification, the Company contended that its proposed generic versions do not infringe Janssen’s patent and/or that the patent is invalid. A Stipulated Dismissal of Action was ordered by the Court on March 31, 2009. In the dismissal, Janssen agreed to dismiss all claims regarding infringement of the ‘559 patent and the Company agreed to dismiss with prejudice its counterclaim for non-infringement and invalidity of the ‘599 patent. Janssen also agreed that it will not use the existence or terms of this stipulated dismissal as evidence of infringement, validity or enforceability of the ‘559 patent in any future action between the parties.

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 10mg, 20mg, 30mg, and 40mg strengths of Ritalin LA^® 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, the Company contended that its proposed generic versions do not infringe Celgene’s patents.

The Company is named as a defendant in another patent infringement case filed in the U.S. District Court for the District of New Jersey by Celgene and Novartis on December 5, 2008 and styled Celgene Corporation et al. v. KV Pharmaceutical Company. After the Company filed an ANDA with the FDA seeking approval to market a generic version of FOCALIN XR^® drug products, Celgene and Novartis filed this lawsuit for patent infringement under the patent laws of the United States. In the Company’s Paragraph IV Certification, the Company contended the Patents-In-Suit would not be infringed by the activities described in the Company’s ANDA. On March 1, 2010, the Company entered into a Settlement Agreement to settle the patent infringement actions with respect to Ritalin LA^® and FOCALIN XR^®. The Agreement is currently under review by the Department of Justice and the Federal Trade Commission.

The Company was named as a defendant in three patent infringement cases brought by Purdue Pharma L.P., The P.F. Laboratories, Inc. and Purdue Pharmaceuticals L.P. (collectively “Purdue”). On January 16, 2007, after the Company filed an ANDA with the FDA seeking permission to market generic versions of the 10 mg, 20 mg, 40 mg and 80 mg dosage strengths of OxyContin, a controlled-release oxycodone product marketed and sold under NDA No. 20-553 (“OxyContin”), in extended-release tablet form, Purdue filed a lawsuit in the U.S. District Court for the District of Delaware against the Company and an unrelated third party for patent infringement under the provisions of Hatch-Waxman Act with respect to three Purdue patents. In the Company’s Paragraph IV certification set forth in the Company’s ANDA, the Company contended that Purdue’s patents were invalid, unenforceable, or would not be infringed by the Company’s proposed generic versions of

146

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

OxyContin. On February 12, 2007, Purdue filed a second patent infringement lawsuit against the Company in the same court, asserting patent infringement under the same three patents with respect to the Company’s filing of an amendment to its ANDA to sell a generic equivalent of Purdue’s OxyContin, 30mg and 60mg dosage strengths, product. On June 6, 2007, Purdue filed a third patent infringement lawsuit against the Company in the U.S. District Court for the Southern District of New York (the “NY District Court”), asserting infringement under the same three Purdue patents with respect to the Company’s filing of an amendment to its ANDA to sell a generic equivalent of Purdue’s OxyContin, 15mg dosage strength, product. The two lawsuits filed in federal court in Delaware were transferred to the NY District Court for multi-district litigation purposes.

Pursuant to the Hatch-Waxman Act, the filing of the patent infringement lawsuits against the Company by Purdue instituted an automatic stay of any FDA approval of the Company’s ANDA, on a dosage strength-by-dosage strength basis, until the earlier of a judgment, or 30 months from the date that Purdue received notice from the Company that its ANDA had been submitted to the FDA.

In connection with the above referenced litigation, on June 9, 2009, the Company entered into a Settlement Agreement with Purdue (the “Settlement Agreement”). In connection with the Settlement Agreement, the Company and Purdue also entered into a Patent License Agreement (the “Patent License Agreement”) and a Distribution and Supply Agreement (the “Distribution Agreement”).

Pursuant to the Settlement Agreement, the Company and Purdue agreed to a complete settlement of Civil Actions No. 07 Civ. 3972, 07 Civ. 3973 and 07 Civ. 4810 (SHS) in the NY District Court regarding, among other things, the validity and enforceability of United States Patents Nos. 5,508,042 (the “‘042 Patent”), 5,226,331, 5,549,912 and 5,656,295 relating to OxyContin (collectively, the “Purdue Patents”) as well as the alleged patent infringement by the Company. The Company has also agreed to no longer dispute, among other things, the validity, enforceability or infringement of the Purdue Patents and to make, use or sell generic versions of controlled-release oxycodone product, including OxyContin that are described in the Company’s ANDA (the “Company Product”) only in accordance with the Patent License Agreement.

Pursuant to the terms of the Patent License Agreement, dated as of June 9, 2009, Purdue granted to the Company a limited, non-exclusive, royalty-bearing, non-transferable (except as permitted by the Patent License Agreement) license of limited duration under the ‘042 Patent (the “License”) to sell, in the United States, a certain amount of various dosage strengths of the Company Product under the Purdue NDA. The Company will pay Purdue a royalty fee as set forth in the Patent License Agreement. The License terminates upon certain circumstances, including upon the effectiveness of the Distribution Agreement.

Pursuant to the Distribution Agreement, dated as of June 9, 2009, the Company was appointed, based on certain contingencies, as an authorized, non-exclusive distributor in the United States of certain generic versions of OxyContin specified in the Distribution Agreement (the “Product”). The Company or Purdue may elect for the Distribution Agreement to become effective within a period of time specified in the Distribution Agreement, so long as the Company’s ANDA has not yet been approved by the FDA. The Company plans to take all actions reasonably necessary to obtain FDA approval of the Company’s ANDA as soon as reasonably practicable. On September 1, 2009, the Company elected for the Distribution Agreement to become effective as of September 1, 2009. Pursuant to the terms of the Distribution Agreement, Purdue provided the Company with a specified amount of the Product to be distributed by the Company on the terms set forth in the Distribution Agreement, and the Company paid Purdue a royalty fee and reimbursed Purdue the cost of manufacturing of the supplied Product.

The Company and ETHEX were 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

147

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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 entered a stay pending the outcome of the U.S. Patent and Trademark Office’s (“USPTO”) reexamination of a patent at issue in the suit. On August 17, 2009, the Court entered an order “administratively” terminating this action in Minnesota, but any party has the right to seek leave to reinstitute the case. On September 30, 2009, on appeal of the Examiner’s rejection of the claims, the Board of Patent Appeals and Interferences affirmed the Examiner’s rejections. After the Board’s denial of CIMA’s appeal, CIMA requested a rehearing with the Board, which remains pending.

The Company and its subsidiaries Ther-Rx Corporation and Drugtech Corporation, together with Albion International Inc., filed a patent infringement case against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the Eastern District of Missouri on July 17, 2008, styled KV Pharmaceutical Company et al. v. Breckenridge Pharmaceutical, Inc. The Company and the other plaintiffs alleged that Breckenridge infringed a patent owned by Albion which has been exclusively licensed to KV and its subsidiaries in the field of oral prescription products for prenatal products and hematinic products (including the Company’s Chromagen^® and Chromagen^® Forte hematinic products), among others, with respect to Breckenridge’s Multigen^® and Multigen^® Plus caplet products. The Company and other plaintiffs sought injunctive relief and damages from Breckenridge.

The Company and its subsidiary Ther-Rx Corporation together with Albion International, Inc., were named as defendants in a patent infringement case filed in the U.S. District Court for the Southern District of Florida on August 29, 2008 and styled Breckenridge Pharmaceutical, Inc. v. KV Pharmaceutical Company, Ther-Rx Corporation and Albion International, Inc. Breckenridge sought a declaratory judgment of non-infringement and invalidity of the same patent in issue in the Eastern District of Missouri (described in the preceding paragraph). This case was transferred to the U.S. District Court for the Eastern District of Missouri on June 2, 2009. The parties in the KV Pharmaceutical et al v. Breckenridge Pharmaceutical, Inc. and Breckenridge Pharmaceutical, Inc. v. KV Pharmaceutical Company, Ther-Rx Corporation and Albion International, Inc. matters entered into a Settlement Agreement, dated June 22, 2009. Under the terms of the Settlement Agreement, Breckenridge agreed to pay the Company a total of $1,000, payable in nine monthly payments beginning July 1, 2009, with the final payment due on March 1, 2010.

Stiefel Laboratories, Inc. (“Stiefel”) filed a patent infringement case against the Company on May 28, 2009 in the U.S. District Court for the District of Delaware styled Stiefel Laboratories, Inc. v. KV Pharmaceutical Company. The suit arose from the Company’s submission of a first to file Paragraph IV ANDA seeking permission to market a generic version of Duac^® (clindamycin, 1% benzoyl peroxide, 5%) gel indicated for the topical treatment of mild to moderate acne vulgaris. Stiefel filed suit for patent infringement under the provisions of the Hatch-Waxman Act with respect to its U.S. Patent No. 5,466,446 (the “446 Patent”). On September 21, 2009, the Company entered into a sale agreement with Perrigo Company to sell the rights to the ANDA. (See Note 26—“Subsequent Events” for more information.) Pursuant to the sale agreement, Perrigo Company assumed the Company’s obligations under this litigation. On October 15, 2009, a stipulated dismissal with prejudice was submitted by the parties and entered by the Court.

The Company and ETHEX were named as defendants in a case brought by Axcan ScandiPharm, Inc. and styled Axcan ScandiPharm, Inc. v. ETHEX Corporation, et al., filed in U.S. District Court in Minnesota on June 1, 2007. In general, Axcan alleged that ETHEX’s comparative promotion of its Pangestyme^™ UL12 and Pangestyme^™ UL18 products to Axcan’s Ultrase^® MT12 and Ultrase^® MT18 products constituted false advertising and misleading statements under various federal and state laws, and constituted unfair and deceptive trade practices. The Company disagreed, and denied the material allegations of the complaint. Nonetheless, a confidential settlement agreement with Axcan was entered into on May 4, 2009 in which the Company agreed to

148

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

grant undertakings to cease and refrain from future marketing of its Pangestyme UL product line and to the payment of a global confidential settlement, payable in three installments. The first installment payment of $3,500 was paid in May 2009. On February 5, 2010, the Company satisfied all remaining payments owed to Axcan by paying Axcan $1,950.

On July 24, 2008, a federal action was filed against certain unapproved drug products manufactured by the Company, in the U.S. District Court for the Eastern District of Missouri, styled United States v. Various Quantities of Articles of Drug et al. By this complaint, which the Company received on July 29, 2008, the FDA sought to take possession of the Company’s inventory of those products, in order to prevent their distribution. The lawsuit had been preceded in March 2008 by the Missouri Department of Health and Senior Services, acting at the FDA’s behest, embargoing most of the products that were later the subject of the federal seizure action and notifying the Company of a hold on its inventory of these products, restricting its ability to remove or dispose of those inventories without permission. Ultimately, the products that were the subject of the lawsuit were destroyed.

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 allegedly 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, by New York City, and by 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. On August 13, 2007 ETHEX settled the Massachusetts lawsuit and received a general release of liability with no admission of liability. On October 7, 2008, ETHEX settled the Alabama lawsuit for $2,000 and received a general release of liability with no admission of liability. On November 25, 2009, ETHEX settled the New York City and New York county cases (other than the Erie, Oswego and Schenectady County cases) and received a general release of liability.

In October 2006, the Board formed a Special Committee (the “Option Special Committee”) of independent directors to conduct an investigation of past stock option grant practices. 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 cooperated with the SEC staff in its investigation and, among other things, provided them with copies of the Option Special Committee’s report and all documents collected by the Option Special Committee in the course of its review. In December 2007, the SEC staff, pursuant to a formal order of investigation, issued subpoenas for additional documents and testimony by certain employees. The production of additional documents called for by the subpoena and the testimony of the employees was completed in May 2008. On September 26, 2008, the SEC notified the Company that the investigation had been completed and no enforcement action would be taken.

The Company received a subpoena from the Office of Inspector General of the Department of Health and Human Services, seeking documents with respect to two of ETHEX’s nitroglycerin products. Both are unapproved products, that is, they have not received FDA approval. (FDA approval is not necessarily required for drugs to be sold in the marketplace.) The subpoena states that it is in connection with an investigation into potential false claims under Title 42 of the U.S. Code, and appears to pertain to whether these products were eligible for reimbursement under federal health care programs. On or about July 2, 2008, the Company received a supplementary subpoena in this matter, seeking additional documents and information. In a letter dated August 4, 2008, that subpoena was withdrawn and a separate supplementary subpoena was substituted. In October 2009,

149

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

the Office of Inspector General of the Department of Health and Human Services identified five additional products as being subject to its investigation: Hydro-tussin (carbinoxamine); Guaifenex (extended release); Hyoscyamine sulfate (extended release); Hycoclear (hydrocodone); and Histinex (hydrocodone). The Company has provided additional documents requested in the subpoena, as supplemented. Discussions with the U.S. Department of Justice and the United States Attorney’s Office for the District of Massachusetts indicate that this matter is a False Claims Act qui tam action that is currently still under seal and that the government is reviewing similar claims relating to other drugs manufactured by ETHEX, as well as drugs manufactured by other companies. The Company has not been provided a copy of the qui tam complaint. On or about March 26, 2009, the Company consented to an extension of the time during which the government may elect to intervene in the qui tam lawsuit.

On December 12, 2008, by letter, the Company was notified by the staff of the SEC that it had commenced an informal inquiry to determine whether there have been violations of certain provisions of the federal securities laws. The Company is cooperating with the government and, among other things, has provided copies of requested documents and information.

As previously disclosed, the Company, at the direction of the Special Committee, responded to requests for information from the Office of the United States Attorney for the Eastern District of Missouri and FDA representatives working with that office. In connection therewith, on February 25, 2010, the Board, at the recommendation of the Special Committee, approved entering into a plea agreement subject to court approval with the Office of the United States Attorney for the Eastern District of Missouri and the Office of Consumer Litigation of the United States Department of Justice (referred to herein collectively as the “Department of Justice”).

The plea agreement was executed by the parties and was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 2, 2010. Pursuant to the terms of the plea agreement, ETHEX pleaded guilty to two felony counts, each stemming from the failure to make and submit a field alert report to the FDA in September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. Sentencing pursuant to the plea agreement also took place on March 2, 2010.

Pursuant to the plea agreement, ETHEX agreed to pay a criminal fine in the amount of $23,437 in four installments. The first installment, in the amount of $2,344, is due within 10 days of sentencing. The second and third installments, each in the amount of $5,859, are due on December 15, 2010 and July 11, 2011, respectively. The fourth and final installment, in the amount of $9,375, is due on July 11, 2012. ETHEX also agreed to pay, within 10 days of sentencing, restitution to the Medicare and the Medicaid programs in the amounts of $1,762 and $573, respectively. In addition to the fine and restitution, ETHEX agreed not to contest an administrative forfeiture in the amount of $1,796, which is payable 45 days after sentencing and satisfies any and all forfeiture obligations ETHEX may have as a result of the guilty plea. In total, ETHEX agreed to pay fines, restitution and forfeiture in the aggregate amount of $27,569.

In exchange for the voluntary guilty plea, the Department of Justice agreed that no further federal prosecution will be brought in the Eastern District of Missouri against ETHEX, the Company and the Company’s wholly-owned subsidiary, Ther-Rx Corporation, regarding allegations of the misbranding and adulteration of any oversized tablets of drugs manufactured by the Company, and the failure to file required reports regarding these drugs and patients’ use of these drugs with the FDA, during the period commencing on January 1, 2008 through December 31, 2008.

In connection with the guilty plea by ETHEX, ETHEX is expected to be excluded from participation in federal healthcare programs, including Medicare and Medicaid. In addition, as a result of the guilty plea by

150

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

ETHEX, the U.S. Department of Health and Human Services (“HHS”) may use its discretionary authority to also exclude the Company from participation in federal healthcare programs. However, the Company is in receipt of correspondence from the Office of the Inspector General of HHS stating that, absent any transfer of assets or operations that would trigger successor liability, HHS has no present intent to exercise its discretionary authority to exclude the Company as a result of the guilty plea by ETHEX.

In connection with the exclusion of ETHEX from participation in federal healthcare programs, the Company plans to cease operations of ETHEX. However, the Company has retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and is in possession of all intellectual property related to generic products, including all New Drug Applications and Abbreviated New Drug Applications.

The Company currently does not anticipate that the voluntary guilty plea by ETHEX will have a material adverse effect on the Company’s efforts to comply with the requirements pursuant to the consent decree and to resume production and shipments of its approved products.

The Company has received a subpoena from the State of California, Department of Justice, seeking documents with respect to ETHEX’s NitroQuick product. In an email dated August 12, 2009, the California Department of Justice advised that after reading CMS Release 151, it might resolve the subpoena that was issued. The Company provided limited information requested by the California Department of Justice on October 7, 2009, and on November 10, 2009 the California Department of Justice informed the Company that the California Department of Justice is contemplating what additional information, if any, it will request.

On February 27, 2009, by letter, the Company was notified by the U.S. Department of Labor that it was conducting an investigation of the Company’s Fifth Restated Profit Sharing Plan and Trust, to determine whether such plan is conforming with the provisions of Title I of the Employee Retirement Income Security Act (ERISA) or any regulations or orders thereunder. The Company cooperated with the Department of Labor in its investigation and on August 27, 2009, the Department of Labor notified the Company it had completed a limited review and no further review was contemplated at this time.

On February 3, 2009, plaintiff Harold Crocker filed a putative class-action complaint against the Company in the United States District Court for the Eastern District of Missouri, Crocker v. KV Pharmaceutical Co., et al., No. 4-09-cv-198-CEJ. The Crocker case was followed shortly thereafter by two similar cases, also in the Eastern District of Missouri (Bodnar v. KV Pharmaceutical Co., et al., No. 4:09-cv-00222-HEA, on February 9, 2009, and Knoll v. KV Pharmaceutical Co., et al., No. 4:09-cv-00297-JCH, on February 24, 2009). The two later cases were consolidated into Crocker so that only a single action now exists, and the plaintiffs filed a Consolidated Amended Complaint on June 26, 2009 (“Complaint”).

The Complaint purports to state claims against the Company and certain current and former employees for alleged breach of fiduciary duties to participants in the Company’s 401(k) plan. Defendants, including the Company and certain of its directors and officers, moved to dismiss the amended complaint on August 25, 2009, and briefing of those motions was completed on October 19, 2009. The court granted the motion to dismiss of the Company and all individual defendants on March 24, 2010. The plaintiff has the right to appeal the court’s determination within 30 days. In addition, the plaintiff has the right to make a motion for reconsideration within 28 days and, if such motion were to be made, the deadline for the appeal would be suspended until the court makes a determination on such motion.

The Company was named as a defendant in an ERISA and WARN Act putative class action filed on March 12, 2009 in the U.S. District Court, Eastern District of Missouri styled John Foster on behalf of himself and all others similarly situated v. KV Pharmaceutical Company. The putative class action is being brought on behalf of terminated or laid off employees who allegedly were not provided sixty (60) days advance written

151

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

notice as required by the WARN Act. Service was received on April 8, 2009. A motion to dismiss or in the alternative a motion for summary judgment was filed on April 28, 2009 and on March 12, 2010, the court dismissed the case with prejudice pursuant to the Company’s motion to dismiss or, in the alternative, for summary judgment. The plaintiff has the right to appeal the court’s determination within 30 days.

On December 2, 2008, plaintiff Joseph Mas filed a complaint against the Company, in the United States District Court for the Eastern District of Missouri, Mas v. KV Pharma. Co., et al., Case No. 08-CV-1859. On January 9, 2009, plaintiff Herman Unvericht filed a complaint against the Company also in the Eastern District of Missouri, Unvericht v. KV Pharma. Co., et al., Case No. 09-CV-0061. And on January 21, 2009, plaintiff Norfolk County Retirement System filed a complaint against the Company, again in the Eastern District of Missouri, Norfolk County Retirement System v. KV Pharma. Co., et al., Case No. 09-CV-00138.

The operative complaints in these three cases purport to state claims arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stock purchasers. On April 15, 2009, the Honorable Carol E. Jackson consolidated the Unvericht and Norfolk County cases into the Mas case already before her. The amended complaint for the consolidated action, styled Public Pension Fund Group v. KV Pharma. Co., et al., Case No. 4:08-CV-1859 (CEJ), was filed on May 22, 2009. Defendants, including the Company and certain of its directors and officers, moved to dismiss the amended complaint on July 27, 2009, and briefing was completed on the motions to dismiss on September 3, 2009. The court granted the motion to dismiss of the Company and all individual defendants in February 2010. On March 18, 2010, the plaintiffs filed a motion for relief from the order of dismissal and to amend their complaint, and also filed a notice of appeal.

On February 25, 2009, the Company initiated a legal action against Citigroup Global Markets Inc. (“CGMI”) in connection with $72,200 in outstanding principal amount of certain ARS, which the Company acquired through CGMI, in the U.S. District Court for the Eastern District of Missouri styled K-V Pharmaceutical Company v. Citigroup Global Markets Inc. On January 21, 2010, the Company and CGMI entered into a Purchase and Release Agreement, pursuant to which CGMI agreed to purchase the Company’s remaining ARS for an aggregate purchase price of approximately $61,707. The Company also received a two-year option (which expires on January 21, 2012) to reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further payments in the event any ARS are redeemed prior to the expiration of the option. The Company agreed to release CGMI from any liability or claim arising from the Company’s investment in ARS sold by CGMI, and the Company and CGMI agreed to take all necessary steps to dismiss with prejudice all claims asserted by the Company against CGMI regarding the ARS, including the legal action referred to above. (See Note 26—“Subsequent Events” for more information regarding the settlement agreement and the proceeds received in connection therewith.)

On October 2, 2009, the U.S. Equal Employment Opportunity Commission sent the Company a Notice of Charge of Discrimination regarding a charge, dated September 23, 2009, of employment discrimination based on religion (in connection with the termination of his employment with the Company) filed against the Company by David S. Hermelin, a current director and former Vice President, Corporate Strategy and Operations Analysis of the Company. On January 29, 2010, the Company filed its response to the Notice of Charge of Discrimination, which stated the Company’s position that Mr. D. Hermelin’s termination had nothing to do with religious discrimination and that his claim should be dismissed.

The Company and/or ETHEX are named defendants in at least 30 pending product liability lawsuits that relate to the voluntary product recalls initiated by the Company in late 2008 and early 2009 (see Note 13—“Accrued Liabilities”). The plaintiffs in these lawsuits allege damages as a result of the ingestion of purportedly oversized tablets allegedly distributed in 2007 and 2008. The lawsuits are pending in federal and state courts in

152

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

various jurisdictions. Of the 30 pending lawsuits, the plaintiffs in 2 lawsuits allege economic harm, the plaintiffs in 15 lawsuits allege that a death occurred, and the plaintiffs in the remaining lawsuits allege non-fatal physical injuries. Plaintiffs’ allegations of liability are based on various theories of recovery, including, but not limited to strict liability, negligence, various breaches of warranty, misbranding, fraud and other common law and/or statutory claims. Plaintiffs seek substantial compensatory and punitive damages. Three of the lawsuits are putative class actions, one of the lawsuits is on behalf of 22 claimants, and the remaining lawsuits are individual lawsuits. The Company believes that these lawsuits are without merit and is vigorously defending against them, except where, in its judgment, settlement is appropriate. In addition to the 30 pending lawsuits, there are at least 208 pending pre-litigation claims (at least 26 of which involve a death) that may or may not eventually become lawsuits. The Company has also resolved a significant number of related product liability lawsuits and pre-litigation claims. In addition to self insurance, the Company possesses third party product liability insurance, which the Company believes is applicable to the pending lawsuits and claims.

The Company and ETHEX are named as defendants in a complaint filed by CVS Pharmacy, Inc. (“CVS”) in the United States District Court for the District of Rhode Island on or about February 26, 2010 and styled CVS Pharmacy, Inc. v. K-V Pharmaceutical Company and Ethex Corporation (No. CA-10-095) (“CVS Complaint”). The CVS Complaint alleges three claims: breach of contract, breach of implied covenant of good faith and fair dealing, and, in the alternative, promissory estoppel. CVS’ claims are premised on the allegation that the Company and/or ETHEX failed to perform their alleged promises to either supply CVS with its requirements for certain generic drugs or reimburse CVS for any higher price it must pay to obtain the generic drugs. CVS seeks damages of no less than $100,000, plus interest and costs. The Company was served with the CVS Complaint on March 8, 2010 and has thirty days to answer the complaint or request additional time to respond. The Company believes it has strong defenses and intends to vigorously defend its interests in this case.

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, financial condition or liquidity.

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

17. 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 former Chief Executive Officer (“former CEO”) contained 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 former CEO’s employment agreement provided for retirement compensation to be paid in the form of a single annuity equal to 30% of the former CEO’s final average compensation payable each year beginning at retirement and continuing for the longer of ten years or the life of the former CEO. In accordance with this agreement, the Company recognized retirement expense up to the time the former CEO was terminated (discussed below) of $1,752, $2,232 and $877 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

On December 5, 2008, the Board, acting upon the recommendation of the Audit Committee as a result of the investigation described above, terminated the employment agreement of the former CEO “for cause” (as that term is defined in such employment agreement). In addition, the Board removed the former CEO as Chairman of

153

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

the Board and as the Chief Executive Officer, effective December 5, 2008. The former CEO remains a member of the Board. Due to the termination of his employment agreement “for cause,” Mr. M. Hermelin is not entitled to any severance benefits. In addition, as a result of the former CEO’s termination “for cause,” the Company also determined it was no longer obligated for the retirement benefits specified in the employment agreement and, accordingly, reversed the previously recorded accrual which reduced selling and administrative expense by $10,303 for the fiscal year ended March 31, 2009 (see Note 16—“Commitments and Contingencies”). The former CEO has informed the Company, however, that he believes he effectively retired from his employment with the Company prior to the termination of his employment agreement on December 5, 2008 by the Board.

18. Income Taxes

The income tax provisions (benefit) for the fiscal years ended March 31, 2009, 2008 and 2007, are based on estimated federal and state taxable income (loss) using the applicable statutory rates. The current and deferred federal and state income tax provisions (benefit), excluding income taxes related to the cumulative effect of a change in accounting, for the fiscal years ended March 31, 2009, 2008 and 2007 were as follows:

	2009			2008			2007
Provision/(Benefit)
Current:
Federal	$	(107,984	)	$	43,398		$	22,646
State		(7,086	)		3,314			1,842
		(115,070	)		46,712			24,488
Deferred:
Federal	$	(12,049	)	$	(4,706	)	$	7,955
State		(927	)		(360	)		624
		(12,976	)		(5,066	)		8,579
	$	(128,046	)	$	41,646		$	33,067
Valuation allowance		82,449			—			—
Tax Provision/(Benefit)	$	(45,597	)	$	41,646		$	33,067

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:

	2009			2008			2007
Expected income tax expense (benefit)	$	(125,747	)	$	44,573		$	31,332
State income taxes, net of federal income tax benefit		(5,592	)		1,920			1,603
Business credits		(3,765	)		(1,213	)		(945	)
Domestic manufacturer deduction adjustment for loss carry back		3,688			—			—
Domestic manufacturer deduction		—			(2,961	)		(741	)
Adjustment to unrecognized tax benefits		(6,727	)		(2,464	)		1,910
Non deductible expenses related to plea agreement		8,366			—			—
Other		1,731			1,791			(92	)
	$	(128,046	)	$	41,646		$	33,067
Valuation allowance		82,449			—			—
Provision for income tax expense (benefit)	$	(45,597	)	$	41,646		$	33,067

154

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

As of March 31, 2009 and 2008, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts were as follows:

	2009						2008
	Current			Non-Current			Current			Non-Current
Gross Deferred Tax Assets:
Revenue related accrued liabilities		33,237			—			17,269			—
Vacation liability		1,494			—			426			—
Accrued compensation		2,136			—			1,612			—
Deferred compensation		—			—			—			3,138
Intangible assets		—			5,811			—			6,081
Translation adjustment		—			585			—			—
Stock-based compensation		1,868			—			2,514			—
Payroll tax liability		481			—			3,227			—
Litigation and governmental inquiries liability		5,934			3,766			—			—
Auction rate securities		—			3,348			—			—
Impairment on property and equipment		—			902			—			—
Operating losses		—			36,175			—			—
Credit carry forwards		—			9,311			—			—
Other		710			1,578			630			2,802
	$	45,860		$	61,476		$	25,678		$	12,021
Gross Deferred Tax Liabilities:
Property and equipment basis differences	$	—		$	(21,171	)	$	—		$	(14,653	)
Intangible assets		—			(1,120	)		—			(3,961	)
Convertible notes interest		—			(38,962	)		—			(30,168	)
Inventories		(1,171	)		—			(1,556	)		—
Prepaid insurance		(620	)		—			—			—
Other		—			(805	)		—			(361	)
		(1,791	)		(62,058	)		(1,556	)		(49,143	)
Valuation allowance		(35,227	)		(47,222	)		—			—
Net deferred tax asset (liability)	$	8,842		$	(47,804	)	$	24,122		$	(37,122	)

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 all significant available positive and negative evidence, including the existence of losses in recent years, the timing of deferred tax liability reversals, projected future taxable income, taxable income in carry back years, and tax planning strategies to assess the need for a valuation allowance. Based upon the level of current taxable loss, projections for future taxable income over the periods in which the temporary differences are deductible, the taxable income in available carry back years and tax planning strategies, management believes it is not more likely than not the Company will realize the benefits of these deductible differences. The operating loss for the year ended March 31, 2009 exceeded the cumulative income from the prior two years. The available carry back of this operating loss will not be fully absorbed, which will result in an operating loss carry forward. As such, the Company established valuation allowances of $82,449 that were charged to income tax expense in the year ended March 31, 2009.

155

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The Company incurred a net operating loss during the fiscal year ended March 31, 2009. An Application for Tentative Refund was filed with the Internal Revenue Service subsequent to its tax year ended March 31, 2009 in order to carry back a portion of its net operating loss generated during the year. The carry back period applicable at March 31, 2009 was two years. The filing of this refund claim produced a tax refund of $61,534, which was received in May, 2009. The Company also filed state carry back claims pursuant to which it received $3,388. The Company has Federal loss carry forwards of $93,000 and state loss carry forwards of $139,000 at March 31, 2009. The Company also has tax credit carry forwards for alternative minimum tax, research credit, and foreign tax credit of $9,311. The loss carry forwards begin to expire in the year 2029. The alternative minimum tax credits have no expiration date. The research credit and foreign tax credit begin to expire in the year 2029 and 2019, respectively.

The Company paid income taxes of $8,288, $49,862, and $22,134 during the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

At March 31, 2009, the Company had $5,194 of gross unrecognized tax benefits, of which $5,194 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.

A reconciliation of the unrecognized tax benefits at the beginning and end of the period is as follows:

Balance of unrecognized tax benefits at April 1, 2008	$	11,657
Increase/(decrease) in unrecognized tax benefits resulting from tax positions taken during current period		419
Increase/(decrease) in unrecognized tax benefits resulting from tax positions taken in prior periods		—
Reduction to unrecognized tax benefits as a result of settlement with taxing authorities		(5,376	)
Reduction to unrecognized tax benefits as a result of the lapse of the applicable statute of limitations		(1,506	)
Balance of unrecognized tax benefits at March 31, 2009	$	5,194

The Company recognizes interest and penalties associated with uncertain tax positions as a component of income tax expense. At April 1, 2008, the Company had accrued $2,310 for interest and penalties. Through March 31, 2009, the Company accrued an additional $949 of interest and penalties and released $2,009 of interest and penalties as a result of settlements and the expiration of the statute of limitations. As of March 31, 2009, the accrual for interest and penalties was $1,250.

It is anticipated the Company will recognize approximately $568 of unrecognized tax benefits within the next 12 months as a result of the expected expiration of the relevant statute of limitations.

The Company is subject to taxation in the U.S. and various states and is subject to examination by those authorities. The Company’s federal statute of limitations has expired for fiscal years prior to 2006 and the relevant state statutes vary. The Company concluded its employment tax and income tax audit by the IRS during the fiscal year ended March 31, 2009. The employment tax examination resulted in the payment of withholding taxes related to stock option income for the affected employees and the release of tax reserves determined to be no longer necessary. The Company had two state examinations in progress at March 31, 2009.

Management regularly evaluates 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

156

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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

On November 6, 2009, President Obama signed into law H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009. This new law provides an optional longer net operating loss carry back period and allows most taxpayers the ability to elect a carry back period of three, four or five years (the net operating loss carry back period was previously limited to two years). This election can only be made for one year for net operating losses incurred for a tax year ending after December 31, 2007 and beginning before January 1, 2010. The Company has elected to apply this extended carry back period to its tax year ended March 31, 2009. The Company elected a carry back period of five years. The Company filed an Application for Tentative Refund with the Internal Revenue Service for this additional carry back period and subsequently received a refund in the amount of $23,754 in February, 2010. The impact of this new law will be recorded in the period the new law was enacted.

19. 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. In September 2008, shareholders approved an amendment to the 2001 Plan to increase by 3,000 the number of shares of Class A Common Stock available for issuance under the 2001 Plan. Under the Company’s stock option plan, options to acquire shares of common stock have been made available for grant to all employees. Each option granted has an exercise price of not less than 100% of the market value of the common stock on the date of grant. The contractual life of each option is generally ten years and the options generally vest at the rate of 10% per year from the date of grant.

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

The Company’s stock option agreements for options granted prior to January 2009 include a post-exercise service condition which provides that exercised options are to be held by the Company for a two-year period during which time the shares cannot be sold by the employee. If the employee’s employment is terminated voluntarily or involuntarily (other than by retirement, death or disability) during the two-year period, these 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 with the two-year post-exercise service condition expire unexercised or an employee terminates employment after options become exercisable, no compensation expense associated with the

157

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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

During fiscal year 2009 (commencing in January 2009), the Company granted stock options that vest over three years. In addition, these options were granted without a two-year post-exercise service condition. Similar to previous grants, these options have an exercise price of not less than 100% of the market value of the common stock on the date of grant and the contractual life of each option is ten years. The Company’s estimate of the expected term for these options was calculated using the Company’s historical exercise patterns of previously issued options, adjusted to exclude the impact of the two-year forfeiture period.

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 the 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. For the fiscal year ended March 31, 2007, 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 $0.04 and $0.03, respectively.

For the fiscal years ended March 31, 2009, 2008 and 2007, the Company recognized stock-based compensation expense of $3,506, $5,843 and $4,047, respectively, and related tax benefits of $566, $1,288 and $1,119, respectively. Stock-based compensation for the fiscal year ended March 31, 2009 was reduced by $1,437 for unvested stock-based compensation expense previously recognized for options granted to employees terminated in the February 2009 workforce reduction.

There was no stock-based employee compensation cost capitalized as of March 31, 2009 or 2008. Cash received as deposits for option exercises was $746, $1,514, and $4,264 for 2009, 2008 and 2007, respectively. The actual tax benefit realized for the tax deductions from option exercises (at expiration of two-year forfeiture period) was $1,468 and $904 for the fiscal years ended March 31, 2008 and 2007, respectively. There was no actual tax benefit realized for tax deductions from option exercises for the fiscal year ended March 31, 2009, based on the operating loss reported.

158

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The following weighted average assumptions were used for stock options granted during the fiscal years ended March 31, 2009, 2008 and 2007:

	Years ended March 31,
	2009			2008			2007
Dividend yield		None			None			None
Expected volatility		73	%		42	%		45	%
Risk-free interest rate		1.96	%		4.53	%		4.93	%
Expected term		6.6 years			9.0 years			8.9 years
Weighted average fair value per share at grant date	$	2.13		$	15.40		$	12.98

A summary of the changes in the Company’s stock option plan for the fiscal years ended March 31, 2009, 2008 and 2007 consisted of the following:

			Weighted Average
	Shares		Exercise Price		Remaining Expected Term	Aggregate Intrinsic Value
Balance, March 31, 2006	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
Options granted	944			27.02
Options exercised	(184	)		5.19			3,644
Options canceled	(493	)		19.28
Balance, March 31, 2008	3,933			18.84
Options granted	2,318			6.20
Options exercised	(356	)		7.19			—
Options canceled	(1,603	)		18.90
Balance, March 31, 2009	4,292		$	12.49	7.7	$	—
Expected to vest at March 31, 2009	3,180		$	12.49	7.7	$	—
Options exercisable at March 31, 2009 (excluding shares in the two-year forfeiture period)	819		$	18.30	5.0	$	—

As of March 31, 2009, the Company had $32,057 of total unrecognized compensation expense related to stock option grants, which will be recognized over the remaining weighted average period of 4.1 years.

20. 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 and $500 for the fiscal years ended March 31, 2008 and 2007, respectively. At the discretion of senior management, it was determined that the Company would not make a contribution to the Plan for the fiscal year ended March 31, 2009. The Plan includes features as described under Section 401(k) of the Internal Revenue Code.

159

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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 $2,653, $2,477 and $2,227 were made to the 401(k) investment funds for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

Pension Plans

Contributions were made to a multi-employer defined benefit plan administered by Teamsters Negotiated Pension Plan for certain union employees. Amounts charged to pension expense and contributed to this plan were $170 and $197 for the fiscal years ended March 31, 2008 and 2007, respectively. In the event of a withdrawal from the multi-employer pension plan, the Company was to incur an obligation to the plan for the portion of the unfunded benefit obligation applicable to its employees covered by the plan.

In January 2008, 133 employees represented by the Teamsters Union voted to decertify union representation effective February 7, 2008. As a result of the decertification, the Company recorded in fiscal year 2008 a withdrawal liability of $923 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 liability was paid in full in fiscal year 2009.

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 year 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 $10 and $797 at March 31, 2009 and 2008, respectively. For union employees, the Company participated in a fully funded insurance plan sponsored by the union. The Company’s participation in the union plan ended as a result of the decertification of union representation effective February 7, 2008. Total health and medical insurance expense for the two plans was $13,375 and $11,635 for the fiscal years ended March 31, 2008 and 2007, respectively. Total health and medical insurance expense for the non-union program was $16,501 for the fiscal year ended March 31, 2009.

21. Related Party Transactions

The Company currently leases certain real property from an affiliated partnership of the former Chairman and CEO of the Company. Lease payments made for this property for the fiscal years ended March 31, 2009, 2008 and 2007 totaled $316, $303 and $296, respectively.

22. Equity Transactions

As of March 31, 2009 and 2008, 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, 2009 and

160

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

2008. Also, under the terms of its credit agreement (which was terminated in February 2009, as described in Note 14—“Long-Term Debt”), the Company was prohibited from paying 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.

In accordance with the investigation of the Company’s stock option grant practices by the Option Special Committee (as described in Note 16—“Commitments and Contingencies”), a remediation plan was developed by the Option Special Committee that recommended reimbursement of $1,401 by the Company’s former CEO. The recommended reimbursement was made by the former CEO in November 2007 by delivery to the Company of 45,531 shares of Class A Common Stock.

161

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

23. Earnings (Loss) Per Share

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

	2009						2008						2007
	Class A			Class B			Class A			Class B			Class A			Class B
Basic earnings (loss) per share:
Numerator:
Allocation of undistributed earnings (loss) from continuing operations before cumulative effect of change in accounting principle	$	(241,180	)	$	(77,484	)	$	64,794		$	17,729		$	42,622		$	11,954
Allocation of undistributed earnings from discontinued operations before cumulative effect of change in accounting principle		3,759			1,208			3,019			826			1,513			424
Allocation of cumulative effect of change in accounting principle		—			—			—			—			1,543			433
Allocation of undistributed earnings (loss)	$	(237,421	)	$	(76,276	)	$	67,813		$	18,555		$	45,678		$	12,811
Denominator:
Weighted average shares outstanding		37,794			12,140			37,582			12,299			37,180			12,455
Less—weighted average unvested common shares subject to repurchase		(187	)		(58	)		(432	)		(101	)		(367	)		(65	)
Number of shares used in per share computations		37,607			12,082			37,150			12,198			36,813			12,390
Basic earnings (loss) per share from continuing operations before cumulative effect of change in accounting principle	$	(6.41	)	$	(6.41	)	$	1.75		$	1.45		$	1.16		$	0.96
Basic earnings (loss) per share from discontinued operations before cumulative effect of change in accounting principle		0.10			0.10			0.08			0.07			0.04			0.03
Per share effect of cumulative effect of change in accounting principle		—			—			—			—			0.04			0.04
Basic earnings (loss) per share	$	(6.31	)	$	(6.31	)	$	1.83		$	1.52		$	1.24		$	1.03
Diluted earnings (loss) per share:
Numerator:
Allocation of undistributed earnings (loss) from continuing operations before cumulative effect of change in accounting principle	$	(241,180	)	$	(77,484	)	$	64,794		$	17,729		$	42,622		$	11,954
Reallocation of undistributed earnings (loss) from continuing operations as a result of conversion of Class B to Class A shares		(77,484	)		—			17,729			—			11,954			—
Reallocation of undistributed earnings from continuing operations to Class B shares		—			—			—			(2,134	)		—			(1,243	)
Add—preferred stock dividends		—			—			70			—			70			—
Add—interest expense convertible notes		—			—			4,414			—			3,883			—
Allocation of undistributed earnings (loss) from continuing operations for diluted computation before cumulative effect of change in accounting principle		(318,664	)		(77,484	)		87,007			15,595			58,529			10,711
Allocation of undistributed earnings from discontinued operations before cumulative effect of a change in accounting principle		3,759			1,208			3,019			826			1,513			424
Reallocation of undistributed earnings from discontinued operations as a result of conversion of Class B to Class A shares		1,208			—			826			—			424			—
Reallocation of undistributed earnings from discontinued operations to Class B shares		—			—			—			(137	)		—			(70	)
Allocation of undistributed earnings from discontinued operations for diluted computation before cumulative effect of change in accounting principle		4,967			1,208			3,845			689			1,937			354
Allocation of cumulative effect of change in accounting principle		—			—			—			—			1,976			362
Allocation of undistributed earnings (loss)	$	(313,697	)	$	(76,276	)	$	90,852		$	16,284		$	62,442		$	11,427
Denominator:
Number of shares used in basic computation		37,607			12,082			37,150			12,198			36,813			12,390
Weighted average effect of dilutive securities:
Conversion of Class B to Class A shares		12,082			—			12,198			—			12,390			—
Employee stock options		—			—			766			83			720			99
Convertible preferred stock		—			—			338			—			338			—
Convertible notes		—			—			8,692			—			8,692			—
Number of shares used in per share computations		49,689			12,082			59,144			12,281			58,953			12,489
Diluted earnings (loss) per share from continuing operations before cumulative effect of change in accounting principle	$	(6.41	)	$	(6.41	)	$	1.47		$	1.27		$	0.99		$	0.86
Diluted earnings per share from discontinued operations before cumulative effect of change in accounting principle		0.10			0.10			0.07			0.06			0.03			0.03
Per share effect of cumulative effect of change in accounting principle		—			—			—			—			0.04			0.03
Diluted earnings (loss) per share(1)(2)	$	(6.31	)	$	(6.31	)	$	1.54		$	1.33		$	1.06		$	0.92

162

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

(1) For the fiscal year ended March 31, 2009, the conversion of employee stock options, preferred stock, and convertible notes into shares of Class A Common Stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

(2) 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 fiscal years ended March 31, 2008 and 2007, excluded from the computation were options to purchase 649 and 216 of Class A and Class B common shares, respectively.

24. Segment Reporting

The reportable operating segments of the Company are branded products (through the Company’s Ther-Rx subsidiary) and specialty generic/non-branded (through the Company’s ETHEX subsidiary). 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 generic/non-branded segment includes off-patent pharmaceutical products that are therapeutically equivalent to proprietary products. The Company sells its branded and specialty generic/non-branded products primarily to pharmaceutical wholesalers, drug distributors and chain drug stores.

In the fourth quarter of fiscal year 2009, the Company decided to market the Company’s specialty materials segment, PDI, for sale because of liquidity concerns and the Company’s expected near-term cash requirements. As a result, the Company has segregated PDI’s operating results and presented them separately as a discontinued operation for all periods presented.

In connection with the plea agreement with the Department of Justice and the exclusion of ETHEX from participation in federal healthcare programs, the Company plans to cease operations of ETHEX. However, the Company has retained the ability to manufacture (once the requirements under the consent decree have been met), market and distribute all generic products and is in possession of all intellectual property related to generic products, including all NDAs and ANDAs. (See Note 26—“Subsequent Events”.)

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, interest expense, impairment charges, litigation expense and interest and other income are not allocated to segments, but included in the “all other” classification. Identifiable assets for the two reportable operating segments primarily include receivables, inventory, and property and equipment. For the “all other” classification, identifiable assets consist of cash and cash equivalents, certain property and equipment not included with the two reportable segments, intangible and other assets and all income tax related assets.

163

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The following represents information for the Company’s reportable operating segments for fiscal years 2009, 2008 and 2007.

Year Ended March 31,	Branded Products			Specialty Generics		All Other			Eliminations			Consolidated
Net revenues
2009	$	114,771		$	197,175	$	381		$	—		$	312,327
2008		212,281			364,191		1,151			—			577,623
2007		188,050			234,341		1,916			—			424,307
Segment profit (loss)
2009		(20,668	)		40,930		(387,352	)		—			(367,090	)
2008		95,824			217,296		(190,922	)		—			122,198
2007		86,994			125,823		(125,950	)		—			86,867
Identifiable assets
2009		14,996			25,522		618,571			(1,758	)		657,331
2008		48,823			115,163		727,619			(1,158	)		890,447
2007		41,830			90,677		588,959			(1,158	)		720,308
Property and equipment additions
2009		163			—		23,470			—			23,633
2008		242			—		23,917			—			24,159
2007		79			—		25,637			—			25,716
Depreciation and amortization
2009		609			256		35,011			—			35,876
2008		630			314		31,430			—			32,374
2007		593			333		22,486			—			23,412

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.

164

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

25. Quarterly Financial Results (unaudited)

The following tables set forth selected unaudited consolidated quarterly financial information for the fiscal years ended March 31, 2009 and 2008. The Company is amending the June 2008 Form 10-Q to restate its consolidated balance sheet as of June 30, 2008 and the related consolidated statements of income and cash flows for the three months ended June 30, 2008. The results below for the quarter ended June 30, 2008 reflect the restated amounts. The results for all quarters in fiscal year 2008 have been adjusted to reflect the correction of immaterial errors in the Company’s prior period financial statements as described in Note 4—“Correction of Immaterial Errors in Prior Period Consolidated Financial Statements.”

	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter			Full Year
Year Ended March 31, 2009
Net revenues	$	131,060	$	131,141		$	27,616		$	22,510		$	312,327
Gross profit (loss)(b)(c)		86,401		82,250			(65,344	)		(23,363	)		79,944
Income (loss) from continuing operations(a)(b)(c)(d)(e)		4,177		(45,091	)		(96,027	)		(181,653	)		(318,594	)
Income from discontinued operations		1,394		1,510			944			1,119			4,967
Net income (loss)(a)(b)(c)(d)(e)		5,571		(43,581	)		(95,083	)		(180,534	)		(313,627	)
Earnings per share from continuing operations:
Basic—Class A common		0.09		(0.91	)		(1.93	)		(3.64	)		(6.41	)
Basic—Class B common		0.07		(0.91	)		(1.93	)		(3.64	)		(6.41	)
Diluted—Class A common		0.09		(0.91	)		(1.93	)		(3.64	)		(6.41	)
Diluted—Class B common		0.08		(0.91	)		(1.93	)		(3.64	)		(6.41	)
Earnings per share from discontinued operations:
Basic—Class A common		0.03		0.03			0.02			0.02			0.10
Basic—Class B common		0.03		0.03			0.02			0.02			0.10
Diluted—Class A common		0.02		0.03			0.02			0.02			0.10
Diluted—Class B common		0.02		0.03			0.02			0.02			0.10
Earnings per share:
Basic—Class A common		0.12		(0.88	)		(1.91	)		(3.62	)		(6.31	)
Basic—Class B common		0.10		(0.88	)		(1.91	)		(3.62	)		(6.31	)
Diluted—Class A common		0.11		(0.88	)		(1.91	)		(3.62	)		(6.31	)
Diluted—Class B common		0.10		(0.88	)		(1.91	)		(3.62	)		(6.31	)

(a) Operating expenses in the second quarter of fiscal year 2009 included $49,709 of litigation expense related to actual and probable legal settlements (see Note 13—“Accrued Liabilities”).

(b) Cost of sales in the third quarter of fiscal year 2009 included provisions for obsolete inventory of $50,633 to primarily cover inventory losses for all work-in-process and finished goods inventories the Company had on hand at November 30, 2008 (see Note 9—“Inventories”).

(c) Cost of sales in the fourth quarter of fiscal year 2009 included provisions for obsolete inventory of $18,098 to primarily cover a write-off for certain raw materials that had no potential use in drug products to be manufactured in the future (see Note 9—“Inventories”).

(d) Operating expenses in the fourth quarter of fiscal year 2009 included charges of $36,618 related to impairment of intangible assets, $9,805 of severance benefits and $12,332 of expense for administrative costs associated with product recalls (see Note 11—“Intangible Assets and Goodwill” and Note 13—“Accrued Liabilities”).

(e) Income (loss) from continuing operations and net income (loss) in the fourth quarter of fiscal year 2009 included the impact of a $82,449 valuation allowance that was charged to income tax expense during the fiscal year ended March 31, 2009 for deferred tax assets that the Company determined would not be realized as tax deductions in the future.

165

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Full Year
Year Ended March 31, 2008
Net revenues	$	109,840	$	166,770	$	154,207	$	146,806	$	577,623
Gross profit		72,108		123,016		110,672		96,840		402,636
Income from continuing operations		2,875		39,708		33,080		6,930		82,593
Income from discontinued operations		392		1,052		1,163		1,238		3,845
Net income		3,267		40,760		34,243		8,168		86,438
Earnings per share from continuing operations:
Basic—Class A common		0.06		0.84		0.70		0.14		1.75
Basic—Class B common		0.05		0.70		0.58		0.12		1.45
Diluted—Class A common		0.05		0.69		0.58		0.14		1.47
Diluted—Class B common		0.05		0.59		0.50		0.12		1.27
Earnings per share from discontinued operations:
Basic—Class A common		0.01		0.02		0.02		0.03		0.08
Basic—Class B common		0.01		0.02		0.02		0.02		0.07
Diluted—Class A common		0.01		0.02		0.02		0.02		0.07
Diluted—Class B common		0.01		0.02		0.02		0.02		0.06
Earnings per share:
Basic—Class A common		0.07		0.86		0.72		0.17		1.83
Basic—Class B common		0.06		0.72		0.60		0.14		1.52
Diluted—Class A common		0.06		0.71		0.60		0.16		1.54
Diluted—Class B common		0.06		0.61		0.52		0.14		1.33

26. Subsequent Events

In September 2009, the Company sold its first-to-file Paragraph IV ANDA with the FDA for a generic equivalent version of GlaxoSmithKline’s Duac^® gel to Perrigo Company. The Company was the first to file the Paragraph IV ANDA for this product with the FDA. Under the terms of the transaction, the Company received $14,000 in September 2009 from Perrigo Company at closing and will receive an additional $2,000 as a milestone payment upon the completion of a successful technical transfer.

In June 2009, the Company entered into a settlement agreement, a patent license agreement and a distribution and supply agreement with Purdue regarding three patent infringement lawsuits (see Note 16—“Commitments and Contingencies”). These agreements provided the Company certain limited, royalty bearing, rights to sell in the United States generic versions of OxyContin^® extended-release tablets for a limited period of time. Subsequent to finalizing this settlement, the Company and Purdue agreed that Purdue would be responsible for manufacturing the product to be sold by the Company.

On January 8, 2010, the Company and Hologic entered into an amendment to the original Gestiva™ asset purchase agreement. See Note 6—“Acquisitions” for more information about the Amended Agreement.

On February 25, 2009, the Company initiated legal action against Citigroup Global Markets Inc. (“CGMI”), through which it acquired the ARS the Company held at that time, in the District Court for the Eastern District of Missouri. On January 21, 2010, the Company and CGMI entered into a Purchase and Release Agreement pursuant to which CGMI agreed to purchase the Company’s remaining ARS for an aggregate purchase price of approximately $61,707. The Company also received a two-year option (which expires on January 21, 2012) to

166

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

reacquire the ARS (in whole or on a class-by-class basis) for the prices at which they were sold, as well as the right to receive further payments in the event any ARS are redeemed prior to the expiration of the option.

Subsequent to March 31, 2009, the Company received approximately $105,614 of tax refunds from the federal and state tax authorities as a result of amended returns, settlement of an examination and operating loss carry backs (see Note 18—“Income Taxes”). The tax law with respect to operating loss carry backs was changed in November, 2009 to allow a carry back period of up to five years. This increased carry back period allowed the Company to claim an additional refund of $23,754, which is included in the above amount.

On February 25, 2010, the Board, at the recommendation of the Special Committee, approved entering into the plea agreement with the Department of Justice. The plea agreement was executed by the parties and was entered by the U.S. District Court, Eastern District of Missouri, Eastern Division on March 2, 2010. Pursuant to the terms of the plea agreement, ETHEX pleaded guilty to two felony counts, each stemming from the failure to make and submit a field alert report to the FDA in September 2008 regarding the discovery of certain undistributed tablets that failed to meet product specifications. Sentencing pursuant to the plea agreement also took place on March 2, 2010. The Company will pay fines, restitution and forfeiture in the aggregate amount of $27,569. See Note 16—“Commitments and Contingencies” for more information regarding the plea agreement.

On March 1, 2010, the Company entered into a Settlement Agreement with Celgen Corporation and Novartis Pharmaceuticals Corporation and Novartis Pharma AG to resolve the patent infringement litigation on Ritalin LA^® and Focalin XR^®. The Agreement is currently under review by the Department of Justice and the Federal Trade Commission.

167

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

K-V Pharmaceutical Company:

We have audited K-V Pharmaceutical Company’s (the Company) internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). K-V Pharmaceutical 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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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 deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).

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, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2009 and the related financial statement schedule for the years then ended. These material weaknesses were considered in determining

168

the nature, timing, and extent of audit tests applied in our audit of the March 31, 2009 consolidated financial statements, and this report does not affect our report dated March 25, 2010, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, K-V Pharmaceutical Company has not maintained effective internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

(signed) KPMG LLP

St. Louis, Missouri

March 25, 2010

169

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

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 Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2009. 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 GAAP 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 GAAP, 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.

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

Based on our evaluation of internal control over financial reporting as of March 31, 2009, management has determined that the following material weaknesses existed in our internal control over financial reporting.

Material weaknesses in entity-level controls.  We did not maintain an effective control environment or entity-level controls with respect to the risk assessment, information and communications and monitoring components of internal control. Specifically, the following individual material weaknesses were identified:

• We did not sufficiently promote an appropriate level of control awareness;

• We did not maintain a sufficient complement of adequately trained personnel with an appropriate level of knowledge, experience and training in the application of GAAP and commensurate with our financial reporting requirements;

• We did not design adequate controls to identify and address risks critical to financial reporting, including noncompliance with applicable FDA rules and regulations;

170

• We did not design adequate monitoring controls to determine the adequacy of, and to identify deficiencies with respect to, other controls;

• We did not design controls to ensure that identified deficiencies were remediated on a timely basis; and

• The operating effectiveness of our information and communication controls was inadequate to ensure that information was communicated to the appropriate personnel across and within business activities.

These deficiencies resulted in a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis and contributed to the other material weaknesses and material errors described below.

Material weaknesses surrounding the financial statement preparation and review procedures.  Our policies and procedures did not adequately address the financial reporting risks associated with the preparation and review of our financial statements. Specifically, the following individual material weaknesses were identified:

• Manual journal entries.  The operating effectiveness of our controls was inadequate to ensure that we identified, accumulated and documented appropriate information necessary to support manual journal entries;

• Account reconciliations.  The operating effectiveness of our controls was inadequate to ensure that account reconciliations were reviewed and approved for accuracy and completeness and that we identified, accumulated and documented appropriate information necessary to support account balances;

• Spreadsheets.  We did not design adequate controls over access, changes to and review of our spreadsheets used in the preparation of financial statements;

• Customer and supplier agreements.  The design of our controls was inadequate to ensure that necessary information for new and modified agreements was identified and communicated to those responsible for evaluating the accounting implications;

• Stock-based compensation.  The operating effectiveness of our controls was inadequate to ensure the proper grant dates and expected terms were used to measure the fair values of the options and to ensure that necessary information resulting from the modification of options was identified and communicated to those responsible for evaluating the accounting implications;

• Medicaid rebates.  The operating effectiveness of our controls was inadequate to ensure that accurate information, including information related to pricing of products and the exempt status of customers, was captured and communicated to those responsible for evaluating the accounting implications; and

• Income Taxes.  The operating effectiveness of our controls was inadequate to ensure that review and monitoring of the tax provision calculation occurred and that the necessary information was captured and communicated to those responsible for the tax provision calculation.

These deficiencies resulted in material errors related to net revenues, research and development expense, selling and administrative expense, accounts receivable, inventory, property and equipment, accrued liabilities, income taxes, and additional paid-in capital in our interim financial statements for fiscal year 2009. As a result, the interim financial statements for the first quarter of fiscal year 2009 were restated and the interim financial statements for the second and third quarters of fiscal year 2009 and the year-end financial statements for fiscal year 2009 were adjusted prior to their issuance. These deficiencies also resulted in a reasonable possibility that a material misstatement of our annual consolidated financial statements will not be prevented or detected on a timely basis.

171

Material weaknesses related to the application of accounting principles.  Our policies and procedures did not adequately address the financial reporting risks associated with the application of certain accounting principles and standards. Specifically, the following individual material weaknesses were identified:

• Inventories.  The operating effectiveness of our controls was inadequate to ensure that manufacturing variances were capitalized as inventory and that purchases of raw materials to be used in research and development activities were expensed as incurred;

• Property and equipment.  The operating effectiveness of our controls was inadequate to ensure that maintenance and repairs of equipment were expensed as incurred, asset costs were appropriately capitalized, depreciation expense was appropriately calculated and that the selection of useful lives of property and equipment was appropriately and consistently applied;

• Employee compensation.  The operating effectiveness of our controls was inadequate to ensure that costs for vacation pay, severance, and other payroll related accruals were appropriately recorded;

• Reserves for sales allowances.  The operating effectiveness of our controls was inadequate to ensure that the process for estimating reserves for sales allowances was reviewed and monitored; and

• Financing transactions.  The operating effectiveness of our controls was inadequate to ensure that vendor financing arrangements, including financing costs, were properly reflected on the balance sheet.

These deficiencies resulted in material errors related to net revenues, research and development expense, selling and administrative expense, accounts receivable, inventory, property and equipment, and accrued liabilities in our interim financial statements for fiscal year 2009. As a result, the interim financial statements for the first quarter of fiscal year 2009 were restated and the interim financial statements for the second and third quarters of fiscal year 2009 and the year-end financial statements for fiscal year 2009 were adjusted prior to their issuance. These deficiencies also resulted in a reasonable possibility that a material misstatement of our annual consolidated financial statements will not be prevented or detected on a timely basis.

As a result of the material weaknesses described above, management has concluded that we did not maintain effective internal control over financial reporting as of March 31, 2009 based on the criteria established in COSO’s Internal Control—Integrated Framework.

KPMG LLP, our independent registered public accounting firm, who audited our consolidated financial statements included in this Annual Report on Form 10-K has issued their opinion on the effectiveness of our internal control over financial reporting as of March 31, 2009. This report appears on page 168 of this Annual Report on Form 10-K.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the fourth quarter of fiscal year 2009 and continuing after March 31, 2009, we began taking action, including designing and implementing controls, in order to remediate the material weaknesses described above in “—(a) Management’s Report on Internal Control Over Financial Reporting.” We will continue our remediation efforts, including testing of operating effectiveness of new controls, as described below in “—(d) Remediation Activities,” during the fiscal year ending March 31, 2010, and we plan to provide an update on the status of our remediation activities on a quarterly basis.

172

(c) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and our Interim Chief Financial 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, 2009, 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 our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, 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 our management, including the Interim Chief Executive Officer and Interim 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 Interim Chief Executive Officer and our Interim Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of March 31, 2009.

(d) Remediation Activities

During the fourth quarter of fiscal year 2009 and continuing after March 31, 2009, we began taking action, including designing and implementing controls, in order to remediate the material weaknesses described above in “—(a) Management’s Report on Internal Control Over Financial Reporting.” We will continue our remediation efforts described below, including testing of operating effectiveness of new controls, during the fiscal year ending March 31, 2010, and we plan to provide an update on the status of our remediation activities on a quarterly basis. While unremediated, these material weaknesses have the potential to result in our failure to prevent or detect material misstatements in our annual or interim consolidated financial statements.

As previously disclosed, in August 2008, the Audit Committee, with the assistance of legal counsel, including FDA regulatory counsel with respect to FDA matters, and other advisers, conducted an internal investigation with respect to a range of specific allegations involving, among other items, FDA regulatory and other compliance matters and management misconduct. The investigation was substantially completed in December 2008 and the investigation of all remaining matters was completed in June 2009.

The investigation focused on, among other areas, FDA and other healthcare regulatory and compliance matters, financial analysis and reporting, employment and labor issues, and corporate governance and oversight. See Item 1—“Business—(b) Significant Recent Developments” for more information on the Audit Committee investigation. As a result of its findings from the investigation, the Audit Committee, with the assistance of its legal counsel, including FDA regulatory counsel with respect to FDA matters, and other advisors, prepared and approved the Remedial Framework. The Board, either directly or through the Special Committee, has reviewed and approved the Remedial Framework. Some of the measures included in the Remedial Framework are intended to remediate certain material weaknesses and are listed below.

The following actions have been taken or are expected to be taken to remediate one or more of the material weaknesses listed above:

1. Expand the membership of our disclosure committee to include executives with responsibilities over our operating divisions and regulatory affairs; and reviewing, revising and updating existing corporate governance policies and procedures.

2. Reorganize and relocate our legal department adjacent to the Interim Chief Executive Officer’s office to facilitate greater access to the legal department and more extensive involvement of the legal department in corporate governance and compliance matters.

173

3. Adopt measures to strengthen and enhance compliance with FDA regulations and related regulatory compliance, including:

• retaining new outside consultants and counsel for FDA regulatory matters and, with their assistance, reviewing and revising our policies, procedures and practices to enhance compliance with the FDA’s current good manufacturing practice requirements;

• enhancing compliance with FDA drug application, approval and post-approval requirements;

• evaluating compliance with applicable foreign laws and regulations; and

• implementing internal reporting policies pursuant to which our chief compliance officer will report periodically to the non-management members of the Board.

4. Review the staffing levels, capabilities and experience of the members of the Finance department and add employees with appropriate financial statement closing and GAAP expertise to the Finance department as necessary.

5. Establish a monthly business review process to ensure an in-depth senior management review of business segment results on a regular basis.

6. Develop and document comprehensive accounting policies and procedures, including documentation of the methods for applying accounting policies through detailed process maps and procedural narratives.

7. Define and document roles and responsibilities within the financial statement closing process including required reviews and approval of account reconciliations, journal entries and methodologies used to analyze account balances.

8. Identify and implement specific steps to improve information flow between the Finance department and business unit finance personnel, as well as other functional areas within our company, to ensure that information that could affect the financial statements, including the effects of all material agreements, is identified, communicated and addressed on a timely basis.

9. Identify and implement specific steps to improve communication, coordination and oversight with respect to the application of critical accounting policies and the determination of estimates.

10. Implement month-end, quarter-end and year-end closing schedules and closing checklists to ensure timely and documented completion of the financial statements.

11. Develop and implement a policy and procedure to control the access, modification and review processes for spreadsheets that are used in the preparation of our financial statements and other disclosures.

12. Conduct training and education of the Finance department personnel on critical accounting policies and procedures, including account reconciliations and financial statement closing procedures, to develop and maintain an appropriate level of skills for proper identification and application of accounting principles.

13. Define specific roles and responsibilities within the Finance department to improve accounting research and implementation of accounting policies.

14. Conduct training and education for personnel outside the Finance department on critical accounting policies and procedures to improve the level of control awareness at our company and to ensure an appropriate level of understanding of the proper application of accounting principles that are critical to our financial reporting.

15. Implement processes and procedures to (1) identify and assess whether certain entities are appropriately exempt from the Medicaid best price calculation and (2) evaluate Public Health Service (“PHS”) pricing requests.

16. Establish periodic meetings between the contracting functions and the Finance department to improve communication regarding the evaluation and reporting of PHS pricing requests and related matters.

174

(e) Management’s Conclusions on the Remediation Plan

Management believes the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. However, we have not yet implemented all of these measures, including the testing of operating effectiveness of those measures that have been implemented to date. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial controls and procedures. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that the control objective will be met. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies and/or determine not to complete certain of the remediation measures described above.

Item 9B. Other Information

None.

175

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our Certificate of Incorporation, as amended, provides for the election of the entire Board of Directors at each annual meeting. Directors are elected for one-year terms or until their successors are duly elected and qualified. The terms of the current directors expire at the 2009 Annual Meeting of Stockholders. Our By-Laws specify that the number of directors shall be determined by the Board from time to time. Our By-Laws also provide that an increase in the number of directors to a number which is in excess of eight requires unanimous approval by the Board. The Board currently has set the number of directors at eight. There are currently eight directors and no vacancies on the Board. Due to delays in our SEC filings, we have not yet held our 2009 Annual Meeting of Stockholders.

The following table lists, for each of the directors, each such person’s principal occupation for at least the past five years, each person’s present position with our company, the year in which each was first elected as a director (each serving continuously since first elected or appointed), each person’s age (as of January 31, 2010) and each person’s directorships with other companies whose securities are registered with the SEC.

Name	Age	Service as a Director Since	Occupation, Position with Company; Other Directorships
Jean M. Bellin	59	2003	President of Metagenics, Inc., a life sciences company that develops, manufactures and markets science-based medical foods and nutraceuticals, since September 2006; CEO of Mountain View Pharmaceuticals, Inc., a biopharmaceutical company focused on the development of long-acting therapeutic proteins, from 2004 to 2005; Vice President of Osteohealth Company and Luitpold Animal Health from 2003 to 2004; CEO and Director of New Medical Concepts from 1997 to 2001.
Kevin S. Carlie	54	2001	Member or Partner since 1984 in the Certified Public Accounting Firm of Stone Carlie & Company, LLC, and its predecessors.
Terry B. Hatfield	62	2004	Chairman of our company since December 2008; President of ZeaVision, a nutraceutical company with a focus on eye health, since 2003; Consultant for merger and acquisition transactions from 2001 to 2003.
David S. Hermelin(a)	43	2004	Vice President of Corporate Strategy and Operations Analysis of our company from 2002 to December 2008; Vice President of Corporate Planning and Administration of our company from 1995 to 2002; Manager of Strategic Planning and Administration of our company from 1993 to 1995; Manager of Business Development of our company from 1990 to 1993.
Marc S. Hermelin(b)	68	1973	Chairman of the Board from August 2006 to December 2008; Chief Executive Officer of our company from 1974 to December 2008; Vice Chairman of our company from 1974 to August 2006.

176

Name	Age	Service as a Director Since	Occupation, Position with Company; Other Directorships
Jonathon E. Killmer	68	2006	Chairman of Blue Plus, a Minnesota domiciled HMO, since 2006; retired in 2002 as Chief Operating Officer from Hypercom Corporation, an electronic payment products and services company; Consultant of Hypercom Corporation from 2002 to 2004.
John Sampson(c)	60	2010	Retired since January 2008; Vice President and General Manager of European Operations of YourEncore Inc. (in part-time capacity) from March 2008 to December 2008; Vice President and General Manager of the Pharmaceuticals Division of 3M from 2005 to 2007; Vice President and General Manager of the Drug Delivery Systems Division of 3M from 2001 to 2005.
Norman D. Schellenger	78	1998	Director, ProEthics Pharmaceuticals, Inc. since 2004; retired from 1997 to 2004; Vice President of Sales and Marketing of UCB Pharma from 1995 to 1996; President of Whitby Pharmaceuticals from 1992 to 1994.

(a) David S. Hermelin is the son of Marc S. Hermelin. On October 2, 2009, the U.S. Equal Employment Opportunity Commission (the “EEOC”) sent us a Notice of Charge of Discrimination regarding a charge, dated September 23, 2009, of employment discrimination based on religion (in connection with the termination of his employment with us) filed against us by Mr. D. Hermelin. On January 29, 2010, we filed our response to the Notice of Charge of Discrimination, which stated our position that Mr. D. Hermelin’s termination had nothing to do with religious discrimination and that his claim should be dismissed.

(b) The consent decree we entered into with the FDA on March 2, 2009 (as described above) provides that such consent decree shall not apply to Mr. M. Hermelin so long as, among other things, Mr. M. Hermelin has no role in the decision-making, management, or operation of our company that could affect our compliance with the FDCA, its implementing regulations, or the consent decree. The consent decree further provides that, in the event Mr. M. Hermelin assumes any role in the decision-making, management, or operation of our company that could affect our compliance with the FDCA, its implementing regulations, or the consent decree, then all the provisions of the consent decree immediately apply with full force and effect to Mr. M. Hermelin.

(c) John Sampson filled the seat vacated by Ronald J. Kanterman. Mr. Sampson was appointed as a director by stockholder action by written consent and joined the Board in February 2010.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities to file periodic reports of ownership and changes in such ownership with the SEC. Such individuals are required by the rules and regulations of the SEC to furnish us with copies of all such forms they file. Based solely on a review of the copies of all forms furnished to us or written representations that no reports were required to be filed, we believe that such persons complied with all Section 16(a) filing requirements applicable to them with respect to transactions during fiscal year 2009 (which ended on March 31, 2009), except that Mr. M. Hermelin during fiscal year 2009 filed (a) one late report on Form 4 regarding a distribution of shares from a trust without consideration during fiscal year 2009 and (b) one report on Form 4 which was subsequently amended because it incorrectly reported the number of shares held indirectly through Mr. M. Hermelin’s spouse.

Audit Committee

Structure and Responsibilities

We have a standing Audit Committee of the Board consisting of Kevin S. Carlie, CPA (Chairman), Jonathon E. Killmer and Terry B. Hatfield. The Board adopted the Audit Committee’s written charter. The Board

177

has determined that each member of the Audit Committee meets the standards of independence required by our Corporate Governance Guidelines and the NYSE, as well as the independence requirements for audit committee members under Rule 10A-3 promulgated under the Exchange Act. In addition, the Board 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 NYSE and that each of Messrs. Carlie and 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 our 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 and management to monitor the adequacy of reporting, internal controls and compliance with our policies, reviews its annual and interim consolidated financial statements and performs the other functions or duties provided in the Audit Committee Charter.

Oversight of Confidential and Anonymous Employee Reporting

The Audit Committee has adopted a complaint monitoring procedure to enable confidential and anonymous reporting to the Audit Committee of concerns regarding, among other things, questionable accounting or auditing matters. A copy of the Audit Committee Policy on Employee Complaint Procedures for Accounting and Auditing Matters is available through our Internet website (http://www.kvpharmaceutical.com) and can be obtained free of charge by written request to the attention of the Secretary at the address appearing on the first page of this Annual Report on Form 10-K or by telephone at (314) 645-6600.

Standards of Business Ethics Policy

All of our directors, officers, managers and employees are required to comply with our Standards of Business Ethics Policy to ensure that our business is conducted in a legal and ethical manner. Our 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. Through the Audit Committee, we have 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. A copy of our Standards of Business Ethics Policy is available through our Internet website (http://www.kvpharmaceutical.com) and can be obtained free of charge by written request to the attention of the Secretary at the address appearing on the first page of this Annual Report on Form 10-K or by telephone at (314) 645-6600.

We also have 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 Interim Chief Executive Officer, Interim Chief Financial Officer, Chief Accounting Officer and any other officer serving in a finance, accounting, treasury, tax or investor relations role. The Senior Executives Code of Ethics requires each such officer to provide accurate and timely information related to our public disclosure requirements. A copy of our Senior Executives Code of Ethics is available through our Internet website (http://www.kvpharmaceutical.com) and can be obtained free of charge by written request to the attention of the Secretary at the address appearing on the first page of this Annual Report on Form 10-K or by telephone at (314) 645-6600.

178

Item 11. Executive Compensation

Compensation of Directors

Director Compensation is designed to attract individuals who have the required background, experience and functional expertise to provide strategic direction and oversight to us. Only those directors who are not also employees of our company are compensated for their service as directors. With respect to such non-employee directors, the Compensation Committee of the Board recommends the appropriate levels of compensation to the Board, and the full Board approves the actual compensation to be paid to the non-employee directors. On January 12, 2009, the Board adopted and approved a revised compensation plan for directors for calendar year 2009 (the “2009 Plan”). On December 22, 2009, the Board adopted and approved a revised compensation plan for directors for calendar year 2010 (the “2010 Plan”). The 2010 Plan will be reviewed annually thereafter.

Director Compensation Until December 31, 2008

Basic Retainer—From January 1, 2008 until September 30, 2008, the cash compensation component for non-employee directors consisted of a base retainer of $15,000 per year and the Chairman of the Audit Committee received an additional retainer of $5,000. Effective October 1, 2008, the base retainer for non-employee directors was increased to $35,000 per year, Audit Committee members received an additional retainer of $5,000 and the Chairman of the Audit Committee received an additional retainer of $15,000.

Meeting Fees—From January 1, 2008 until September 30, 2008, non-employee directors also received $1,000 per day for in-person meetings of the Board of Directors. Fees received for telephonic meetings and committee meetings (including the Special Committee) were $500. Beginning on October 1, 2008, fees received per committee meeting (including the Special Committee), whether telephonic or attended in person, were increased to $1,600, the fee for in-person meetings of the Board of Directors was increased to $2,000 and fees for telephonic meetings were increased to $750. The total annual compensation received by the non-employee directors, therefore, was determined by the number of committee and Board meetings attended each year.

Expense Reimbursement—We also paid for the reasonable out-of-pocket expenses incurred by the non-employee directors for attendance at Board and committee meetings.

Stock Options—The stock option component of the director compensation program was designed to align the interest of the directors with those of our stockholders. As such, upon appointment as a director, each non-employee director was granted options to acquire 10,000 shares of Class A Common Stock. Subsequent grants for non-employee directors who were not members of the Compensation Committee were determined periodically by the Board, based on the recommendation of the Compensation Committee. Subsequent grants for members of the Compensation Committee were determined periodically by the Board. Such options were granted as non-qualified options under the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan and generally vested ratably over five years. The shares acquired upon exercise are subject to a two-year forfeiture period, during which time they cannot be sold.

One-Time Stock Option Grant—On October 1, 2008, the Board granted each non-employee director the option to purchase 4,500 shares of our Class A Common Stock pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan at an exercise price equal to the closing price of the Class A Common Stock on the NYSE on that date. The non-incentive stock options, which have a 10 year life, vest in 25% increments on December 31, 2008, March 31, 2009, June 30, 2009, and September 30, 2009 and are exercisable upon vesting. In the event a director ceases to be a director within 12 months of a change of control, the options are exercisable immediately.

Director Compensation During Calendar Year 2009

Annual Retainers—The 2009 Plan provided that, instead of receiving a fee for each meeting, every director received an annual retainer in the amount of $116,000. The 2009 Plan also included additional annual retainers in the following amounts:

• For the non-executive Chairman of the Board, $125,000;

179

• For each member of the Audit Committee, $5,000, with an additional $15,000 for the Chairman of the Audit Committee;

• For each of the Chairman of the Compensation Committee and the Chairman of the Nominating and Corporate Governance Committee, $5,000; and

• For each member of the Special Committee, $55,000, with an additional $15,000 for the Chairman of the Special Committee. The annual retainer for each member of the Special Committee was reduced by fees received for service on this Special Committee prior to the adoption of the 2009 Plan.

Annual retainers were payable in equal quarterly installments. If a director attended fewer than 75% of meetings during the calendar year, the 2009 Plan provided that such director’s retainer would be reduced on a pro-rata basis and that excess amounts already received were required to be reimbursed to us. None of the directors attended fewer than 75% of meetings during the calendar year.

Meetings of Independent Directors—Independent directors received a fee in the amount of $2,000 for every meeting lasting more than one hour and $750 for every meeting lasting one hour or less. Such fees were not required to be pro-rated.

One-Time Stock Option Grant—On January 13, 2009, the Board granted each non-employee director the option to purchase 15,000 shares of our Class A Common Stock pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan at an exercise price equal to the closing price of the Class A Common Stock on the NYSE on that date. The non-incentive stock options, which have a 10 year life, vest in 25% increments on March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 and are exercisable upon vesting. In the event a director ceases to be a director within 12 months of a change of control, the options are exercisable immediately.

Total Director Compensation Paid During Fiscal Year 2009

The following table sets forth the annual compensation to non-employee directors for the fiscal year ended March 31, 2009:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)(1)	Total ($)
Jean M. Bellin	78,116	—	18,216	96,332
Kevin S. Carlie	165,050	—	18,520	183,570
Terry B. Hatfield	174,522	—	17,084	191,606
David S. Hermelin	33,723	—	1,318	35,041
Marc S. Hermelin	33,723	—	1,318	35,041
Jonathon E. Killmer	145,090	—	12,754	157,844
Norman D. Schellenger	87,632	—	9,936	97,568

(1) Option awards represent the compensation expense recognized for financial statement reporting purposes for the fiscal year ended March 31, 2009 in accordance with SFAS 123(R) for stock options granted in and prior to fiscal year 2009. SFAS 123(R) requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based compensation. Fair value is based on the Black-Scholes option pricing model using the fair value of the underlying shares at the measurement date. For additional discussion of the valuation assumptions used in determining stock-based compensation and the grant date fair value for stock options, see Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

180

As of March 31, 2009, the following non-employee directors had the following outstanding unexercised options:

	Number of Securities Underlying Options(#)
Name	Class A Common Stock	Class B Common Stock	Option Exercise Price ($)	Option Expiration Date	Option Grant Date Fair Value ($)
Jean M. Bellin	—   2,500 4,500 15,000	2,500 —   —   —	17.85 19.99 22.32 2.95	9/10/2009 11/01/2010 10/01/2013 01/13/2019	26,973 30,067 52,331 24,964
Kevin S. Carlie	—   7,500 2,000 4,500 15,000	2,500 —   —   —   —	17.85 19.70 23.70 22.32 2.95	9/10/2009 11/01/2010 10/05/2011 10/01/2013 01/13/2019	26,973 88,358 25,302 52,331 24,964
Terry B. Hatfield	—   —   2,500 4,500 15,000	5,000 2,500 —   —   —	25.23 17.85 19.26 22.32 2.95	6/29/2009 9/10/2009 11/01/2010 10/01/2013 01/13/2019	73,283 26,973 28,524 52,331 24,964
David S. Hermelin	15,000	—	2.95	01/13/2019	24,964
Marc S. Hermelin	15,000	—	2.95	01/13/2019	24,964
Jonathon E. Killmer	—   2,500 4,500 15,000	5,000 —   —   —	23.80 24.72 22.32 2.95	10/05/2011 05/06/2013 10/01/2013 01/13/2019	63,522 32,954 52,331 24,964
Norman D. Schellenger	—   2,500 4,500 15,000	2,500 —   —   —	17.85 19.99 22.32 2.95	9/10/2009 11/01/2010 10/01/2013 01/13/2019	25,903 30,067 52,331 24,964

Director Compensation During Calendar Year 2010

Annual Retainers—The 2010 Plan provides that every director receives an annual retainer in the amount of $175,000. The 2010 Plan also includes additional annual retainers in the following amounts:

• For the non-executive Chairman of the Board, $125,000;

• For each member of the Audit Committee, $5,000, with an additional $15,000 for the Chairman of the Audit Committee; and

• For each of the Chairman of the Compensation Committee and the Chairman of the Nominating and Corporate Governance Committee, $5,000.

Annual retainers are payable in advance in equal quarterly installments on the first business day of each calendar quarter. If, during any quarter, a director resigns, including due to incapacity or death, is removed without cause, or is not re-elected, any previously paid quarterly installment is deemed fully earned. If a director attends fewer than 75% of meetings during the calendar year, the 2010 Plan provides that such director’s retainer will be reduced on a pro-rata basis and that excess amounts already received are required to be reimbursed to us.

Meetings of Independent Directors and of the Special Committee—Directors receive a fee in the amount of $2,000 for every meeting lasting more than one hour and $750 for every meeting lasting one hour or less. Such fees are not required to be pro-rated.

181

Per-Meeting Fees—Beginning with the thirteenth Board meeting in each calendar year, each non-employee director will receive a fee in the amount of $2,000 for every Board meeting lasting more than two hours and $1,000 for every Board meeting lasting two hours or less. Beginning with the thirteenth meeting of each committee in each calendar year (other than the Special Committee), each non-employee director will receive a fee in the amount of $1,500 for every meeting of such committee lasting more than two hours and $750 for every meeting of such committee lasting two hours or less.

Compensation Discussion and Analysis

The Compensation Discussion and Analysis describes our compensation philosophy, objectives and policies for fiscal year 2009 as applicable to the seven current and former executive officers that constitute the “named executive officers:”

• David A. Van Vliet, Interim Chief Executive Officer, who served as President and Chief Executive Officer of our subsidiary, ETHEX Corporation, prior to his appointment as Interim Chief Executive Officer on December 5, 2008;

• Ronald J. Kanterman, former Vice President, Treasurer and Chief Financial Officer, who served in such capacities until September 2, 2009;

• Michael S. Anderson, President and Chief Executive Officer of our subsidiary, ETHEX Corporation, who served as Vice President, Industry Presence and Development, prior to his appointment as President and Chief Executive Officer of ETHEX Corporation on December 5, 2008;

• Gregory J. Divis, Jr., President of our subsidiary, Ther-Rx Corporation;

• Richard H. Chibnall, former Vice President, Finance and Chief Accounting Officer, who served in such capacities until February 19, 2010;

• Marc S. Hermelin, former Chairman of the Board and Chief Executive Officer, who served in such capacities until December 5, 2008; and

• Gregory S. Bentley, former Senior Vice President and General Counsel, who served in such capacities until January 16, 2009.

The Compensation Discussion and Analysis summarizes the structure and rationale for each element of the named executive officers’ compensation. Each of the named executive officers entered into an employment agreement with our company prior to fiscal year 2009. (However, as described under “—Employment Arrangements with Named Executive Officers” below, Messrs. Van Vliet and Divis entered into new employment agreements with our company after the end of fiscal year 2009.) Compensation for our former Chief Executive Officer (Mr. M. Hermelin) was dictated by the terms of his employment agreement, which included, among other things, base salary and cash bonus. See “—Employment Arrangements with Named Executive Officers—Mr. M. Hermelin (Former Chief Executive Officer)” for more information. Compensation for the other named executive officers was determined as described in more detail under the caption “—Determining Individual Compensation Levels.”

In connection with the discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters, as more fully described under Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” in this Annual Report on Form 10-K, and due to the related impact on our operations and financial position, the Compensation Committee elected (1) to discontinue all Incentive Compensation Plans for fiscal year 2009, as a result of which none of the named executive officers received any annual incentive payments with respect to fiscal year 2009, (2) not to pre-establish performance goals with respect to performance-based compensation for fiscal year 2010 and (3) not to increase base salary levels for the named executive officers, and increase base salaries for salaried employees only in connection with promotions or salary adjustments, for fiscal year 2010.

182

As noted above, Messrs. Van Vliet and Anderson were appointed to new positions during fiscal year 2009, at which time their base salaries were increased. In addition, as described in more detail below, certain of the named executive officers are participants in retention programs that we implemented in fiscal year 2009 as a result of our desire to retain their services following the discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters, as more fully described under Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” in this Annual Report on Form 10-K, and the substantial decline in our stock price during fiscal year 2009.

Compensation Program Objectives

The objectives of our executive compensation program are to (1) recruit, retain and motivate highly qualified and experienced executives who have the necessary skills and experience to succeed, (2) provide compensation that is fair, reasonable and competitive, (3) link compensation to performance and (4) align the interests of executives with those of our stockholders.

Compensation and Benefits Philosophy

Our compensation program for fiscal year 2009 was based on the following guiding principles:

Performance—We believe the best way to accomplish alignment of compensation plans with the interest of our stockholders is to link executive pay directly to our performance.

Competitiveness—Our executive compensation and benefits program is intended 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—Our total compensation and benefit program is designed to be cost-effective and affordable, ensuring that the interests of our stockholders are considered in determining executive pay levels. We seek to adequately fund our executive compensation program while, at the same time, ensuring that enough capital remains for reinvestment to facilitate achievement of our short-term and long-term goals.

Retention—In light of the discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters, as well as the decline in our stock price, we have implemented a retention program and entered into retention agreements with certain named executive officers (as described in more detail following this section) that were intended to encourage these executive officers to remain with our company and forgo other potential employment opportunities.

Compensation Committee Process

The Compensation Committee is responsible for establishing and periodically reviewing our 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, our executive compensation program continues to help attract and retain the talent necessary to foster a culture of compliance, strong sales growth, long-term financial performance and stockholder returns.

In December 2008, the Compensation Committee retained Frederic W. Cook & Co., Inc. to act as its compensation consultant. The compensation consultant assisted the Compensation Committee in determining the initial base salary for our Interim Chief Executive Officer, conducted an analysis of non-employee director compensation, and worked with the Compensation Committee and outside counsel on the terms of the retention agreements and employment agreements for selected employees.

183

To benchmark Interim Chief Executive Officer compensation, the compensation consultant reviewed the amounts and composition of compensation paid to chief executive officers of the following publicly traded pharmaceutical and drug delivery companies:

• Angiotech Pharmaceuticals

• APP Pharmaceuticals (acquired by Fresenius in 2008)

• Auxilium Pharmaceuticals

• Barr Pharmaceuticals (acquired by Teva Pharmaceuticals in 2008)

• Biovail Corporation

• Caraco Pharmaceutical Laboratories

• Endo Pharmaceuticals Holdings

• Hi-Tech Pharmacal

• Medecis Pharmaceutical Corporation

• Par Pharmaceutical Companies

• Sciele Pharma (acquitted by Shionogi & Co. in 2008)

• Valeant Pharmaceuticals

• Watson Pharmaceuticals

At the time the review was conducted, our net revenues for the most recently completed fiscal year (the fiscal year ended March 31, 2008) approximated the median of the peer group. Based on the compensation consultant’s analysis of the market data, the Compensation Committee recommended and the Board approved an increase in Mr. Van Vliet’s annual base salary from $445,050 to $525,000 in connection with his appointment as Interim Chief Executive Officer in December 2008. Mr. Van Vliet’s increased based salary was below the 25^th percentile of the peer group. The Compensation Committee also reviewed Mr. Anderson’s salary in light of the Interim Chief Executive Officer’s salary determination and Mr. Anderson’s appointment as President and Chief Executive Officer of ETHEX and, based on the Compensation Committee’s recommendation, the Compensation Committee recommended and the Board approved an increase in Mr. Anderson’s annual base salary from $357,365 to $400,000 in connection with his appointment as President and Chief Executive Officer of ETHEX in December 2008. Mr. Anderson’s salary increase was not based on a review of external market data, but rather on a review of Mr. Anderson’s pay relative to that of the Interim Chief Executive Officer, as well as on other internal equity considerations.

Components of Total Compensation

We provide two main types of compensation: (1) direct compensation (including base salary, annual cash incentives, stock options and retention awards) and (2) indirect compensation (including benefits such as insurance, 401(k) plan and perquisites).

In connection with the discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters, as more fully described under Item 1—“Business—(b) Significant Recent Developments—Discontinuation of Manufacturing and Distribution; Product Recalls; and the FDA Consent Decree” in this Annual Report on Form 10-K, and due to the related impact on our operations and financial position, the Compensation Committee elected (1) to discontinue all Incentive Compensation Plans for fiscal year 2009, as a result of which none of the named executive officers received any annual incentive payments with respect to fiscal year 2009, (2) not to pre-establish performance goals with respect to performance-based compensation for fiscal year 2010 and (3) not to increase base salary levels for the named executive officers, and increase base salaries for salaried employees only in connection with promotions or salary adjustments, for fiscal year 2010.

184

Direct Compensation

Direct compensation for executive officers consists of the following components:

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

We may grant 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. Following discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters and due to the related impact on our operations and financial position, the Compensation Committee elected not to increase base salary levels for the named executive officers, and increase base salaries for salaried employees only in connection with promotions or salary adjustments, for fiscal year 2010. The Compensation Committee will consider implementing base salary increases in subsequent fiscal years.

Annual cash incentives—Annual cash incentives are designed to link a significant portion of an executive’s annual compensation to both our company’s and the individual’s annual performance. Annual cash incentives are based on individual performance, performance of our company and performance of the department or division under the responsibility of the executive. Although different performance factors are applied to individual executives, such factors generally include how well the individual executive and his or her 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 his or her areas of responsibility.

For fiscal year 2009, we adopted an Incentive Compensation Plan for each named executive officer, other than our former Chief Executive Officer (Mr. M. Hermelin), to reward achievement of certain corporate objectives, as determined at the end of fiscal year 2009. (As set forth under “—Employment Arrangements with Named Executive Officers—Mr. M. Hermelin (Former Chief Executive Officer)” below, Mr. M. Hermelin’s employment agreement included a set of criteria pursuant to which he was eligible to receive an annual bonus.) However, following the discontinuation of manufacturing and distribution of our approved products and the investigation by the FDA and related matters and due to the related impact on our operations and financial position, we discontinued all Incentive Compensation Plans for fiscal year 2009. Consequently, none of the named executive officers received any annual incentive payments with respect to fiscal year 2009, and we did not determine the extent to which the goals set forth in the Incentive Compensation Plans were met. In addition, for the same reasons, the Compensation Committee determined not to pre-establish performance goals with respect to performance-based compensation for fiscal year 2010. As a result, our current compensation program, including decisions relating to performance-based compensation, is based on the Compensation Committee’s subjective and discretionary assessment of the overall performance of our company and individual executive officers after receiving recommendations from the Interim Chief Executive Officer with respect to his direct reports. The Compensation Committee anticipates establishing performance goals in the future.

Each Incentive Compensation Plan adopted for fiscal year 2009 is described in more detail below. Individual performance objectives target specific areas for improvement or set specific goals against key performance indicators within an executive’s area of responsibility.

Mr. Van Vliet

We adopted an initial Incentive Compensation Plan for Mr. Van Vliet which was effective from April 1, 2008 until July 31, 2008. Under the terms of his initial Incentive Compensation Plan, Mr. Van Vliet was eligible

185

to receive an annual incentive award of up to 50% of his base salary. He was eligible to receive (1) up to 20% of his base salary for achieving performance objectives for the pharmaceutical division (which included manufacturing, material management, planning and scheduling, engineering quality assurance, quality control laboratory and distribution), (2) up to 10% of his base salary for achieving performance objectives in the areas of human resource management and corporate communications (which included staffing, investor relations, corporate communications, corporate training and development and employee and labor relations), and (3) up to 10% of his base salary for achieving performance objectives with respect to scientific affairs (which included research and development, analytical laboratory, product formulation, clinical affairs, regulatory, medical affairs, R&D quality assurance and project management). Such performance objectives consisted of the pharmaceutical division, human resources management and corporate communications and scientific affairs meeting their divisional and departmental objectives. Each of these units had numerous and detailed goals that had to be met in order to achieve their overall objectives.

In addition, Mr. Van Vliet was eligible to receive up to 10% of his base salary for (1) achieving certain average daily production targets, (2) achieving a certain level of adherence to laboratory turnaround times and (3) implementing and adhering to certain operations schedules. Average daily production targets were based on a specified number of units to be produced for 10 months of fiscal year 2009, unless lower levels were agreed to by executive management based on safety stock requirements. In evaluating the achievement of daily production targets, consideration was given to compression speeds, streamlining of batch records and turnaround times, efficiency of pharmacy operations and training of personnel. Adherence to laboratory turnaround times related to products in all areas, including raw materials, in-process, finished product, PDI and stability, with the goal of achieving 80% adherence for at least eight months and 85% adherence for two months of fiscal year 2009. Implementing and adhering to operations schedules related to specific facilities and operations, with the goal of achieving at least 90% of the scheduled plan for at least nine months of fiscal year 2009 and achieving at least 95% of the scheduled plan for at least five of such nine months.

We adopted a second Incentive Compensation Plan for Mr. Van Vliet which was effective from August 1, 2008 until March 31, 2009, pursuant to which Mr. Van Vliet was eligible to receive an annual incentive award of up to 50% of his base salary. Under the terms of his second Incentive Compensation Plan, Mr. Van Vliet was eligible to receive up to 25% of his base salary for achieving performance objectives with respect to our ETHEX subsidiary. Such performance objectives consisted of achieving corporate objectives, projects and tasks, including financial objectives in all areas of responsibility, which included the following:

• achieving specified net revenues and gross profits with respect to certain new ETHEX products, including launching such products, executing a marketing plan for each product and maximizing product distribution and awards for each new product;

• achieving specified net revenues and gross profits with respect to existing ETHEX products, including addressing related regulatory matters, making packaging enhancements, successfully executing detailed sales and marketing strategies and achieving a specified market share for certain products;

• developing a comprehensive strategic plan for ETHEX, including identifying new products for development and advancing business partnerships that will result in a specified amount of combined revenues;

• creating operating efficiencies that maximize profit contributions, including with respect to returned goods processing, certain compliance matters and forecasting; and

• enhancing corporate team building, including conducting periodic meetings, mentoring and recognizing outstanding contributions.

Mr. Van Vliet was also eligible to receive up to 15% of his base salary if ETHEX generated a specified amount of budgeted net revenues. In addition, Mr. Van Vliet was eligible to receive up to 10% of his base salary for the development, approval and initial implementation of a comprehensive five-year business plan for

186

ETHEX, including an executive summary, income statement projections, strategic and tactical plans, product pipeline assessments, new business opportunities and resources requirements.

Both of Mr. Van Vliet’s Incentive Compensation Plans provided that a promotion or transfer to another position of equal or greater responsibility would result in the termination of such plans. Consequently, the Incentive Compensation Plans we adopted for Mr. Van Vliet were terminated upon his appointment as Interim Chief Executive Officer in December 2008. In addition, we did not adopt a new incentive compensation plan for Mr. Van Vliet at the time he was appointed as Interim Chief Executive Officer.

Mr. Kanterman

We adopted an Incentive Compensation Plan for Mr. Kanterman which was effective from April 1, 2008 until March 31, 2009. Under the terms of his Incentive Compensation Plan, Mr. Kanterman was eligible to receive an annual incentive award of up to 20% of his base salary. He was eligible to receive (1) up to 10% of his base salary for achieving performance objectives in the areas of finance and business technology and (2) up to 10% of his base salary for achieving performance objectives in the areas of treasury and investor relations. Performance objectives in the finance area consisted of the completion of corporate objectives, projects and tasks, and special projects, which included the following:

• improving internal controls over financial reporting;

• developing standard operating procedures for the budgeting process;

• developing new approaches for determining costs related to product development;

• reviewing internal reporting procedures;

• providing financial training seminars to senior and mid-level managers in other departments; and

• conducting periodic reviews of division and unit financial performance.

Performance objectives in the business technology area consisted of the completion of corporate objectives, projects and tasks, and special projects, which included the following:

• extending existing technological capabilities with respect to certain facilities;

• enhancing data security with respect to laptops and mobile devices;

• conducting business continuity tests of critical systems;

• implementing cost saving measures to achieve a specified percentage reduction of costs;

• developing a data mining and reporting system to support the pharmaceutical division;

• implementing a unified architecture for audio and video conferencing, fax, telephone calls, voice mail and e-mail; and

• implementing new data storage subsystems to support business growth and disaster recovery capabilities.

Performance objectives in the area of investor relations consisted of the completion of corporate objectives, projects and tasks, and special projects, which included increasing our market capitalization by interacting with institutional investors and attending industry specific healthcare conferences and events and collaborating with the corporate growth and strategy area to assist in facilitating possible transactions.

Mr. Anderson

We adopted an Incentive Compensation Plan for Mr. Anderson which was effective from April 1, 2008 until March 31, 2009. Under the terms of his Incentive Compensation Plan, Mr. Anderson was eligible to receive an annual incentive award of up to 25% of his base salary for achieving performance objectives in the areas of

187

corporate growth and strategy and investor relations. Such performance objectives consisted of the completion of corporate objectives, projects and tasks, and special projects assigned to Mr. Anderson in such areas, as well as consideration of (1) the relative value and benefit to us of corporate growth and strategy agreements for which Mr. Anderson was the primary driver and (2) the relative contributions and effectiveness of his efforts in promoting stockholder value.

Mr. Anderson’s Incentive Compensation Plan provided that a promotion or transfer to another position of equal or greater responsibility would result in the termination of such plan. Consequently, the Incentive Compensation Plan we adopted for Mr. Anderson terminated upon his appointment as President and Chief Executive Officer of ETHEX in December 2008. In addition, we did not adopt a new incentive compensation plan for Mr. Anderson at the time he was appointed as President and Chief Executive Officer of ETHEX.

Mr. Bentley

We adopted an Incentive Compensation Plan for Mr. Bentley which was effective from April 1, 2008 until March 31, 2009. Under the terms of his Incentive Compensation Plan, Mr. Bentley was eligible to receive an annual incentive award of up to 30% of his base salary for achieving performance objectives in all functional areas of responsibility reporting to him. Performance objectives relating to the legal department, which was the functional area of responsibility reporting to Mr. Bentley, consisted of the completion of corporate objectives, projects and tasks, and special projects assigned to Mr. Bentley, which included the following:

• identifying legal requirements for conducting business in certain oversees countries and developing related standard contract provisions;

• developing standardized contract terms for various types of commercial agreements with third parties;

• reviewing and updating then-current standard form agreements;

• establishing an intranet site for the legal department;

• establishing a standardized promotional review board for all promotional and advertising communications pertaining to products;

• implementing policies and procedures relating to IP matters;

• creating periodic reports and establishing communication practices regarding company litigation; and

• developing a revised stock option policy.

Mr. Bentley’s employment with us was terminated on January 16, 2009, and he consequently was not eligible to receive any payments pursuant to his Incentive Compensation Plan.

Mr. Chibnall

We adopted an Incentive Compensation Plan for Mr. Chibnall which was effective from April 1, 2008 until March 31, 2009. Under the terms of his Incentive Compensation Plan, Mr. Chibnall was eligible to receive an annual incentive award of up to 30% of his base salary. He was eligible to receive up to 22.5% of his base salary for achieving performance objectives in all functional areas of responsibility reporting to him. Performance objectives in the areas of finance, which was the functional area of responsibility reporting to Mr. Chibnall, consisted of the completion of corporate objectives, projects and tasks, and special projects, which included the following:

• improving internal controls over financial reporting;

• developing standard operating procedures for the budgeting process;

• evaluating market conditions with respect to debt or equity transactions;

• enhancing communication in the finance department and adherence to all company policies and procedures;

188

• developing new approaches for determining costs related to product development;

• reviewing internal reporting procedures;

• providing financial training seminars to senior and mid-level managers in other departments; and

• conducting periodic reviews of division and unit financial performance.

Mr. Chibnall also was eligible to receive up to 5% of his base salary for conducting and documenting biweekly meetings with each of his direct reports and, beginning on July 1, 2008, conducting monthly departmental meetings in each functional area of finance and business technology. In addition, Mr. Chibnall was eligible to receive up to an additional 2.5% of his base salary for operating all areas under his responsibility in such a manner that, beginning on July 1, 2008, there are no major or minor deficiencies identified and that all internal controls in all areas are in place, functional and effective with no observations resulting in required remediation.

Mr. Divis

We adopted an Incentive Compensation Plan for Mr. Divis which was effective from April 1, 2008 until March 31, 2009. Under the terms of his Incentive Compensation Plan, Mr. Divis was eligible to receive an annual incentive award of up to 35% of his base salary. He was eligible to receive up to 15% of his base salary for achieving performance objectives with respect to our Ther-Rx subsidiary. Such performance objectives consisted of the completion of corporate objectives, projects and tasks, including financial objectives for net revenues and operating income, which included the following:

• achieving specified gross portfolio sales;

• achieving specified net portfolio sales;

• operating within a specified total annual departmental budget;

• improving resource allocation and returns by a specified percentage;

• achieving a specified amount of cost savings in specified areas;

• implementing cross-functional business reports; and

• restructuring standard operating procedures and establishing new standard operating procedures.

Mr. Divis was also eligible to receive up to 10% of his base salary if Ther-Rx generated a specified amount of budgeted net revenues and all selling, marketing and general administrative spending remained within budget, unless otherwise approved by executive management. In addition, Mr. Divis was eligible to receive up to 10% of his base salary for the successful acquisition of one or more products that were expected to launch in fiscal year 2009 or fiscal year 2010 with specified expected net revenues during the third year following the product launch. Mr. Divis was also eligible to receive 5% of his base salary based on the prescription level of our Evamist^™ product. However, the Incentive Compensation Plan provided that the total incentive earned could not exceed 35% of Mr. Divis’ base salary.

Discretionary cash incentives—During fiscal year 2009, Messrs. Kanterman and Chibnall each received a discretionary bonus of $30,000 in connection with completing the restatement of our interim and annual financial statements for the fiscal year ended March 31, 2007 after the conclusion of a review by the Option Special Committee of our stock option grant practices (which review was concluded in fiscal year 2008 and has been disclosed in our prior filings with the SEC).

Stock option grants—Stock option grants are designed to strengthen the link between realized compensation and returns for stockholders and thereby align management’s interest in our long-term success with the interests of our stockholders. Awards granted to executive officers are discretionary under the K-V Pharmaceutical

189

Company 2001 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. As part of implementing the goal of retaining the services of the named executive officers, we have awarded stock options to certain named executive officers as part of our retention programs (as more fully described below). The criteria described above are applied to each executive officer subjectively, based on the Compensation Committee’s evaluation of each named executive officer’s performance, options received previously by each named executive officer and the need to retain each named executive officer’s services.

On January 12, 2009, the Board, at the recommendation of the Compensation Committee, made the following stock option grants to certain named executive officers. All such options have a ten year term, an exercise price equal to the closing price of the Class A Common Stock on the NYSE on January 13, 2009 ($2.95 per share), and vest annually over three years (33% on the first anniversary date, 33% on the second anniversary date and 34% on the third anniversary date).

Name	Total Number of Stock Options Granted During Fiscal Year 2009(a)	Portion of Stock Options Vesting on January 13, 2010	Portion of Stock Options Vesting on January 13, 2011	Portion of Stock Options Vesting on January 13, 2012
David A. Van Vliet	150,000	49,500	49,500	51,000
Ronald J. Kanterman(b)	50,000	16,500	16,500	17,000
Michael S. Anderson	70,000	23,100	23,100	23,800
Gregory J. Divis, Jr.	70,000	23,100	23,100	23,800

(a) The stock options have a ten-year term and an exercise price of $2.95 per share.

(b) As set forth under “Employment Arrangements with Named Executive Officers—Mr. Kanterman (Former Chief Financial Officer)—Separation Agreement” below, pursuant to the terms of the Separation Agreement (as defined below), Mr. Kanterman has waived any and all rights to stock options held by him immediately prior to the Separation Date (as defined below).

Retention Awards—In April 2009, we implemented a retention program designed to achieve the following objectives:

• retain key executives that are critical to helping us successfully overcome the challenges facing our company at that time; and

• provide meaningful retention incentives while conserving as much cash as possible.

The primary components of the program included cash retention bonuses for 24 key employees at the vice president and director levels, as well as a combination of stock option awards and longer-term cash retention bonuses for 41 senior managers. As part of this program, Mr. Van Vliet received a grant of stock options, Messrs. Anderson and Kanterman each received cash retention bonuses and Mr. Divis received a cash retention bonus and a grant of stock options.

• The stock options were granted pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan and represent options to purchase shares of our Class A Common Stock. The options were granted on April 24, 2009, with a ten year term and an exercise price equal to the closing price of the Class A Common Stock on the NYSE on the date of grant ($1.52 per share), and vest 50% on December 31, 2009 and 50% on December 31, 2010, subject to the executive’s continued employment with our company or any subsidiary. If the executive’s employment is terminated without cause prior to December 31, 2010, any unvested stock options will vest upon termination.

• The cash retention awards will be paid no later than June 30, 2010, subject to the participant’s continued employment with our company or a subsidiary through March 31, 2010. If the executive is terminated without cause before March 31, 2010, the executive will receive the cash retention award.

190

The following table outlines the stock option retention grants and cash retention bonuses provided to the named executive officers. These awards are not disclosed in the Summary Compensation Table or the Grants of Plan Based Awards Table because they were made after March 31, 2009, the end of fiscal year 2009.

Name	Stock Options(a)	Cash Retention Award
David A. Van Vliet	50,000		—
Ronald J. Kanterman(b)	—	$	40,000
Michael S. Anderson	—	$	60,000
Gregory J. Divis, Jr.	10,000	$	60,000

(a) The stock options have a ten-year term and an exercise price of $1.52 per share. They vest in 50% installments on December 31, 2009 and 2010.

(b) As set forth under “Employment Arrangements with Named Executive Officers—Mr. Kanterman (Former Chief Financial Officer)—Separation Agreement” below, pursuant to the terms of the Separation Agreement, Mr. Kanterman remains eligible to receive the cash retention award.

Indirect Compensation

Indirect compensation for executive officers consists of the following benefit plans:

Insurance plans—We provide standard company-sponsored insurance plans to our employees, including the named 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 employees.

401(k) Plan—Through our 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 employees at the beginning of each pay period. We match employee contributions to the 401(k) Plan at 50% of the first 7% of the employee’s contributions.

Perquisites—Certain executives are generally provided a car allowance or use of a company owned or leased car. See the footnotes to the Summary Compensation Table under the heading “Other Compensation.” The former Chief Executive Officer was entitled to receive certain perquisites under the terms of his employment agreement, which are described in greater detail in the footnotes to the Summary Compensation Table under the heading “Other Compensation.”

Tax gross-up for disqualified incentive stock options—In connection with a review by the Option Special Committee of our board of directors of our stock option grant practices (which review was concluded in fiscal year 2008 and has been disclosed in our prior filings with the SEC), it was determined that certain incentive stock options granted to certain executives and employees in prior years had inadvertently been disqualified. As a result of this inadvertent disqualification, those executives and employees who exercised such options during fiscal year 2009 incurred additional tax liabilities. We provided a tax gross-up to all executives and employees in the amount of the additional tax liabilities incurred as a result of such option exercises. See the footnotes to the Summary Compensation Table under the heading “Other Compensation.”

The Compensation Committee periodically reviews the benefits offered to the named executive officers to ensure that the benefits program is competitive and cost-effective for us and supports our need for a qualified and experienced executive team. The benefits component of the executive compensation program is not tied to our company’s or individual performance.

Establishing Overall Compensation Levels.  The Compensation Committee establishes overall compensation levels based on the competitive market value for the area of responsibility as well as the education and experience of the executive.

191

Determining Incentive Compensation Allocation—Annual and Long-Term Incentives—The amount allocated to annual versus long-term compensation is determined on the basis of the amount of available funding for our 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 our stockholders and our ability to meet our 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 exercises discretion in determining an appropriate balance between short-term cash and long-term equity compensation. We believe 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. We have not adopted any policy with respect to coordinating option grant dates with the release of material 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 option grant dates correspond to the last trading day of a 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

Former Chief Executive Officer.  The former Chief Executive Officer’s compensation was based on the terms of his employment agreement, which was entered into in 1996 and subsequently amended. For a description of the compensatory elements of the employment agreement, please refer to the information under “—Employment Arrangements with Named Executive Officers” below.

Other Named Executive Officers.  Compensation levels for named executive officers who currently are employed with our company are determined, and for the former Chief Financial Officer and the former Senior Vice President and General Counsel were determined, based on (1) the overall performance of our company, (2) individual performance, (3) the executive’s experience and tenure at our company and (4) the terms of the related employment agreement.

For fiscal year 2009, we adopted an Incentive Compensation Plan for each named executive officer, other than Mr. M. Hermelin, which are described above under “—Components of Total Compensation—Direct Compensation—Annual Cash Incentives.” As noted above, we discontinued all Incentive Compensation Plans for fiscal year 2009. Consequently, none of the named executive officers received any annual incentive payments with respect to fiscal year 2009. In addition, the Compensation Committee determined not to pre-establish performance goals with respect to our performance-based compensation for fiscal year 2010. The Compensation Committee will consider establishing performance goals for subsequent fiscal years.

Employment Arrangements with Named Executive Officers

Mr. Van Vliet (Interim Chief Executive Officer)

Following the termination of the employment agreement of Mr. M. Hermelin and his termination as our Chief Executive Officer, the Board on December 5, 2008 appointed Mr. Van Vliet to serve as Interim Chief Executive Officer. (Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.) Prior to such date, Mr. Van Vliet served as President and Chief Executive Officer of our subsidiary, ETHEX

192

Corporation. Mr. Van Vliet’s employment and confidentiality agreement, which became effective on September 29, 2006 and was amended on December 31, 2008, remained in full force and effect during fiscal year 2009. On December 5, 2008, in connection with his appointment as Interim Chief Executive Officer, the Compensation Committee increased Mr. Van Vliet’s annual base salary from $445,050 to $525,000. On November 23, 2009, we entered into a new employment agreement with Mr. Van Vliet, which replaced and superseded in its entirety the employment and confidentiality agreement. Both agreements are described below.

Employment and confidentiality agreement—The initial term of the employment and confidentiality agreement was to expire on March 31, 2007. The employment and confidentiality agreement automatically renewed for successive 12-month periods unless terminated by us or Mr. Van Vliet. In addition to his base salary, the agreement stated that Mr. Van Vliet was eligible to receive an incentive bonus based on his participation in an Incentive Compensation Plan. Mr. Van Vliet was also provided the use of a company vehicle. As previously discussed, for fiscal year 2009, no bonuses or annual incentive payments were paid to any named executive officers. Mr. Van Vliet was eligible to receive stock-based awards under the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan and to participate in our Profit Sharing and 401(k) Plans.

The employment and confidentiality agreement also contained restrictive covenants preventing Mr. Van Vliet from competing against us or soliciting our customers or employees for a period of 36 months after the end of his employment.

Employment agreement entered into on November 23, 2009—The agreement has an initial term that ends on December 31, 2011. The term will automatically extend for successive twelve month periods unless terminated by us or Mr. Van Vliet by written notice at least 180 days prior to the expiration of the then current term. In addition, if a change of control (as such term is defined in the agreement) occurs during the term, the agreement will not expire prior to the second anniversary of the date of consummation of the change of control.

Pursuant to the agreement, Mr. Van Vliet receives a base salary of $525,000 per annum, which will be reviewed annually and may be increased at the discretion of the Board or the Compensation Committee. Mr. Van Vliet is eligible to receive an annual cash bonus based on performance objectives established by the Compensation Committee each year, provided that we, in our discretion, elect to put into effect an annual cash incentive plan or similar policy with respect to any applicable year.

We may terminate the agreement (1) immediately for “cause” (as defined in the agreement) upon written notice to Mr. Van Vliet, (2) without cause upon 30 days’ advance written notice or (3) upon Mr. Van Vliet’s disability (as defined in the agreement) upon 30 days’ advance written notice. Any determination that Mr. Van Vliet should be terminated for cause may be made during or after the term of the agreement and must be approved by no fewer than sixty-six and two-thirds (66 ²/3) percent of the directors then serving on the Board; provided, however, that if Mr. Van Vliet is a member of the Board, he will not participate in such vote, and a determination of cause may be made by no fewer than sixty-six and two-thirds (66 ²/3) percent of the remaining directors then serving on the Board.

Mr. Van Vliet may resign his employment upon giving us at least 120 days’ advance written notice. In addition, subject to certain notice and cure periods provided in the agreement, Mr. Van Vliet may resign from his employment with us for “good reason,” which is defined as the occurrence of any of the following without Mr. Van Vliet’s prior written consent:

• a material diminution by us in Mr. Van Vliet’s title, position, authority, responsibilities or duties or our assignment to him of duties inconsistent with his position or status with our company as of the effective date of the agreement, including, without limitation, any change which results in Mr. Van Vliet reporting to a lower level position than he reported to before such change;

• a material breach of the agreement;

193

• failure of a successor to our company to expressly agree to assume and agree to be bound by the agreement; or

• the relocation of Mr. Van Vliet’s principal place of employment to a place more than 75 miles from his principal place of employment as of the effective date of the agreement.

In the event that Mr. Van Vliet’s employment is terminated by us without cause or by Mr. Van Vliet with good reason, subject to Mr. Van Vliet’s compliance with the provisions of the agreement and the execution by Mr. Van Vliet of a general release of claims, as set forth in the agreement, we will pay or provide to Mr. Van Vliet the following. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits:

• continued participation in our plans providing medical, dental and vision insurance benefits, as applicable, for the 18 month period following the termination date; provided that, such welfare plan coverage will cease if Mr. Van Vliet obtains other full time employment providing for comparable welfare plan benefits prior to the expiration of such 18 month period; and

• one of the following amounts to be paid (1) over a period of 12 months in equal bi-weekly installments, less deductions as required by law, if the termination occurs prior to a change of control (as defined in the agreement) or (2) in a lump sum, less deductions as required by law, if the termination occurs within 12 months of a change of control:

• if the termination occurs prior to December 1, 2010, an amount equal to two times the sum of (x) Mr. Van Vliet’s then current base salary plus (y) Mr. Van Vliet’s target annual cash incentive, which amount (solely for purposes of determining payments following a termination by us without cause or by Mr. Van Vliet with good reason) will be determined by the Board in its sole discretion at the time of such termination and will not exceed 50 percent of Mr. Van Vliet’s then-current base salary; or

• if the termination occurs on or after December 1, 2010, an amount equal to two times the sum of (x) Mr. Van Vliet’s then current base salary plus (y) Mr. Van Vliet’s target annual cash incentive for the then-current year of the term (provided, however, solely for purposes of determining payments following a termination by us without cause or by Mr. Van Vliet with good reason, that in the event we have not adopted an annual cash incentive plan or similar policy with respect to any applicable year, the annual cash incentive for such year will be an amount equal to 50 percent of Mr. Van Vliet’s then-current base salary; and, provided further, that if such termination occurs after the initial term of the agreement, the average of the annual cash incentive earned by Mr. Van Vliet for the two calendar years immediately preceding the year of termination will replace “target annual cash incentive”).

Pursuant to the agreement, we will make a tax gross-up payment to Mr. Van Vliet under certain circumstances in the event he is required to pay any excise tax imposed on any amounts or benefits payable in connection with a change of control pursuant to Section 4999 of the Internal Revenue Code; provided, however, that in the event the aggregate value of the total amounts and benefits payable to Mr. Van Vliet in connection with a change of control exceeds three times his “base amount,” as defined in Section 280G(b)(3) of the Internal Revenue Code (the “Parachute Threshold”), by less than 10%, one or more of the amounts or benefits payable to Mr. Van Vliet will be reduced so that the aggregate value of such amounts and benefits is $1.00 less than the Parachute Threshold.

For a period of 36 months immediately following termination, regardless of how, when or why Mr. Van Vliet’s employment ends, he may not, among other things, compete with us, solicit our customers or employees or interfere with any of our suppliers, all as more fully described in the agreement.

194

Mr. Kanterman (Former Chief Financial Officer)

We previously entered into an employment and confidential information agreement with Mr. Kanterman, former Vice President and Chief Financial Officer, that commenced on January 26, 2004, and which was amended effective March 23, 2008 upon his appointment as Chief Financial Officer, and on December 31, 2008. The employment and confidential information agreement, which remained in full force and effect during fiscal year 2009, renewed for successive 12-month periods unless terminated by us or Mr. Kanterman. The employment and confidential information agreement stated that Mr. Kanterman was eligible to receive an incentive bonus based on his participation in an Incentive Compensation Plan. As previously discussed, for fiscal year 2009, no bonuses or annual incentive awards were paid to any named executive officers.

The employment and confidential information agreement also contained restrictive covenants preventing Mr. Kanterman from competing against us or soliciting our customers or employees for a period of 36 months after the end of his employment.

On September 2, 2009, Mr. Kanterman ceased serving as our Vice President and Chief Financial Officer as of that date. In connection with the foregoing, on December 14, 2009, we entered into a separation agreement and general release (the “Separation Agreement”) and a consulting and confidentiality agreement (the “Consulting Agreement”) with Mr. Kanterman, each effective as of September 2, 2009. The terms of the Separation Agreement and the Consulting Agreement are described below.

Separation Agreement—The Separation Agreement provides, among other things, that subject to Mr. Kanterman abiding by the terms of the Separation Agreement, and in consideration of Mr. Kanterman’s release of claims and Mr. Kanterman’s other covenants and agreements contained in the Separation Agreement, we agree to provide the following benefits to Mr. Kanterman:

• We will enter into the Consulting Agreement with Mr. Kanterman, which provides for an annual compensation rate (the “Compensation Rate”) of $330,000, an amount equal to his annual base salary as of September 2, 2009 (the “Separation Date”), payable in equal monthly installments as more fully described in the Consulting Agreement.

• We will pay Mr. Kanterman on June 30, 2010 an amount of $40,000, which represents the retention bonus to which Mr. Kanterman would have become entitled had his employment continued, upon the condition that Mr. Kanterman satisfactorily performs his duties under the Separation Agreement, the Consulting Agreement and our policies.

• For the period beginning on the Separation Date and ending on September 2, 2010, we will continue to provide, or cause our affiliates to provide, health (including medical, vision and dental), life and disability insurance to Mr. Kanterman and his family on terms and conditions available to our executive officers.

• Mr. Kanterman waives any and all rights to stock options held by him immediately prior to the Separation Date.

• Mr. Kanterman will receive a payment of $50,000 (the “Initial Payment”) and a gross-up payment (the “Gross-Up Payment”) in an amount such that after payment by Mr. Kanterman of all taxes imposed on the Initial Payment and the Gross-Up Payment, Mr. Kanterman retains an amount equal to the Initial Payment.

We previously entered into an indemnification agreement dated October 24, 2008 with Mr. Kanterman, in his capacity as a member of the Board, which is and will remain in effect. The existing rights of Mr. Kanterman pursuant to such agreement with regard to indemnification, advancement of expenses, insurance and exculpation from liability as described in such agreement are unaffected by the Separation Agreement.

195

We and Mr. Kanterman agree to release and discharge each other from any and all claims we have or may have one against the other, and that such releases and discharges extend to themselves and to certain released parties, all as set forth in the Separation Agreement.

Consulting Agreement—The Consulting Agreement provides, among other things, for a term of one year, beginning on September 2, 2009. Beginning on such date, Mr. Kanterman agrees to provide consulting services to us in the financial field, as requested by us, including but not limited to assistance in transition of responsibilities and ongoing continuity of Mr. Kanterman’s former job functions. During the term of the Consulting Agreement, we agree to pay Mr. Kanterman the Compensation Rate and will reimburse Mr. Kanterman for all travel and related expenses incurred as a result of his consulting services, provided we have approved such expenses in advance.

Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of the benefits pursuant to the Separation Agreement and the Consulting Agreement.

Mr. Anderson (President and Chief Executive Officer of ETHEX Corporation)

We previously entered into an employment agreement with Mr. Anderson, President and Chief Executive Officer of ETHEX. Mr. Anderson’s initial employment agreement with us commenced on May 23, 1994 and was subsequently amended on May 5, 1997, February 16, 2000, February 20, 2006 and December 31, 2008. The current term of the agreement expires on March 31, 2011 and thereafter the agreement automatically renews for successive 12-month periods until terminated by us or Mr. Anderson. In connection with his appointment as President and Chief Executive Officer of ETHEX, the Board increased Mr. Anderson’s annual base salary from $357,365 to $400,000 in December 2008. Prior to his appointment as President and Chief Executive Officer of ETHEX, Mr. Anderson served as Vice President, Industry Presence and Development.

Mr. Anderson may terminate the employment agreement by giving us notice (1) three months prior to the end of the initial term or a successive term or (2) at any time in the event he experiences health problems that require his retirement from a business career. The agreement terminates six months after notice is given, unless Mr. Anderson is disabled and unable to carry out the duties of his position, in which case the agreement may terminate earlier. Unless otherwise notified by us, Mr. Anderson is required to continue to perform his duties as an employee for six months after giving notice. He will receive his standard compensation while continuing to perform his duties as an employee.

We may terminate the agreement for any reason or for “cause” (as such term is defined in the agreement). If the agreement is terminated by us not for cause, Mr. Anderson is entitled to receive no less than one-half of his annual base salary, reduced by usual withholdings, payable in twelve equal monthly installments. In addition, Mr. Anderson will receive, at our expense, continued medical, disability, life insurance and other insurance coverage for twelve months or until Mr. Anderson obtains other full-time, non-temporary employment which provides comparable coverage. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits. In addition, all stock options held by Mr. Anderson become fully vested on the day of termination and remain exercisable for six months thereafter or until Mr. Anderson obtains other full-time, non-temporary employment, if earlier.

In the event we terminate the agreement for cause, Mr. Anderson is not entitled to any severance pay.

If, within two years following a change of control (as such term is defined in the agreement), Mr. Anderson’s employment terminates, involuntarily, with or without cause, for any reason whatsoever (except the death or disability of Mr. Anderson), he is entitled to receive a lump sum payment equal to the sum of (1) 1.5 times the greater of (a) his base salary immediately prior to the date of termination or (b) his base salary in effect immediately prior to the date on which the change of control occurred and (2) Mr. Anderson’s bonus which would have been payable in respect of the eighteen month period beginning on the date of termination if

196

Mr. Anderson had continued in his position. The bonus will be equal to the average of the bonuses Mr. Anderson received during the three most recent complete bonus years. Mr. Anderson will receive continued welfare benefits, such as health, life, dental and accidental death and dismemberment insurance, for a period of twenty-four months. In addition, unless the related option agreements provide otherwise, all stock options held by Mr. Anderson become fully vested and transferrable on the day of termination and remain exercisable for ninety days thereafter. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits.

For a period of 36 months immediately following termination, regardless of how, when or why Mr. Anderson’s employment ends, he may not, among other things, compete with us, solicit our customers or employees or interfere with any of our suppliers, all as more fully described in the agreement.

Mr. Divis (President of Ther-Rx Corporation)

We previously entered into an employment and confidentiality agreement with Mr. Divis, President of Ther-Rx Corporation that commenced on July 20, 2007 and remained in full force and effect during fiscal year 2009. On November 19, 2009, we entered into a new employment agreement with Mr. Divis, which replaced and superseded in its entirety the employment and confidentiality agreement. Both agreements are described below.

Employment and confidentiality agreement—The employment and confidentiality agreement automatically renewed for successive 12-month periods unless terminated by us or Mr. Divis. Under the terms of the employment and confidentiality agreement, Mr. Divis was entitled to benefits if his employment is terminated by us without cause. The employment and confidentiality agreement also contained restrictive covenants preventing Mr. Divis from competing against us or soliciting our customers or employees for a period of 36 months after the end of his employment.

Employment agreement entered into November 19, 2009—The agreement has an initial term that ends on December 31, 2011. The term will automatically extend for successive twelve month periods unless terminated by us or Mr. Divis by written notice at least 180 days prior to the expiration of the then current term. In addition, if a change of control (as such term is defined in the agreement) occurs during the term, the agreement will not expire prior to the second anniversary of the date of consummation of the change of control.

Pursuant to the agreement, Mr. Divis receives a base salary of $335,000 per annum, which will be reviewed annually and may be increased at the discretion of the Board or the Compensation Committee. Mr. Divis is eligible to receive an annual cash bonus based on performance objectives established by the Compensation Committee each year, provided that we, in our discretion, elect to put into effect an annual cash incentive plan or similar policy with respect to any applicable year.

We may terminate the agreement (1) immediately for “cause” (as defined in the agreement) upon written notice to Mr. Divis, (2) without cause upon 30 days’ advance written notice or (3) upon Mr. Divis’ disability (as defined in the agreement) upon 30 days’ advance written notice. Any determination that Mr. Divis should be terminated for cause may be made during or after the term of the agreement and must be approved by no fewer than sixty-six and two-thirds (66 ²/3) percent of the directors then serving on the Board; provided, however, that if Mr. Divis is a member of the Board, he will not participate in such vote, and a determination of cause may be made by no fewer than sixty-six and two-thirds (66 ²/3) percent of the remaining directors then serving on the Board.

Mr. Divis may resign his employment upon giving us at least 120 days’ advance written notice. In addition, subject to certain notice and cure periods provided in the agreement, Mr. Divis may resign from his employment with us for “relocation,” which is defined as the relocation of Mr. Divis’ principal place of employment to a place more than 75 miles from his principal place of employment as of the effective date of the Divis Agreement.

In the event that Mr. Divis’ employment is terminated by us without cause or by Mr. Divis upon relocation, subject to Mr. Divis’ compliance with the provisions of the agreement and the execution by Mr. Divis of a

197

general release of claims, as set forth in the agreement, we will pay or provide to Mr. Divis the following. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits:

• continued participation in our plans providing medical, dental and vision insurance benefits, as applicable, for the 18 month period following the termination date; provided that, such welfare plan coverage will cease if Mr. Divis obtains other full time employment providing for comparable welfare plan benefits prior to the expiration of such 18 month period; and

• the following amount to be paid (1) over a period of 12 months in equal bi-weekly installments, less deductions as required by law, if the termination occurs prior to a change of control (as defined in the agreement) or (2) in a lump sum, less deductions as required by law, if the termination occurs within 12 months of a change of control: an amount equal to one times the sum of (x) Mr. Divis’ then current base salary plus (y) Mr. Divis’ target annual cash incentive for the then-current year of the term (provided, however, solely for purposes of determining payments following a termination by us without cause or by Mr. Divis upon relocation, that in the event we have not adopted an annual cash incentive plan or similar policy with respect to any applicable year, the annual cash incentive for such year will be an amount equal to 25 percent of Mr. Divis’ then-current base salary; and, provided further, that if such termination occurs after the initial term of the agreement, the average of the annual cash incentive earned by Mr. Divis for the two calendar years immediately preceding the year of termination will replace “target annual cash incentive”).

Pursuant to the agreement, we will make a tax gross-up payment to Mr. Divis under certain circumstances in the event he is required to pay any excise tax imposed on any amounts or benefits payable in connection with a change of control pursuant to Section 4999 of the Internal Revenue Code; provided, however, that in the event the aggregate value of the total amounts and benefits payable to Mr. Divis in connection with a change of control exceeds three times his “base amount,” as defined in Section 280G(b)(3) of the Internal Revenue Code (the “Parachute Threshold”), by less than 10%, one or more of the amounts or benefits payable to Mr. Divis will be reduced so that the aggregate value of such amounts and benefits is $1.00 less than the Parachute Threshold.

For a period of 36 months immediately following termination, regardless of how, when or why Mr. Divis’ employment ends, he may not, among other things, compete with us, solicit our customers or employees or interfere with any of our suppliers, all as more fully described in the agreement.

Mr. Chibnall (Former Vice President, Finance and Chief Accounting Officer)

We previously entered into an employment agreement with Mr. Chibnall, Vice President, Finance and Chief Accounting Officer. Mr. Chibnall’s initial employment agreement with us commenced on December 22, 1995, and was subsequently amended on February 1, 2000, April 1, 2005 and December 31, 2008.

On February 19, 2010, Mr. Chibnall ceased serving as our Vice President, Finance and Chief Accounting Officer as of that date. In connection with the termination of his employment by us not for cause, Mr. Chibnall will receive one-half of his annual base salary, reduced by usual withholdings, payable in six equal monthly installments. Mr. Chibnall will also receive, at our expense, continued medical, disability, life insurance and other insurance coverage for six months or until Mr. Chibnall obtains other full-time, non-temporary employment which provides comparable coverage. In addition, all stock options held by Mr. Chibnall became fully vested on the day of termination and remain exercisable for six months thereafter or until Mr. Chibnall obtains other full-time, non-temporary employment, if earlier. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits.

Pursuant to the agreement, Mr. Chibnall agreed to provide reasonable and necessary services to assist us in the transition of responsibilities and ongoing continuity of his job function unless we do not request such services. In addition, for a period of 36 months immediately following termination, Mr. Chibnall may not, among other things, compete with us, solicit our customers or employees or interfere with any of our suppliers, all as more fully described in the agreement.

198

In addition, effective March 2, 2010, we entered into an agreement and release (the “Release”) with Mr. Chibnall. Pursuant to the Release, Mr. Chibnall agrees to release our company from any and all claims arising out of Mr. Chibnall’s employment with our company, all as set forth in the Release. Mr. Chibnall will receive a payment in the amount of one-twelfth of his annual base salary. The Release will not become effective until the related revocation period pursuant to the Age Discrimination in Employment Act of 1967 has passed.

Also effective March 2, 2010, we entered into an amendment to Mr. Chibnall’s employment agreement, which provides that in the event that any amounts payable to Mr. Chibnall in connection with his termination are subject to Section 409A of the Internal Revenue Code and are not subject to a related exception, such payments will be paid to Mr. Chibnall in a single sum as of the first day of the seventh month following the month in which payment would otherwise have commenced, together with interest on such amounts.

Mr. M. Hermelin (Former Chief Executive Officer)

As previously disclosed, on December 5, 2008, the Board terminated the employment agreement of Mr. M. Hermelin, our former Chief Executive Officer. Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.

The employment agreement with Mr. M. Hermelin commenced in 1996 and was extended in November 2004 through March 2010. It provided for automatic renewals for successive 12-month periods thereafter unless terminated by Mr. M. Hermelin or us. Pursuant to the terms of his employment agreement, Mr. M. Hermelin’s base compensation increased annually by the greater of the consumer price index or 8%. In addition, Mr. M. Hermelin was entitled to receive an incentive bonus calculated as a percentage of our company’s net income. For purposes of calculating the bonus, net income was adjusted to exclude the expense associated with the accrual of the bonus and any charges associated with in-process research and development. In addition, the bonus was reduced to reimburse our company for the cost of a personal assistant supplied by us to assist Mr. M. Hermelin with personal financial matters. Mr. M. Hermelin’s bonus was based on the following formula:

Net Income	Bonus %
Below $200,000	0	%
$200,000-$600,000	5	%
$600,000-$3,000,000	7	%
$3,000,000-$5,000,000	6	%
$5,000,000-$10,000,000	5	%
Over $10,000,000	4	%

The bonus was payable in one or more of the following forms: stock options, shares of restricted stock, discounted stock options or cash, as agreed upon by us and Mr. M. Hermelin. Because his employment was terminated prior to the end of the fiscal year, Mr. M. Hermelin did not receive an incentive bonus with respect to fiscal year 2009. Mr. M. Hermelin was also provided the use of a company vehicle and an annual allowance up to $10,000 for personal financial planning services. Mr. M. Hermelin had the option to elect 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. During fiscal year 2009, Mr. M. Hermelin did not elect to defer any compensation.

Mr. M. Hermelin was provided life insurance policies, which are currently in effect. The related premiums are to be repaid to us out of policy proceeds, in accordance with split-dollar agreements between us and Mr. M. Hermelin dated July 1, 1990, November 8, 1991 and June 9, 1999. Mr. M. Hermelin has the right to name the beneficiaries of these insurance policies. Mr. M. Hermelin was entitled to participate in our group life and health insurance programs or other comparable coverage at our expense for the duration of his life.

199

The employment agreement also provided for certain retirement benefits, as well as certain benefits if Mr. M. Hermelin’s employment had been terminated following a change in control of our company.

In 2004, the Compensation Committee engaged Watson Wyatt, a compensation, employee benefit and human resources consulting firm, to review the terms of Mr. M. 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 agreement was competitive with the median total direct compensation of comparable peer group companies. While Mr. M. Hermelin’s salary and bonus were at the high end of the range within the group, long-term incentives were lower, resulting in total compensation below the peer group’s median.

In reaching its conclusion, Watson Wyatt compared Mr. M. Hermelin’s compensation to a peer group of 13 companies in the pharmaceutical industry similar in size to our company. The peer group considered by Watson Wyatt included the following companies: Perrigo, Cephalon, Pharmaceutical Res, Valeant Pharm, Endo, Eon, American Pharma, Sepracor, Kos, Medicis, Ligand, Regeneron and Nektar. Mr. M. Hermelin’s total direct compensation (base salary, bonus and stock option grants) was between the 25^th percentile and median of the peer group. Mr. M. Hermelin’s base salary and bonus were in the top quartile of the peer group, whereas his long-term incentives were below the 25^th percentile of the peer group.

The Compensation Committee also reviewed a Bank of America report on chief executive officer compensation in the specialty pharmaceutical industry. The Bank of America report reviewed compensation practices of 21 specialty pharmaceutical companies. The companies included in the report were as follows: Cephalon, Mylan, Allergan, Shire, Alcon, Bausch & Lomb, Ivax, Forest, Biovail, Barr, Watson, Alpharma, KV Pharmaceutical, Eon Labs, Cubist, Andrx, King, Sepracor, AAI Pharma, Teva, and Elan. Based on the report, Mr. M. 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 officer 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.

Mr. Bentley (Former Senior Vice President and General Counsel)

On January 16, 2009, we gave written notice to Mr. Bentley that the employment and confidential information agreement dated April 24, 2006 and the letter agreement dated March 23, 2006 would terminate at the end of the 120-day notice period provided for in the employment agreement. In addition, we removed Mr. Bentley as Senior Vice President and General Counsel, effective immediately.

The employment agreement commenced on April 24, 2006 and automatically renewed for successive 12-month periods until terminated by us or Mr. Bentley.

Under the terms of his employment agreement, Mr. Bentley was entitled to benefits following the termination of his employment agreement. Please see “—Potential Payments Upon Termination or Change-in-Control” for a description of these benefits.

The employment agreement also contained restrictive covenants preventing Mr. Bentley from competing against us or soliciting our customers or employees for a period of 36 months after the end of his employment.

The Impact of Accounting and Tax Treatments on Forms of Compensation Paid

Based on regulations issued by the Internal Revenue Service, we have taken the certain actions to be eligible to deduct performance-based compensation paid to our named executive officers. Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation exceeding $1 million

200

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.

Effective April 1, 2006, we adopted SFAS 123(R), 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. 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(R) and (2) for any awards granted on or subsequent to the effective date of SFAS 123(R) based on the grant date fair value estimated in accordance with the provisions of that statement. Determining the fair value of share-based awards at the grant date requires judgment to identify the appropriate valuation model and estimate the assumptions, including the expected term of the stock options and expected stock-price volatility, to be used in the calculation. Judgment is also required in estimating the percentage of share-based awards that are expected to be forfeited. We estimated the fair value of stock options granted using the Black-Scholes option-pricing model with assumptions based primarily on historical data. If actual results differ significantly from these estimates, stock-based compensation expense could be materially impacted.

201

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 years ended March 31, 2009, 2008 and 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) two individuals, Marc S. Hermelin and Gregory S. Bentley, who were not serving as executive officers at the end of the fiscal year ended March 31, 2009 but would have been deemed named executive officers had they been serving as executive officers at such fiscal year end (each, a “named executive officer” and collectively, the “named executive officers”).

Name and Principal Position	Fiscal Year	Salary ($)		Bonus ($)		Option Awards ($)(1)		Non-Equity Incentive Plan Compensation ($)(2)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(3)	All Other Compensation ($)(4)	Total ($)
David A. Van Vliet,	2009	471,700		—		201,864		—	—	7,712	681,276
Interim President and Interim Chief Executive Officer	2008	371,035		52,628		144,549		64,500	—	8,768	641,480
	2007	176,641	(5)	72,916	(6)	74,914	(6)	—	—	3,170	327,641
Ronald J. Kanterman,	2009	330,000		30,000	(7)	87,648		—	—	8,276	455,924
Former Vice President, Treasurer and Chief Financial Officer	2008	298,975		—		34,470		42,900	—	8,510	384,855
	2007	280,420		35,000		34,296		—	—	5,726	355,442
Michael S. Anderson,	2009	371,577		—		153,555		—	—	13,372	538,503
President and Chief Executive Officer, ETHEX Corporation	2008	344,300		75,000		113,186		—	—	12,918	545,404
	2007	332,000		166,000	(8)	113,028		—	—	13,582	624,610
Gregory J. Divis, Jr.,	2009	335,000		—		68,911		—	—	8,716	412,627
President, Ther-Ex Corporation	2008	223,333		—		28,813		54,200	—	17,189	323,535
	2007	—		—		—		—	—	—	—
Richard H. Chibnall,	2009	252,252		30,000	(7)	56,236		—	—	432,281	770,769
Former Vice President, Finance and Chief Accounting Officer	2008	252,252		—		58,911		45,000	—	7,968	364,131
	2007	239,680		—		62,076		63,500	—	7,714	372,970
Marc S. Hermelin,	2009	1,087,917		—		1,778		—	0	711,968	1,801,663
Former Chairman of the Board and Former Chief Executive Officer	2008	1,383,847		—		—		4,276,735	2,232,000	768,730	8,661,312
	2007	1,281,764		—		—		2,545,857	877,000	602,652	5,307,273
Gregory S. Bentley,	2009	288,058		—		32,305		—	—	99,465	419,828
Former Senior Vice President and Former General Counsel	2008	315,680		—		25,105		94,500	—	12,705	447,990
	2007	273,071		90,000		18,863		—	—	3,884	385,818

(1) Option awards represent the compensation expense recognized by us for financial statement reporting purposes for fiscal year 2009 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 of the valuation assumptions used in determining the compensation expense, see Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(2) Non-equity incentive plan compensation represents payments under our annual cash incentive award programs. For additional discussion of our annual cash incentive award programs for the fiscal year ended March 31, 2009, see “—Compensation Discussion and Analysis—Components of Total Compensation—Annual cash incentives” above.

(3) Under the terms of his employment agreement, Mr. M. Hermelin would potentially have been 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 $1,752,000, $2,232,000 and $877,000 for fiscal years 2009, 2008 and 2007, respectively, in accordance with APB No. 12, Omnibus Opinion, as amended by

202

SFAS No. 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.

As previously disclosed, on December 5, 2008, the Board terminated the employment agreement with Mr. M. Hermelin “for cause” (as that term is defined in such employment agreement). Due to the termination of his employment agreement “for cause,” Mr. M. Hermelin is not entitled to any severance benefits. In addition, as a result of Mr. M. Hermelin’s termination “for cause,” we also determined we were no longer obligated for the retirement benefits specified in the employment agreement. Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.

(4) All other compensation for the fiscal year ended March 31, 2009 includes the following:

Name	Car Allowance ($)	401(k) Match ($)	Split Dollar Life Insurance ($)	Group Term Life Insurance ($)	Other Compensation ($)	Total Other Compensation ($)
David A. Van Vliet	20	7,530	—	162	—	7,712
Ronald J. Kanterman	—	8,105	—	171	—	8,276
Michael S. Anderson	4,570	8,269	—	533	—	13,372
Gregory J. Divis, Jr.	—	7,829	—	59	828	8,716
Richard H. Chibnall	8,989	7,817	—	167	415,308	432,281
Marc S. Hermelin	607	4,566	395,669	718	310,408	711,968
Gregory S. Bentley	2,953	8,739	—	274	87,499	99,465

During fiscal year 2009, we provided a company owned or leased vehicle to certain named executive officers as set forth above. At the end of each annual period ending October 31, each executive officer is required to indicate to us the personal usage made of the vehicle. The value of such usage, which is calculated on the basis of the value of the vehicle and the miles driven for personal use, is attributed to the executive officer as taxable income.

Other compensation for Mr. M. Hermelin includes $395,669 for the fiscal year ended March 31, 2009 of premiums paid by us under split-dollar life insurance agreements with Mr. M. 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. M. Hermelin should die while the agreements and policies remain in force. Mr. M. Hermelin has the right to name the beneficiaries of these insurance policies. The policies have a total death benefit of $19,500,000. Cumulative premiums paid since the date of the agreements total $5,023,386.

Other perquisites for Mr. M. Hermelin include the following:

Disability Insurance—Under the terms of his employment agreement, we were required to provide disability insurance for Mr. M. Hermelin equal to 60% of his base salary. The value of the disability protection was imputed to Mr. M. Hermelin in order for the ultimate disability benefits to be tax-free. The amount of compensation relative to this perquisite for the fiscal year ended March 31, 2009 was $7,035.

Vacation Payout—Under the terms of his employment agreement, Mr. M. Hermelin was entitled to either carry over up to eight weeks of vacation days accrued during the fiscal year to the next fiscal year or to receive a cash payment equal to the pro rata amount of his base salary for the portion of his accrued vacation days not taken. The amount of the cash equivalent of vacation days paid to Mr. M. Hermelin was $310,408 for the fiscal year ended March 31, 2009.

Tax Gross-up—Represents the amount payable under the employment agreement for taxes due on the imputed value of life and disability insurance. The amount of tax gross-up was $54,984 for the fiscal year ended March 31, 2009.

Other compensation for Mr. Chibnall includes a tax gross-up payment for disqualified incentive stock options in the amount of $415,308. As a result of an inadvertent disqualification of certain incentive stock options granted to Mr. Chibnall in prior years, he incurred additional tax liabilities upon exercising such options during fiscal year 2009. We provided a tax gross-up to Mr. Chibnall in the amount of the additional tax liabilities incurred as a result of such option exercises during fiscal year 2009. We also provided similar tax gross-up payments for disqualified incentive stock options to other employees who also incurred additional tax liabilities upon exercise of such options during fiscal year 2009. See “—Compensation Discussion and Analysis—Components of Total Compensation—Indirect Compensation—Tax gross-up for disqualified incentive stock options” above.

Other compensation for Mr. Bentley includes severance pay in the amount of $53,846, calculated based on his salary, and a vacation payout in the amount of $33,653. Mr. Bentley was entitled to this compensation as a result of the termination of his employment agreement, as described under “Employment Arrangements with Named Executive Officers—Mr. Bentley (Former Senior Vice President and General Counsel)” above.

(5) Mr. Van Vliet joined our company in October 2006. His salary for fiscal year 2007 covers the period of October 1, 2006 through March 31, 2007.

(6) Mr. Van Vliet was guaranteed a bonus of $72,916 for fiscal year 2007 under the terms of his employment offer. In addition, he received a stock option grant of 100,000 shares of Class A Common Stock under the terms of the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan in fiscal year 2007.

203

(7) Messrs. Kanterman and Chibnall each received a one-time bonus of $30,000 in recognition of their efforts in connection with completing the restatement of our interim and annual financial statements for the fiscal year ended March 31, 2007 after the conclusion of a review by the Option Special Committee of our stock option grant practices.

(8) Mr. Anderson was guaranteed a one-time bonus of $166,000 for fiscal year 2007 under the terms of his Fiscal Year 2007 Incentive Compensation Plan.

(9) Mr. Divis joined our company in July 2007. His salary for fiscal year 2008 covers the period of July 1, 2007 through March 31, 2008.

Grants of Plan-Based Awards

The following table provides information about equity and non-equity awards granted to named executive officers for the fiscal year ended March 31, 2009:

Name	Grant Date	Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)			All Other Option Awards: Number of Securities Underlying Options (#)(2)	Exercise or Base Price of Option Awards ($/Sh)	Grant Date Fair Value of Stock and Option Awards ($)(3)
		Threshold ($)	Target ($)	Maximum ($)
David A. Van Vliet(4)	01/13/2009	—	—	—	150,000	2.95	249,644
		—	235,850	235,850	—	—	—
Ronald J. Kanterman	01/13/2009	—	—	—	50,000	2.95	83,215
		—	66,000	66,000	—	—	—
Michael S. Anderson	01/13/2009	—	—	—	70,000	2.95	116,501
		—	92,894	92,894	—	—	—
Gregory J. Divis, Jr.	01/13/2009	—	—	—	70,000	2.95	116,501
		—	117,250	117,250	—	—	—
Richard H. Chibnall		—	75,676	75,676	—	—	—
Marc S. Hermelin(5)	01/13/2009	—	—	—	15,000	2.95	24,964
Gregory S. Bentley		—	102,594	102,594	—	—	—

(1) We adopted a cash incentive compensation plan for fiscal year 2009 for each named executive officer, other than Mr. M. Hermelin, to reward achievement of certain corporate objectives, as determined at the end of fiscal year 2009. As noted above under “—Compensation Discussion and Analysis—Components of Total Compensation—Annual cash incentives,” following the discontinuation of manufacturing and distribution of our products and the investigation by the FDA and related matters, in January 2009 we terminated all incentive compensation plans for fiscal year 2009. Consequently, none of the named executive officers received any annual cash incentive payments with respect to fiscal year 2009.

For additional discussion of our annual cash incentive award programs, see “—Compensation Discussion and Analysis—Components of Total Compensation—Annual Cash Incentives” above.

(2) On January 12, 2009, the Board, at the recommendation of the Compensation Committee, granted options to purchase shares of our Class A Common Stock to the named executive officers and the directors. Options granted to the named executive officers have a ten year term, an exercise price equal to the closing price of the Class A Common Stock on the NYSE on January 13, 2009 ($2.95 per share), and vest annually over three years (33% on the first anniversary date, 33% on the second anniversary date and 34% on the third anniversary date).

Mr. M. Hermelin, who no longer served as Chairman of the Board and Chief Executive Officer on January 12, 2009, received a grant of stock options to purchase 15,000 shares of Class A Common Stock in his capacity as director (not as an officer of our company). Such options have a ten year term, an exercise price equal to the closing price of the Class A Common Stock on the NYSE on January 13, 2009 ($2.95 per share), and vest in four equal quarterly installments beginning on March 31, 2009.

204

(3) 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 of the valuation assumptions used in determining the grant date fair value and the accounting for stock options, see Note 19—“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

(4) We adopted two cash incentive plans for Mr. Van Vliet during fiscal year 2009. The first plan was effective from April 1, 2008 until July 31, 2008. The second plan was effective from August 1, 2008 until March 31, 2009. See “—Compensation Discussion and Analysis—Components of Total Compensation—Annual cash incentives” above for more information.

(5) Mr. M. Hermelin’s employment agreement provided that annual incentive payments would be determined by applying the bonus formula in the employment agreement to our net income for fiscal year 2009, as determined at the end of fiscal year 2009. See the “—Employment Arrangements with Named Executive Officers—Mr. M. Hermelin (Former Chief Executive Officer)” section for a description of the formula. As described above, the Board terminated Mr. M. Hermelin’s employment agreement prior to the end of fiscal year 2009. As a result, Mr. M. Hermelin did not receive any annual incentive payments with respect to fiscal year 2009. Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.

205

Information as to Stock Options

The following tables list certain information concerning option exercises and option holdings as of the end of fiscal year 2009 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 Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)	Option Expiration Date
Name	Class A Common Stock	Class B Common Stock		All listed are Class A Common Stock
David A. Van Vliet	30,000 —   —   2,000 —	—   5,000 2,500 —   —	(1)  (2)	70,000 —   —   500 150,000	(3)  (4)  (5)	23.70 25.23 17.85 19.99 2.95	10/05/2016 6/29/2009 9/10/2009 11/1/2010 01/13/2019
Ronald J. Kanterman	15,000 5,000 —	—   —   —		10,000 20,000 50,000	(6)  (7)  (5)	24.56 24.96 2.95	3/26/2014 3/31/2018 01/13/2019
Michael S. Anderson	60,000 2,500 —	—   —   —		15,000 2,500 70,000	(8)  (9)  (5)	24.12 23.09 2.95	3/31/2011 5/21/2014 01/13/2019
Gregory J. Divis, Jr.	6,000 —	—   —		24,000 70,000	(10)  (5)	28.60 2.95	09/28/2017 01/13/2019
Richard H. Chibnall	—   5,000 10,000	6,750 —   —	(11)	—   5,000 15,000	(12)  (13)	6.23 23.09 19.99	03/31/2009 05/21/2014 11/01/2015
Marc S. Hermelin	3,750	—		11,250	(14)	2.95	01/13/2019
Gregory S. Bentley	—	—		25,000	(15)	18.66	6/30/2016

(1) Option granted on 6/29/2004 and vests ratably as to 20% per year from date of grant.

(2) Option granted on 9/10/2004 and vests ratably as to 20% per year from date of grant.

(3) Option granted on 10/05/2006 and vests ratably as to 10% per year from date of grant.

(4) Option granted on 11/01/2005 and vests ratably as to 20% per year from date of grant.

(5) Option granted on 1/13/2009 and vests ratably as to 33.33% the first two years from date of grant and 33.34% the third year from date of grant.

(6) Option granted on 3/26/2004 and vests ratably as to 10% per year from date of grant.

(7) Option granted on 3/31/2008 and vests ratably as to 10% per year from date of grant.

(8) Option granted on 3/31/2006 and vests ratably as to 20% per year from date of grant.

(9) Option granted on 5/21/2004 and vests ratably as to 10% per year from date of grant.

(10) Option granted on 9/28/2007 and vests ratably as to 10% per year from date of grant.

(11) Option granted on 3/31/1999 and vests ratably as to 10% per year from date of grant.

(12) Option granted on 5/21/2004 and vests ratably as to 10% per year from date of grant.

(13) Option granted on 11/1/2005 and vests ratably as to 10% per year from date of grant.

(14) Option granted to Mr. M. Hermelin in his capacity as director on 1/13/2009 and vests in four equal quarterly installments beginning on March 31, 2009.

(15) Option granted on 6/30/2006 and vests ratably as to 10% per year from date of grant.

206

Option Exercises and Stock Vested

Name	Number of Shares Acquired on Exercise(#)	Value Realized on Exercise($)(a)
Michael S. Anderson	3,375	—
Richard H. Chibnall	4,250	—

(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 are considered exercised upon completion of a two-year forfeiture period.

Potential Payments Upon Termination or Change-in-Control

Certain of the our 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 our company. The following discussion provides information with respect to payments which named executive officers are entitled to receive upon termination of employment or following termination resulting from a change in control of our company. The dollar amounts described below assume that the triggering event for each named executive officer occurred at March 31, 2009. 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.

David A. Van Vliet

As described above under “—Employment Arrangements with Named Executive Officers,” on November 23, 2009, we entered into a new employment agreement with Mr. Van Vliet that supersedes the employment agreement that was in effect during fiscal year 2009. Assuming that the employment agreement entered into with Mr. Van Vliet on November 23, 2009 was in effect on March 31, 2009, Mr. Van Vliet would have been entitled to benefits if his employment had been terminated by us without cause or by him for good reason, including if such termination occurred following a change of control of our company, subject to his compliance with the provisions of the agreement and the execution by Mr. Van Vliet of a general release of claims. In either case, Mr. Van Vliet would have been entitled to (1) continued benefits over an 18-month period and (2) severance pay equal to two times the sum of (x) Mr. Van Vliet’s then current base salary plus (y) Mr. Van Vliet’s target annual cash incentive, which target annual cash incentive (solely for purposes of determining payments following termination) would have been determined by the Board in its sole discretion at the time of such termination and would not have exceeded 50 percent of Mr. Van Vliet’s then-current base salary. Such severance pay would have been paid over a period of 12 months in equal bi-weekly installments, less deductions as required by law, or in a lump sum, less deductions as required by law, if the termination had occurred within 12 months of a change of control. (As described above under “—Employment Arrangements with Named Executive Officers,” if the termination were to occur after December 1, 2010, a different calculation would be used to determine Mr. Van Vliet’s target annual cash incentive for purposes of determining payments following termination.)

Assuming that Mr. Van Vliet’s employment had been terminated as of March 31, 2009 by us without cause or by him for good reason, regardless of whether following a change of control of our company, the value of these benefits would have been approximately $1,589,823, calculated as follows:

2x Annual base salary	$	1,050,000
2x Target annual cash incentive(a)		525,000
Employee benefits(b)		14,823
Total value	$	1,589,823

(a) Assumes a target annual cash incentive equal to 50% of Mr. Van Vliet’s base salary.

(b) Represents the benefits to be paid to Mr. Van Vliet, including continued participation in plans providing medical, dental and vision insurance benefits, as applicable, over the next 18 months, assuming no increase in cost over the cost incurred for the 18 months ended March 31, 2009.

207

Ronald J. Kanterman

As described above under “—Employment Arrangements with Named Executive Officers,” Mr. Kanterman ceased serving as our Chief Financial Officer on September 2, 2009, and on December 14, 2009 we entered into a Separation Agreement and General Release and a Consulting and Confidentiality Agreement with Mr. Kanterman, each effective as of September 2, 2009. Such agreements supersede the employment agreement that was in effect during fiscal year 2009. Pursuant to the agreements, subject to his compliance with the provisions of the agreements, the execution by Mr. Kanterman of a general release of claims and the waiver by Mr. Kanterman of any rights to stock options held by him immediately prior to the separation date, Mr. Kanterman became entitled to (1) his annual base salary as of September 2, 2009 for a term of one year, payable in equal monthly installments, for agreeing to provide consulting services in the financial field, (2) an amount of $40,000, which represents the retention bonus Mr. Kanterman would have become entitled to had his employment continued, (3) an additional payment of $50,000 (including a gross-up payment such that after payment by Mr. Kanterman of all taxes imposed on the $50,000 and the gross-up payment, Mr. Kanterman would retain an amount equal to $50,000), and (4) continued health (including medical, vision and dental), life and disability insurance for himself and his family over a 12-month period.

The value of these benefits is approximately $435,040, calculated as follows:

Annual base salary(a)	$	330,000
Retention bonus		40,000
Additional payment		50,000
Employee benefits(b)		15,040
Total value	$	435,040

(a) Represents consulting payments to Mr. Kanterman.

(b) Represents continued health (including medical, vision and dental), life and disability insurance for Mr. Kanterman and his family over the next 12 months, assuming no increase in cost over the cost incurred for the 12 months ended March 31, 2009.

Michael S. Anderson

Under the terms of his employment agreement, Mr. Anderson is entitled to benefits if his employment is terminated by us not for cause or if his employment is terminated following a change of control of our company.

In the event of involuntary termination, except for cause, Mr. Anderson is entitled to receive severance pay equal to 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, 2009, the value of these benefits would be approximately $415,402, calculated as follows:

Annual base salary	$	400,000
Acceleration of stock options(a)		—
Employee benefits(b)		15,402
Total value	$	415,402

(a) Represents the aggregate value of the acceleration of unvested stock options based on the difference between the closing price of our Class A Common Stock on March 31, 2009 of $1.65 and the exercise price of the option. The value set forth above is zero because all of Mr. Anderson’s unvested stock options have exercise prices greater than $1.65.

(b) Represents the benefits paid for Mr. Anderson including group term insurance, disability insurance and medical benefits.

208

In the event of a termination following a change of control of our 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, 2009 following a change of control, the value of these benefits to Mr. Anderson would be approximately $810,804, calculated as follows:

1.5x base salary	$	600,000
Bonus(a)		180,000
Acceleration of stock options(b)		—
Employee benefits(c)		30,804
Total value	$	810,804

(a) Represents an estimated bonus to be paid assuming an annual bonus of 30% of base salary prorated over 18 months.

(b) Represents the aggregate value of the acceleration of unvested stock options based on the difference between the closing price of our Class A Common Stock on March 31, 2009 of $1.65 and the exercise price of the option. The value set forth above is zero because all of Mr. Anderson’s unvested stock options have exercise prices greater than $1.65.

(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, 2009.

Gregory J. Divis, Jr.

As described above under “—Employment Arrangements with Named Executive Officers,” on November 19, 2009, we entered into a new employment agreement with Mr. Divis that supersedes the employment agreement that was in effect during fiscal year 2009. Assuming that the employment agreement entered into with Mr. Divis on November 19, 2009 was in effect on March 31, 2009, Mr. Divis would have been entitled to benefits if his employment had been terminated by us without cause or by him following the relocation of his principal place of employment by more than 75 miles, including if such termination occurred following a change of control of our company, subject to his compliance with the provisions of the agreement and the execution by Mr. Divis of a general release of claims. In either case, Mr. Divis would have been entitled to (1) continued benefits over an 18-month period and (2) severance pay equal to the sum of (x) Mr. Divis’ then current base salary plus (y) Mr. Divis’ target annual cash incentive, which target annual cash incentive, if none had been adopted for the applicable year, would have been equal to 25 percent of Mr. Divis’ then-current base salary. Such severance pay would have been paid over a period of 12 months in equal bi-weekly installments, less deductions as required by law, or in a lump sum, less deductions as required by law, if the termination had occurred within 12 months of a change of control.

Assuming that Mr. Divis’ employment had been terminated as of March 31, 2009 by us without cause or by him following a relocation of his principal place of employment by more than 75 miles, regardless whether following a change of control of our company, the value of these benefits would have been approximately $441,142, calculated as follows:

Annual base salary	$	335,000
Target annual cash incentive(a)		83,750
Employee benefits(b)		22,392
Total value	$	441,142

(a) Assumes a target annual cash incentive of 25% of Mr. Divis’ base salary.

(b) Represents the benefits to be paid to Mr. Divis, including continued participation in plans providing medical, dental and vision insurance benefits, as applicable, over the next 18 months, assuming no increase in cost over the cost incurred for the 18 months ended March 31, 2009.

209

Richard H. Chibnall

As described above under “—Employment Arrangements with Named Executive Officers,” Mr. Chibnall ceased serving as our Vice President, Finance and Chief Accounting Officer on February 19, 2010. In connection with the termination of his employment by us not for cause, Mr. Chibnall will receive one-half of his annual base salary, reduced by usual withholdings, payable in six equal monthly installments. Mr. Chibnall will also receive, at our expense, continued medical, disability, life insurance and other insurance coverage for six months or until Mr. Chibnall obtains other full-time, non-temporary employment which provides comparable coverage. In addition, all stock options held by Mr. Chibnall became fully vested on the day of termination and remain exercisable for six months thereafter or until Mr. Chibnall obtains other full-time, non-temporary employment, if earlier. Further, under the terms of the Release described above under “—Employment Arrangements with Named Executive Officers,” Mr. Chibnall will receive a payment in the amount of one-twelfth of his annual base salary. The value of these benefits is approximately $152,091, calculated as follows:

One-half annual base salary	$	126,126
One-twelfth annual base salary		21,021
Acceleration of stock options(a)		—
Employee benefits(b)		4,944
Total value	$	152,091

(a) Represents the aggregate value of the acceleration of unvested stock options based on the difference between the closing price of our Class A Common Stock on February 19, 2010 of $3.03 and the exercise price of the option. The value set forth above is zero because all of Mr. Chibnall’s unvested stock options have exercise prices greater than $3.03.

(b) Represents the benefits to be paid to Mr. Chibnall, including continued medical, disability, life insurance and other insurance coverage, as applicable, over the next 6 months, assuming no increase in cost over the cost incurred for the 18 months ended March 31, 2009.

Gregory S. Bentley

Under the terms of his employment agreement, Mr. Bentley was entitled to benefits after his employment was terminated by us without cause. During the 120 day notice period following his termination without cause on January 16, 2009, Mr. Bentley received his regular compensation. Pursuant to the employment agreement, such payments would have been reduced by any compensation Mr. Bentley would have received from other full-time employment during the notice period. We exercised our option pursuant to the employment agreement to direct Mr. Bentley not to perform any work for us or our affiliates during the notice period.

Base salary for 120 days	$	114,475
Total value	$	114,475

Pension Benefits

Name	Plan Name	Present Value of Accumulated Benefit		Payments During Last Fiscal Year ($)
Marc S. Hermelin	K-V Pharmaceutical Company Non-Qualified Retirement Plan	$	—	$	—

210

Under the terms of his employment agreement, Mr. M. Hermelin would have been 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 would have been 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. Since the employment agreement was terminated as discussed above, the present value of the accumulated benefit is zero. Mr. M. Hermelin has informed us, however, that he believes he effectively retired from his employment with us prior to the termination of his employment agreement on December 5, 2008 by the Board.

In addition, the employment agreement would have entitled Mr. M. 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 was unfunded at the time of Mr. M. Hermelin’s termination.

There are no defined benefit arrangements for the other named executive officers.

Compensation Committee Interlocks and Insider Participation

Jonathon E. Killmer served as the Chairman of the Compensation Committee, and Norman D. Schellenger served as a member of the Compensation Committee, during fiscal year 2009. Neither has ever served as an officer or employee of our company or had any relationship requiring disclosure under any paragraph of Item 404 of Regulation S-K.

211

COMPENSATION COMMITTEE REPORT

In fulfilling its oversight responsibilities with respect to the Compensation Discussion and Analysis included in this Annual Report on Form 10-K, the Compensation Committee, among other things, has:

• reviewed and discussed the Compensation Discussion and Analysis with management; and

• based on such review, the Compensation Committee recommended to the Board of Directors that such Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Respectfully submitted,

THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF K-V PHARMACEUTICAL COMPANY

Jonathon E. Killmer, Chairman

Norman D. Schellenger, Member

The information contained in the Compensation Committee Report in this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

212

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners

Under regulations of the SEC, persons who have power directly or indirectly to vote or to dispose of our shares of Class A and Class B Common Stock (together, the “Common Stock”), either alone or jointly with others, are deemed to be beneficial owners of those shares. The following table sets forth information as of January 31, 2010, with respect to each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our Common Stock, in addition to those holders listed under “Security Ownership of Management.”

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percent of Class A		Percent of Class B
Class A Common Stock	FMR LLC(1) 82 Devonshire Street Boston, MA 02109	4,109,050	10.89	%	—
Class A Common Stock	Royce & Associates, LLC(2) 1414 Avenue of the Americas New York, NY 10019	3,463,823	9.18	%	—
Class B Common Stock	Parkside Financial Bank & Trust(3) 8112 Maryland Avenue, Suite 101 Clayton, MO 63105	2,234,145	—		18.45	%
Class B Common Stock	Thomas R. Corbett(4) One US Bank Plaza St. Louis, MO 63101	881,780	—		7.28	%

(1) As reflected on the Schedule 13G/A dated December 31, 2009 and filed with the SEC on February 16, 2010 by FMR LLC and Edward C. Johnson 3d. As more fully described on the Schedule 13G/A, Fidelity Management & Research Company, a wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 4,109,050 shares of Class A Common Stock as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of such investment companies is more fully described on the Schedule 13G/A. Edward C. Johnson 3d and FMR LLC each reported no sole voting power; no shared voting power; sole dispositive power of 4,109,050 shares of Class A Common Stock; and no shared dispositive power.

(2) As reflected on the Schedule 13G dated November 30, 2008 and filed with the SEC on January 26, 2009 by Royce & Associates, LLC, which reported sole voting power of 3,463,823 shares of Class A Common Stock; no shared voting power; sole dispositive power of 3,463,823 shares of Class A Common Stock; and no shared dispositive power.

(3) As reflected on the Schedule 13G dated December 31, 2009 and filed with the SEC on February 12, 2010 by Parkside Financial Bank & Trust. As more fully described on a Form 4 filed with the SEC on March 27, 2009 by Parkside Financial Bank & Trust, Parkside Financial Bank & Trust is the successor trustee pursuant to a Trust Agreement dated 12/22/1973 for the benefit of Anne S. Kirschner and on behalf of Anne S. Kirschner individually.

(4) As reflected on the Schedule 13D dated August 1, 2009 and filed with the SEC on August 5, 2009 by Mr. Corbett, as amended by the Schedule 13D/A dated September 2, 2009 and filed with the SEC on September 2, 2009 and the Schedule 13D/A dated December 10, 2009 and filed with the SEC on December 15, 2009, as more fully described on the Schedule 13D, as amended. Consists of (i) 215,115 shares of Class B Common Stock over which Mr. Corbett has sole voting and dispositive power as trustee of the Victor M. Hermelin Trust FBO Marc S. Hermelin, dated June 2, 1971 and the Victor M. Hermelin Trust FBO Arnold L. Hermelin, dated June 2, 1971 and (ii) 666,665 shares of Class B Common Stock over which Mr. Corbett has sole voting and dispositive power as trustee of the Yosef Trust, dated January 1, 1997. Mr. Corbett has no pecuniary interest in any of the shares of Class B Common Stock described in this footnote (4) and disclaims beneficial ownership of all such shares.

213

Security Ownership of Management

The following table shows, as of January 31, 2010, the beneficial ownership of (1) each of the executive officers named in the Summary Compensation Table, (2) each present director of our 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.

Name of Beneficial Owner	Amount of Beneficial Ownership- Class A Stock(a)		Percent of Class A(b)		Amount of Beneficial Ownership- Class B Stock(a)		Percent of Class B(b)
Jean M. Bellin	19,300		*	*	—		—
Kevin S. Carlie	25,900		*	*	13,500	(c)	*	*
Terry B. Hatfield	19,300		*	*	—		—
Shares beneficially attributed to David S. Hermelin pursuant to a trust:
Lawrence Brody, Marc S. Hermelin and David S. Hermelin, Trustees One Metropolitan Square St. Louis, MO 63101	1,447,535	(d)	3.69	%	2,136,555	(d)	17.62	%
David S. Hermelin, individually owned	30,375		*	*	52,875		*	*
Total shares attributable to David S. Hermelin	1,477,910		3.77	%	2,189,430		18.06	%
Shares beneficially attributed to Marc S. Hermelin pursuant to trusts:
Lawrence Brody, Arnold L. Hermelin and Marc S. Hermelin, Trustees One Metropolitan Square St. Louis, MO 63101	1,000,312	(e)	2.55	%	2,246,209	(e)	18.53	%
Lawrence Brody, Marc S. Hermelin and David S. Hermelin, Trustees One Metropolitan Square St. Louis, MO 63101	1,447,535	(d)	3.69	%	2,136,555	(d)	17.62	%
Marc S. Hermelin, individually owned	372,842	(f)	*	*	1,934,401	(f)	15.95	%
Total shares attributable to Marc S. Hermelin	2,820,689		7.20	%	6,317,165		52.10	%
Ronald J. Kanterman	3,100		*	*	—		—
Jonathon E. Killmer	17,800		*	*	5,000		*	*
John Sampson	—		—		—		—
Norman D. Schellenger	19,300		*	*	—		—
David A. Van Vliet	117,495		*	*	—		—
Michael S. Anderson	134,431		*	*	—		—
Gregory J. Divis, Jr.	37,331		*	*	—		—
Richard H. Chibnall	39,350		*	*	—		—
Gregory S. Bentley	—		—		—		—
All current directors and executive officers as a group (17 individuals)	3,331,703	(g)	8.50	%	6,388,540	(g)	52.69	%

214

** Less than one percent

(a) Includes the following shares that were not owned by the persons listed but which could be purchased from us under options exercisable currently or within 60 days after January 31, 2010.

	Shares of Class A Common Stock	Shares of Class B Common Stock
Jean M. Bellin	19,300	—
Kevin S. Carlie	25,900	—
Terry B. Hatfield	19,300	—
David S. Hermelin	15,000	—
Marc S. Hermelin	15,000	—
Ronald J. Kanterman	—	—
Jonathon E. Killmer	16,800	5,000
John Sampson	—	—
Norman D. Schellenger	19,300	—
David A. Van Vliet	115,995	—
Michael S. Anderson	86,331	—
Gregory J. Divis, Jr.	36,106	—
Richard H. Chibnall	35,000	—
Gregory S. Bentley	—	—

(b) In determining the percentages of shares deemed beneficially owned by each director and executive 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 31, 2010 is assumed.

(c) These shares are held as security for a loan.

(d) These shares are held in two irrevocable trusts created by another party, the beneficiaries of which are Marc S. Hermelin (as to 956,036 shares of Class A Common Stock and 1,771,293 shares of Class B Common Stock) and Minnette Hermelin (deceased), the mother of Marc S. Hermelin (as to 491,499 shares of Class A Common Stock and 365,262 shares of Class B Common Stock).

(e) These shares are held in an irrevocable trust created by another party, the beneficiary of which is Arnold L. Hermelin.

(f) These shares include 15,000 options of Class A Common Stock, which vest in four quarterly installments beginning on March 31, 2009.

(g) 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 currently are exercisable or are exercisable within 60 days of January 31, 2010, is assumed. For such purposes, 39,200,798 shares of Class A Common Stock and 12,124,335 shares of Class B Common Stock are assumed to be outstanding.

In addition to the 37,735,436 shares of Class A Common Stock outstanding as of January 31, 2010, 40,000 shares of the 7% Preferred Stock were 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, holders of 7% Preferred Stock have 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, 51,662,633 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 31, 2010.

215

In addition, we issued $200.0 million principal amount of Convertible Subordinated Notes which mature in 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 NYSE, a director of our company only qualifies as “independent” (1) if our Board affirmatively determines that the director has no material relationship with our company (either directly or as a partner, shareholder or officer of an organization that has a relationship with our company) and (2) as long as such director otherwise meets the requirements for independence set forth in Section 303A.02 of the NYSE’s Listed Company Manual. Our Board has established guidelines to assist it in determining whether a director has a material relationship with our company. Under these guidelines, a director is considered to be independent if he or she meets the criteria for independence set forth on Exhibit A of our Corporate Governance Guidelines and as required by the Sarbanes-Oxley Act of 2002, the SEC and the NYSE. A copy of our Corporate Governance Guidelines (including Exhibit A) is available on our Internet website (http://www.kvpharmaceutical.com) and can be obtained free of charge by written request to the attention of the Secretary at the address appearing on the first page of this Annual Report on Form 10-K or by telephone at (314) 645-6600.

Our Board of Directors has determined that Messrs. Bellin, Carlie, Hatfield, Killmer and Schellenger are “independent” as determined under our Corporate Governance Guidelines and Section 303A.02 of the NYSE’s Listed Company Manual. Our Board intends to make a determination of Mr. Sampson’s independence in connection with our next annual meeting.

Transactions with Related Persons

Victor M. Hermelin, our founder and Chairman Emeritus, father of Marc S. Hermelin and grandfather of David S. Hermelin, received a salary, consulting fees and other compensation of $142,005, $12,888 and $4,776, respectively, during the fiscal year ended March 31, 2009.

Marc S. Hermelin, a director, the beneficial owner of more than 5% of the outstanding shares of our Class A and Class B Common Stock and our former Chairman and Chief Executive Officer, is a partner in a partnership that leases certain real property to us. Lease payments made by us to the partnership for this property during the fiscal year ended March 31, 2009 was $316,113. Mr. M. Hermelin also received fees for serving as a director on the Board during fiscal year ended March 31, 2009 as set forth above under Item 11—“Executive Compensation—Compensation of Directors—Total Director Compensation Paid During Fiscal Year 2009.”

David S. Hermelin, the son of Marc S. Hermelin, is a director and was employed by us as Vice President, Corporate Strategy and Operations Analysis until December 5, 2008. Pursuant to the terms of his employment agreement with us, Mr. D. Hermelin received a salary, earned incentive and other compensation of $204,627, $0 and $58,686, respectively, during the fiscal year ended March 31, 2009. Mr. D. Hermelin’s employment agreement and employment with us were terminated on December 5, 2008. Mr. D. Hermelin also received fees for serving as a director on the Board during fiscal year ended March 31, 2009 as set forth above under Item 11—“Executive Compensation—Compensation of Directors—Total Director Compensation Paid During Fiscal Year 2009.”

Sarah R. Weltscheff was employed by us as senior vice president, human resource management and corporate communications until December 5, 2008. Ms. Weltscheff and Marc S. Hermelin are married. During the fiscal year ended March 31, 2009, Ms. Weltscheff (1) received a salary, earned incentive and other compensation of $254,216, $0 and $54,311, respectively, from employment with us and (2) exercised options

216

with a realized value of $26,678. Realized value is based on the difference between the market price of the stock on the date of exercise and the exercise price. Ms. Weltscheff’s employment agreement and employment with us were terminated on December 5, 2008.

Review, Approval or Ratification of Transactions with Related Persons

Pursuant to the related party transaction guidelines adopted by the Board, 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 we are a party, and in which an executive officer, director, nominee for director, a stockholder owning 5% or more of our securities or any of such person’s immediate family members, is a party or is known by us 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 per year or (2) the compensation has otherwise been approved by the Compensation Committee or the Board.

In determining whether a related party transaction is in, or not opposed to, our best interest, the Nominating and Corporate Governance Committee may consider any factors deemed relevant or appropriate, including (but not be limited to):

• 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 us 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 us.

In making its decision, the Nominating and Corporate Governance Committee may consider our compliance officer’s written recommendation as to issues raised under our Standards 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 described above were approved under our related party transaction guidelines.

Item 14. Principal Accounting Fees and Services

Audit Fees

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, our current independent registered public accounting firm, during the fiscal years ended March 31, 2009 and March 31, 2008, respectively:

	March 31, 2009		March 31, 2008
Audit Fees(1)	$	3,500,000	$	1,000,000
Total Fees	$	3,500,000	$	1,000,000

(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 quarterly reports for the related annual period.

Includes approximately $840,000 for special investigation services rendered during the fiscal year ended March 31, 2009.

217

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 us 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 a particular 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 Chairman of the Audit Committee authority to approve permitted services provided that the Chairman reports any decisions to the Audit 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 the fiscal year ended March 31, 2009. The Audit Committee, after review and discussion with KPMG LLP of our 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.

We have retained KPMG LLP to act as our independent registered public accounting firm for the fiscal year ending March 31, 2010.

218

PART IV

Item 15. Exhibits, Financial Statement Schedules

The following documents are filed as a part of this Annual Report on Form 10-K:

		Page
(a)  1.	Financial Statements:
	The following consolidated financial statements of the Company are included in Item 8—“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K:
	Report of Independent Registered Public Accounting Firm	105
	Consolidated Balance Sheets as of March 31, 2009 and 2008	106
	Consolidated Statements of Operations for the Years Ended March 31, 2009, 2008 and 2007	107
	Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2009, 2008 and 2007	109
	Consolidated Statements of Shareholders’ Equity for the Years Ended March 31, 2009, 2008 and 2007	110
	Consolidated Statements of Cash Flows for the Years Ended March 31, 2009, 2008 and 2007	111
	Notes to Consolidated Financial Statements	112
2.	Financial Statement Schedules:
	Schedule II—Valuation and Qualifying Accounts	221
3.	Exhibits. See the Exhibit Index on pages 222 through 227 of this Annual Report on Form 10-K. Management contracts and compensatory plans are designated on the Exhibit Index.

219

SIGNATURES

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

K-V PHARMACEUTICAL COMPANY
By:	/s/ David A. Van Vliet
	David A. Van Vliet Interim President and Interim Chief Executive Officer (Principal Executive Officer)

By:	/s/ Thomas S. McHugh
	Thomas S. McHugh Interim Chief Financial Officer, Interim Treasurer, Chief Accounting Officer, Vice President of Finance and Corporate Controller (Principal Financial Officer and Principal Accounting Officer)

Date: March 25, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities as members of the Board of Directors of the Company on the date indicated:

Signature as of March 25, 2010:

By:	/s/ Terry B. Hatfield
	Terry B. Hatfield

By:	/s/ Jean M. Bellin
	Jean M. Bellin

By:	/s/ Kevin S. Carlie
	Kevin S. Carlie

By:
	David S. Hermelin

By:
	Marc S. Hermelin

By:	/s/ Jonathon E. Killmer
	Jonathon E. Killmer

By:	/s/ John Sampson
	John Sampson

By:	/s/ Norman D. Schellenger
	Norman D. Schellenger

220

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

	Balance at beginning of year		Additions charged to costs and expenses			Amounts charged to reserves		Balance at end of year
Year Ended March 31, 2007:
Allowance for doubtful accounts	$	397	$	320		$	1	$	716
Reserves and liabilities for sales allowances		30,405		150,646			147,443		33,608
Inventory obsolescence		4,152		11,979			3,746		12,385
	$	34,954	$	162,945		$	151,190	$	46,709
Year Ended March 31, 2008:
Allowance for doubtful accounts	$	716	$	168		$	17	$	867
Reserves and liabilities for sales allowances		33,608		240,573			221,276		52,905
Inventory obsolescence		12,385		18,849			11,286		19,948
	$	46,709	$	259,590		$	232,579	$	73,720
Year Ended March 31, 2009:
Allowance for doubtful accounts	$	867	$	(577	)	$	290	$	—
Reserves and liabilities for sales allowances		52,905		344,891			304,305		93,491
Inventory obsolescence		19,948		74,212			42,186		51,974
	$	73,720	$	418,526		$	346,781	$	145,465

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.

221

EXHIBIT INDEX

Exhibit No.	Description
3.1	Certificate of Incorporation of the Company, as amended through September 5, 2008, filed herewith.
3.2	By-Laws of the Company, as amended through December 29, 2009, which was filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed January 4, 2010, are incorporated herein by reference.
4.1	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 fiscal year ended March 31, 1987, are incorporated herein by reference.
4.2	Indenture dated as of May 16, 2003, by and between the Company and Deutsche Bank Trust Company Americas, which was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 21, 2003, is incorporated herein by reference.
4.3	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, which was filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed May 21, 2003, is incorporated herein by reference.
4.4	Promissory Note, dated March 23, 2006 between MECW, LLC and LaSalle National Bank Association, which was filed as Exhibit 99 to the Company’s Current Report on Form 8-K filed March 29, 2006, is incorporated herein by reference.
4.5	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 fiscal year ended March 31, 2006, is incorporated herein by reference.
10.1	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 fiscal year ended March 31, 1983, is incorporated herein by reference.
10.2	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 fiscal year ended March 31, 1992, is incorporated herein by reference.
10.3	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 fiscal year ended March 31, 1997, is incorporated herein by reference.
10.4*	K-V 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 reference.
10.5*	First Amendment to the K-V Pharmaceutical Company Fourth Restated Profit Sharing Plan and Trust dated September 18, 1990, is incorporated herein by reference.
10.6*	Fourth Amendment to and Restatement, dated as of January 2, 1997, of the K-V 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 fiscal year ended March 31, 1997, is incorporated herein by reference.

222

Exhibit No.	Description
10.7*	K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, as amended, which was filed as Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2008, is incorporated herein by reference.
10.8*	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 herein by reference.
10.9*	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 herein by reference.
10.10*	Form of Incentive Stock Option Agreement for grants to employees pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 6, 2009, is incorporated herein by reference.
10.11*	Form of Nonqualified Stock Option Agreement for grants to employees pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, which was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 6, 2009, is incorporated herein by reference.
10.12*	Form of Nonqualified Stock Option Agreement for grants to directors pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, which was filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed February 6, 2009, is incorporated herein by reference.
10.13*	Form of Incentive Stock Option Agreement for grants to employees pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, filed herewith.
10.14*	Form of Nonqualified Stock Option Agreement for grants to employees pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, filed herewith.
10.15*	Form of Nonqualified Stock Option Agreement for grants to directors pursuant to the K-V Pharmaceutical Company 2001 Incentive Stock Option Plan, filed herewith.
10.16*	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 fiscal year ended March 31, 1992, is incorporated herein by reference.
10.17*	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 fiscal year ended March 31, 1997, is incorporated herein by reference.
10.18*	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 fiscal year ended March 31, 1999, is incorporated herein by reference.
10.19*	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 fiscal year ended March 31, 2000, is incorporated herein by reference.
10.20*	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 reference.

223

Exhibit No.	Description
10.21	Exclusive License Agreement, dated as of April 1, 1999, between Victor M. Hermelin as licensor and the Company as licensee, which was filed as Exhibit 10(ff) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1999, is incorporated herein by reference.
10.22*	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 fiscal year ended March 31, 2000, is incorporated herein by reference.
10.23*	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 fiscal year ended March 31, 2002, is incorporated herein by reference.
10.24*	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 fiscal year ended March 31, 2003, is incorporated herein by reference.
10.25*	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 fiscal year ended March 31, 2004, is incorporated herein by reference.
10.26*	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 fiscal year ended March 31, 2006, is incorporated herein by reference.
10.27*	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 fiscal year ended March 31, 2006, is incorporated herein by reference.
10.28*	Employment Agreement between the Company and Ronald J. Kanterman, Vice President, Treasurer dated January 26, 2004, which was filed as Exhibit 10(x) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.29*	Amendment to Employment Agreement between the Company and Ronald J. Kanterman, Vice President and Chief Financial Officer, dated March 23, 2008, which was filed as Exhibit 10(ff) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008, is incorporated herein by reference.
10.30*	Separation Agreement and General Release between the Company and Ronald J. Kanterman, dated as of September 2, 2009, filed herewith.
10.31*	Consulting and Confidentiality Agreement between the Company and Ronald J. Kanterman, dated as of September 2, 2009, filed herewith.
10.32*	Employment Agreement between the Company and Gregory S. Bentley, Senior Vice President and General Counsel, dated April 24, 2006, which was filed as Exhibit 10(y) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.33*	Employment Agreement between the Company and David A. Van Vliet, Chief Administration Officer, dated September 29, 2006, which was filed as Exhibit 10(z) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.

224

Exhibit No.	Description
10.34*	Employment Agreement between the Company and David A. Van Vliet, Interim President and Interim Chief Executive Officer, dated November 23, 2009, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 25, 2009, is incorporated herein by reference.
10.35*	Employment Agreement between the Company and Rita E. Bleser, President, Pharmaceutical Division, dated April 30, 2007, which was filed as Exhibit 10(aa) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.36*	Employment Agreement between Ther-Rx and Gregory J. Divis, Jr., President, Ther-Rx Corporation, dated July 20, 2007, which was filed as Exhibit 10(bb) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.37*	Employment Agreement between the Company and Gregory J. Divis, Jr., President of Ther-Rx Corporation, dated November 19, 2009, which was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 25, 2009, is incorporated herein by reference.
10.38*	Employment Agreement between the Company and Janice C. Forsyth, General Counsel, Vice President and Secretary, dated January 11, 2010, filed herewith.
10.39*	Employment Agreement between the Company and Thomas S. McHugh, Interim Chief Financial Officer, Interim Treasurer, Chief Accounting Officer, Vice President of Finance and Corporate Controller, dated February 19, 2010, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 11, 2010, is incorporated herein by reference.
10.40*	Employment and Confidential Information Agreement by and between the Company and Richard H. Chibnall, dated December 22, 1995, as amended by amendment dated February 1, 2000, amendment dated April 1, 2005 and amendment dated December 31, 2008, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 18, 2010, is incorporated herein by reference.
10.41*	Agreement and Release, effective March 2, 2010, between the Company and Richard H. Chibnall, filed herewith.
10.42*	Fourth Amendment, effective March 2, 2010, to Employment and Confidential Information Agreement, as amended, by and between the Company and Richard H. Chibnall, filed herewith.
10.43*	Employment Agreement by and between Particle Dynamics, Inc. and Paul T. Brady, President, Particle Dynamics, Inc., dated May 5, 2005, which was filed as Exhibit 10(dd) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.44*	Employment Agreement between the Company and David S. Hermelin, Vice President, Corporate Strategy and Operations Analysis, dated April 8, 1998, as amended by amendment dated August 16, 2004, which was filed as Exhibit 10(ee) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, is incorporated herein by reference.
10.45*	Consulting agreement, dated March 23, 2008, between the Company and Gerald R. Mitchell, which was filed as Exhibit 10(gg) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008, is incorporated herein by reference.
10.46**	Asset Purchase Agreement by and between the Company and VIVUS, Inc., dated as of March 30, 2007, which was filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, is incorporated herein by reference.

225

Exhibit No.	Description
10.47	Asset Purchase Agreement by and among the Company, Cytyc Prenatal Products Corp. and Hologic, Inc., dated as of January 16, 2008, which was filed as Exhibit 10(ii) to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008, is incorporated herein by reference.
10.48	Amendment, dated January 8, 2010, to the Asset Purchase Agreement by and among the Company, Cytyc Prenatal Products Corp. and Hologic, Inc., dated as of January 16, 2008, filed herewith.
10.49	Form of Indemnification Agreement for directors, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 29, 2008, is incorporated herein by reference.
10.50*	Form of Indemnification Agreement for Interim Chief Executive Officer, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 31, 2009, is incorporated herein by reference.
10.51*	Form of Indemnification Agreement for Certain Executive Officers, which was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 31, 2009, is incorporated herein by reference.
10.52*	Form of Retention Agreement, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 5, 2009, is incorporated herein by reference.
10.53	Consent Decree of Permanent Injunction as filed in the United States District Court, Eastern District of Missouri, Eastern Division on March 2, 2009, which was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed March 3, 2009, is incorporated herein by reference.
10.54	Plea Agreement, Guidelines Recommendations and Stipulations as filed in the United States District Court, Eastern District of Missouri, Eastern Division on March 2, 2010, which was filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 3, 2010, is incorporated herein by reference.
10.55	Settlement Agreement, dated as of June 9, 2009, among Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P. and the Company, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 10, 2009, is incorporated herein by reference.
10.56**	Patent License Agreement, dated as of June 9, 2009, among Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P. and the Company, which was filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 10, 2009, is incorporated herein by reference.
10.57**	Distribution and Supply Agreement, dated as of June 9, 2009, between Purdue Pharma L.P. and the Company, which was filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 10, 2009, is incorporated herein by reference.
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, 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, 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.

226

Exhibit No.	Description
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.

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

227

EX-3.1

Exhibit 3.1

CERTIFICATE OF INCORPORATION

OF

K-V PHARMACEUTICAL COMPANY

* * * * * * * * * * * * * * * * * * * * * * * * *

1. The name of the corporation is K-V PHARMACEUTICAL COMPANY.

2. The address of its registered office in the State of Delaware is No. 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.

3. The nature of the business or purposes to be conducted or promoted is:

To manufacture and sell at wholesale and retail, and to deal in, all kinds of medicinal, chemical, pharmaceutical and other useful preparations for scientific, medicinal and domestic use. To carry on the business of the manufacture and sale of proprietary medicines, remedies, drugs and chemicals.

To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description.

To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation.

To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trade-marks and trade names, relating to or useful in connection with any business of this corporation.

To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof.

To borrow or raise moneys for any of the purposes of the corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes.

To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of the corporation’s property and assets, or any interest therein, wherever situated.

In general, to possess and exercise all the powers and privileges granted by the General Corporation Law of Delaware or by any other law of Delaware or by this certificate of incorporation together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes of the corporation.

The business and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the business and purposes specified in each of the foregoing clauses of this article shall be regarded as independent business and purposes.

4. The total number of shares of stock which the corporation shall have authority to issue is Two Million and One Hundred Thousand (2,100,000) of which stock Two Million (2,000,000) shares of the par value of One Dollar ($1.00) each amounting in the aggregate to Two Million Dollars ($2,000,000.) shall be Common stock and of which One Hundred Thousand (100,000) shares of the par value of One Hundred Dollars ($100.00) each, amounting in the aggregate to Ten Million Dollars ($10,000,000.) shall be Preferred stock.

5. The name and mailing address of each incorporator is as follows:

NAME	MAILING ADDRESS
B. J. Consono	100 West Tenth Street Wilmington, Delaware 19899
W. E. Paul Garrett	100 West Tenth Street Wilmington, Delaware 19899
J. L. Rivera	100 West Tenth Street Wilmington, Delaware 19899

6. The corporation is to have perpetual existence.

7. In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized:

To make, alter or repeal the by-laws of the corporation.

To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation.

To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created.

By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or by-laws, expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.

When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation.

8. The Board of Directors of the company shall be divided into three classes which are hereby designated Class A, Class B and Class C. The authorized number of directors of each class shall be one-third of the total number of directors from time to time authorized by by-law; provided that if the authorized number of directors is not a multiple of three, the authorized number of Class A directors shall be the number nearest to but not exceeding one-third of the total authorized number of directors; the authorized number of Class B directors shall be the number nearest to but not exceeding one-half of the remaining authorized number of directors; and the authorized number of Class C directors shall be the remaining authorized number of directors.

At the first annual meeting of stockholders following the day on which these provisions become effective Class A directors to the authorized number thereof shall be elected to hold office until the first annual meeting of stockholders after their election; Class B directors to the authorized number thereof shall be elected to hold office until the second annual meeting of stockholders after their election; and Class C directors to the authorized number thereof shall be elected to hold office until the third annual meeting of stockholders after their election.

At each succeeding annual meeting of stockholders the directors of the class whose term of office expires on the day of such meeting shall retire and shall be replaced by the election of directors of the same class to the then authorized number thereof to hold office until the third annual meeting of stockholders after their election.

Retiring directors shall be eligible for re-election if otherwise qualified and shall in any event continue in office until their successors shall have been duly elected or appointed.

In the event of any vacancy however caused occurring on the board such vacancy may be filled either by the stockholders at a general meeting called for the purpose or by the board if the remaining directors constitute a quorum. Any director elected or appointed to fill any such vacancy shall hold office for the unexpired portion of the term of the director whose office has been vacated.

9. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

10. Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide.

11. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 28th day of May, 1971.

/s/ B. J. Consono

/s/ W. E. Paul Garrett

/s/ J. L. Rivera

STATE OF DELAWARE	)
	)	ss:
COUNTY OF NEW CASTLE	)

BE IT REMEMBERED that on this 28th day of May, 1971, personally came before me, a Notary Public for the State of Delaware, B. J. Consono, W. E. Paul Garrett & J. L. Rivera all of the parties to the foregoing certificate of incorporation, known to me personally to be such, and severally acknowledged the said certificate to be the act and deed of the signers respectively and that the facts stated therein are true.

GIVEN under my hand and seal of office the day and year aforesaid.

/s/ [name of signatory]

Notary Public

AGREEMENT OF MERGER

AGREEMENT OF MERGER, dated this 17th day of June, 1971, pursuant to Section 252 of the General Corporation Law of the State of Delaware, between K-V PHARMACEUTICAL COMPANY, a Delaware corporation and K-V PHARMACAL COMPANY, a Missouri corporation.

WITNESSETH that:

WHEREAS, all of the constituent corporations desire to merge into a single corporation; and

WHEREAS, said K-V PHARMACEUTICAL COMPANY, by its certificate of incorporation which was filed in the office of the Secretary of State of Delaware on June 1, 1971, and recorded in the office of the Recorder of Deeds for the County of New Castle on June 1, 1971, has an authorized capital stock consisting of Two Million, One Hundred Thousand (2,100,000) shares, divided into One Hundred Thousand (100,000) shares of preferred stock of the par value of One Hundred Dollars ($100.00) each amounting in the aggregate to Ten Million Dollars ($10,000,000) and Two Million (2,000,000) shares of common stock of the par value of One Dollar ($1.00) each amounting in the aggregate to Two Million Dollars ($2,000,000). Five Hundred (500) shares of such common stock are now issued and outstanding and such shares shall be cancelled; and

WHEREAS, said K-V PHARMACAL COMPANY, a corporation organized under the laws of the State of Missouri by its certificate of incorporation which was filed in the office of the Secretary of State of Missouri, on July 13, 1946, has an authorized capital stock consisting of One Thousand (1,000) shares of the par value of One Hundred Dollars ($100.00) each, all of one class, amounting in the aggregate to One Hundred Thousand Dollars ($100,000) of which stock Three Hundred and Fifty (350) shares are now issued and outstanding; and

WHEREAS, the registered office of said K-V PHARMACEUTICAL COMPANY in the State of Delaware is located at 100 West Tenth Street in the City of Wilmington, County of New Castle, and the name of its registered agent at such address is The Corporation Trust Company; and the registered office of K-V PHARMACAL COMPANY in the State of Missouri is located at 2503 South Hanley Road in the City of St. Louis, County of St. Louis, and the name of its registered agent at said address is Victor M. Hermelin:

NOW, THEREFORE, the corporations, parties to this agreement in consideration of the mutual covenants, agreements and provisions hereinafter contained do hereby prescribe the terms and conditions of said merger and mode of carrying the same into effect as follows:

FIRST: K-V PHARMACEUTICAL COMPANY, hereby merges into itself K-V PHARMACAL COMPANY and said K-V PHARMACAL COMPANY shall be and hereby is merged into K-V PHARMACEUTICAL COMPANY, which shall be the surviving corporation.

SECOND: The Certificate of Incorporation of K-V PHARMACEUTICAL COMPANY in effect on the date of the merger provided for in this agreement, shall continue in full force and effect as the Certificate of Incorporation of the corporation surviving this merger.

THIRD: The manner of converting the outstanding shares of the capital stock of each of the constituent corporations into the shares or other securities of the surviving corporation shall be as follows:

(a) Each share of common stock of the merged corporation which shall be outstanding on the effective date of this agreement, and all rights in respect thereof shall forthwith be changed and converted into Two Thousand (2,000) shares of common stock of the surviving corporation.

(b) After the effective date of this agreement each holder of an outstanding certificate representing shares of common stock of the merged corporation shall surrender the same to the surviving corporation and each such holder shall be entitled upon such surrender to receive the number of shares of common stock of the surviving corporation on the basis provided herein. Until so surrendered the outstanding shares of the stock of the merged corporation to be converted into the stock of the surviving corporation as provided herein, may be treated by the surviving corporation for all corporate purposes as evidencing the ownership of shares of the surviving corporation as though said surrender and exchange had taken place.

FOURTH: The terms and conditions of the merger are as follows:

(a) The by-laws of the surviving corporation as they shall exist on the effective date of this agreement shall be and remain the by-laws of the surviving corporation until the same shall be altered, amended or repealed as therein provided.

(b) The directors and officers of the surviving corporation shall continue in office until the next annual meeting of stockholders and until their successors shall have been elected and qualified.

(c) This merger shall become effective upon filing with the Secretary of State of Delaware.

(d) Upon the merger becoming effective, all the property, rights, privileges, franchises, patents, trade-marks, licenses, registrations and other assets of every kind and description of the merged corporation shall be transferred to, vested in and devolve upon the surviving corporation without further act or deed and all property, rights, and every other interest of the surviving corporation and the merged corporation shall be as effectively the property of the surviving corporation as they were of the surviving corporation and the merged corporation respectively. The merged corporation hereby agrees from time to time, as and when requested by the surviving corporation or by its successors or assigns, to execute and deliver or cause to be executed and delivered all such deeds and instruments and to take or cause to be taken such further or other action as the surviving corporation may deem necessary or desirable in order to vest in and confirm to the surviving corporation title to and possession of any property of the merged corporation acquired or to be acquired by reason of or as a result of the merger herein provided for and otherwise to carry out the intent and purposes hereof and the proper officers and directors of the merged corporation and the proper officers and directors of the surviving corporation are fully authorized in the name of the merged corporation or otherwise to take any and all such action.

FIFTH: Anything herein or elsewhere to the contrary notwithstanding, this agreement may be terminated and abandoned by the board of directors of any constituent corporation at any time prior to the date of filing the agreement with the Secretary of State.

IN WITNESS WHEREOF, the parties to this agreement, pursuant to the approval and authority duly given by resolutions adopted by their respective boards of directors have caused these presents to be executed by the President and attested by the Secretary of each party hereto, and the corporate seal affixed.

K-V PHARMACEUTICAL COMPANY
By	/s/ Victor M. Hermelin
	President, Victor M. Hermelin

(Corporate Seal)

ATTEST:
By	/s/ Henry H. Stern
	Secretary, Henry H. Stern

K-V PHARMACAL COMPANY
By	/s/ Victor M. Hermelin
	President, Victor M. Hermelin

(Corporate Seal)

ATTEST:

By	/s/ Henry H. Stern
	Secretary, Henry H. Stern

I, Henry H. Stern, Secretary of K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under the laws of the State of Delaware, hereby certify, as such secretary and under the seal of the said corporation, that the Agreement of Merger to which this certificate is attached, after having been first duly signed on behalf of the said corporation and having been signed on behalf of K-V PHARMACAL COMPANY, a corporation of the State of Missouri was duly adopted pursuant to section 228 of Title 8 of the Delaware Code of 1953, by the unanimous written consent of the stockholders holding Five Hundred (500) shares of the capital stock of the corporation same being all of the shares issued and outstanding having voting power, which Agreement of Merger was thereby adopted as the act of the stockholders of said K-V PHARMACEUTICAL COMPANY, and the duly adopted agreement and act of the said corporation.

WITNESS my hand and seal of said K-V PHARMACEUTICAL COMPANY, on this 17^th day of June, 1971.

/s/ Henry H. Stern

Secretary, Henry H. Stern

(CORPORATE SEAL)

THE ABOVE AGREEMENT OF MERGER, having been executed on behalf of each corporate party thereto, and having been adopted separately by each corporate party thereto, in accordance with the provisions of the General Corporation Law of the State of Delaware, and the General Business Corporation Law of the State of Missouri, the President of each corporate party thereto does now hereby execute the said Agreement of Merger and the Secretary of each corporate party thereto does now hereby attest the said Agreement of Merger under the corporate seals of their respective corporations, by authority of the directors and stockholders thereof, as the respective act, deed and agreement of each of said corporations, on this l7th day of June, 1971.

K-V PHARMACEUTICAL COMPANY

/s/ Victor M. Hermelin

President, Victor M. Hermelin

(Corporate Seal)

ATTEST:

/s/ Henry H. Stern

Secretary, Henry H. Stern

K-V PHARMACAL COMPANY

/s/ Victor M. Hermelin

President, Victor M. Hermelin

(Corporate Seal)

ATTEST:

/s/ Henry H. Stern

Secretary, Henry H. Stern

STATE OF MISSOURI	)
	)	ss:
COUNTY OF ST. LOUIS	)

BE IT REMEMBERED that on this 17^th day of June, 1971, personally came before me, a Notary Public in and for the County and State aforesaid, Victor M. Hermelin, President of K-V PHARMACEUTICAL COMPANY, a corporation of the State of Delaware, and of K-V PHARMACAL COMPANY, a corporation of the State of Missouri, and he duly executed said agreement of merger before me and acknowledged the said agreement of merger to be his act and deed and the act and deed of said corporations and the facts stated therein are true; and that the seals affixed to said agreement of merger and attested by the Secretary of each corporation are the common or corporate seals of said corporations.

IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid.

/s/ [name of signatory]

Notary Public

(SEAL)

Certificate of Agreement of Merger of the “K-V PHARMACAL COMPANY”, a corporation organized and existing under the laws of the State of Missouri, merging with and into the “K-V PHARMACEUTICAL COMPANY”, a corporation organized and existing under the laws of the State of Delaware, under the name of “K-V PHARMACEUTICAL COMPANY”, as received and filed in this office the eighteenth day of June, A.D. 1971, at 10 o’clock A.M.;

And I do hereby further certify that the aforesaid Corporation shall be governed by the laws of the State of Delaware.

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, by the unanimous written consent of its members, filed with the minutes of the board, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation.

RESOLVED, that the Certificate of Incorporation of K-V Pharmaceutical Company be amended by adding thereto a second paragraph to Article 4 to read as follows:

“The preferred stock shall be issued from time to time in one or more series, with such distinctive serial designations and with such preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions providing for the issue of such stock adopted by the board of directors.”

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written consent to said amendment in accordance with the provisions of section 228 of The General Corporation Law of the State of Delaware.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of The General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused its corporate seal to be hereunto affixed and this certificate to be signed by Victor M. Hermelin, its President, and attested by Henry H. Stern, its Secretary, this 8th day of July, 1971.

K-V PHARMACEUTICAL COMPANY
By	/s/ Victor M. Hermelin
	Victor M. Hermelin
	President

(CORPORATE SEAL)

ATTEST:

/s/ Henry H. Stern

Henry H. Stern

Secretary

STATE OF MISSOURI	)
	)	SS
COUNTY OF ST. LOUIS	)

BE IT REMEMBERED that on this 8th day of July, 1971, personally came before me, a Notary Public in and for the County and State aforesaid, Victor M. Hermelin, President of K-V PHARMACEUTICAL COMPANY, a corporation of the State of Delaware, and he duly executed said certificate before me and acknowledged the said certificate to be his act and deed and the act and deed of said corporation and the facts stated therein are true; and that the seal affixed to said certificate and attested by the Secretary of said corporation is the common or corporate seal of said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid.

/s/ [name of signatory]

Notary Public

(SEAL)

CERTIFICATE OF OWNERSHIP AND MERGER

MERGING VICTOR M. HERMELIN & COMPANY

REINE PHARMACEUTICAL CORPORATION AND

CUSTOM PHARMACEUTICAL INSTALLATIONS,

INC. INTO K-V PHARMACEUTICAL COMPANY

Pursuant to Section 253 of the General

Corporation Law of the State of Delaware

K-V Pharmaceutical Company, a corporation organized and existing under the laws of Delaware, does hereby certify:

FIRST: This corporation was incorporated on the first day of June 1971, pursuant to the General Corporation Laws of the State of Delaware.

SECOND: This corporation owns all of the outstanding shares of the stock of each of Victor M. Hermelin & Company, Reine Pharmaceutical Corporation and Custom Pharmaceutical Installations, Inc., all of which corporations are organized and existing under the General and Business Corporation Law of the State of Missouri. Victor M. Hermelin & Company was incorporated on January 3, 1951; Reine Pharmaceutical Corporation was incorporated on February 24, 1972; and Custom Pharmaceutical Installations, Inc. was incorporated on April 30, 1952, all under the aforesaid General and Business Corporation Law of the State of Missouri.

THIRD: This corporation, at a meeting of its Board of Directors on the 28th day of March 1974, adopted resolutions merging into itself said Victor M. Hermelin & Company, Reine Pharmaceutical Corporation and Custom Pharmaceutical Installations, Inc., which resolutions are in the following words, to-wit:

RESOLVED, that this Corporation shall merge into itself Victor M. Hermelin & Company, Reine Pharmaceutical Corporation and Custom Pharmaceutical Installations, Inc., and assume all of the liabilities and obligations of said corporations, such merger to be effective at 12:01 A.M. of April 1, 1974.

RESOLVED, that the appropriate officers of this corporation be, and they hereby are directed to make and execute under the corporate seal of this Corporation, a Certificate of Ownership and Merger setting forth a copy of the resolution to merge said Victor M. Hermelin & Company, Reine Pharmaceutical Corporation and Custom Pharmaceutical Installations, Inc. into itself and assume their liabilities and obligations, and the date of adoption thereof, and to file the same in the office of the Secretary of State of Delaware, and a certified copy thereof in the office of the Recorder of Deeds in New Castle County.

RESOLVED, that the appropriate officers of this Corporation be, and they hereby are authorized and directed to do all acts and things whatsoever whether within or without the State of Delaware, which may in any wise be necessary or proper to effect said merger.

IN WITNESS WHEREOF, the undersigned Chairman of the Board of K-V Pharmaceutical Company does now hereby execute this Certificate of Ownership and Merger, and the Secretary of said K-V Pharmaceutical Company does now hereby attest to said Certificate of Ownership and Merger, as the act and deed of said K-V Pharmaceutical Company on this 28th day of March 1974.

K-V PHARMACEUTICAL COMPANY
By	/s/ Victor M. Hermelin
	Victor M. Hermelin
	Chairman of the Board

ATTEST:

/s/ Henry H. Stern

Henry H. Stern

Secretary

Certificate of Ownership of the “K-V PHARMACEUTICAL COMPANY”, a corporation organized and existing under the laws of the State of Delaware, merging “VICTOR M. HERMELIN & COMPANY”, “REINE PHARMACEUTICAL CORPORATION” and “CUSTOM PHARMACEUTICAL INSTALLATIONS, INC.”, corporations organized and existing under the laws of the State of Missouri, pursuant to Section 253 of the General Corporation Law of the State of Delaware, as received and filed in this office the twenty-eighth day of March, A.D. 1974, at 11:30 o’clock A.M.

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly convened and held on June 14, 1974, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation:

RESOLVED, that the Certificate of Incorporation (as heretofore amended) of K-V Pharmaceutical Company be further amended by changing Article 4 to read as follows:

“4. The amount of the total authorized capital stock of this corporation is Two Million Dollars ($2,000,000) divided into Two Million (2,000,000) shares of Common stock with a par value of One Dollar ($1.00) each.”

SECOND: That the aforesaid amendment was duly adopted at the Annual Meeting of Stockholders of the Corporation held on July 22, 1974, and in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware.

THIRD: That the capital of said corporation will not be reduced under or by reason of said amendment.

IN WITNESS WHEREOF, said K-V Pharmaceutical Company has caused its corporate seal to be hereunto affixed and this Certificate to be signed by Victor M. Hermelin, its Chairman of the Board and attested by Henry H. Stern, its Secretary, this 25th day of July, 1974.

K-V PHARMACEUTICAL COMPANY
By	/s/ Victor M. Hermelin
	Victor M. Hermelin
	Chairman of the Board

(CORPORATE SEAL)

ATTEST:

/s/ Henry H. Stern

Henry H. Stern

Secretary

STATE OF MISSOURI	)
	)	SS
COUNTY OF ST. LOUIS	)

Be it remembered that on this 25th day of July, 1974, personally came before me Veronica M. Mater a Notary Public in and for the County and State aforesaid, Victor M. Hermelin, Chairman of the Board and Henry H. Stern, Secretary of a corporation of the State of Delaware, the corporation described in and which executed the foregoing certificate, known to me personally to be such, and they, the said Victor M. Hermelin and Henry H. Stern, as such Chairman and Secretary, duly executed the said Certificate before me and acknowledged the said certificate to be their act and deed and the act and deed of said corporation and the facts stated therein are true; that the signatures of the said Chairman and Secretary of said corporation to said foregoing certificate are in the handwriting of the said Chairman and Secretary of said corporation, respectively, and that the seal affixed to said certificate is the common or corporate seal of said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid.

/s/ Veronica M. Mater

Notary Public

My commission expires:

VERONICA M. MATER

MY COMMISSION EXPIRES DEC. 17, 1977        

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF

K-V PHARMACEUTICAL COMPANY

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation:

RESOLVED, that the Certificate of Incorporation of K-V PHARMACEUTICAL COMPANY be amended by changing Article 8 thereof so that, as amended, said Article shall be and read as follows in its entirety:

8. The Board of Directors of the company shall be divided into three classes which are hereby designated Class A, Class B and Class C. The authorized number of directors of each class shall be one-third of the total number of directors from time to time authorized by by-law; provided that if the authorized number of directors is not a multiple of three, the authorized number of Class A directors shall be the number nearest to but not exceeding one-third of the total authorized number of directors; the authorized number of Class B directors shall be the number nearest to but not exceeding one-half of the remaining authorized number of directors; and the authorized number of Class C directors shall be the remaining authorized number of directors.

At the first annual meeting of stockholders following the day on which these provisions become effective, Class A directors to the authorized number thereof shall be elected to hold office until the first annual meeting of stockholders after their election; Class B directors to the authorized number thereof shall be elected to hold office until the second annual meeting of stockholders after their election; and Class C directors to the authorized number thereof shall be elected to hold office until the third annual meeting of stockholders after their election.

At each succeeding annual meeting of stockholders the directors of the class whose term of office expires on the day of such meeting shall retire and shall be replaced by the election of directors of the same class to the then authorized number thereof to hold office until the third annual meeting of stockholders after their election.

Retiring directors shall be eligible for re-election if otherwise qualified and shall in any event continue in office until their successors shall have been duly elected or appointed.

In the event of any vacancy however caused occurring on the board, such vacancy may be filled either by the stockholders at a general meeting called for the purpose or by the board if the remaining directors constitute a quorum. Any director elected or appointed to fill any such vacancy shall hold office for the unexpired portion of the term of the director whose office has been vacated.

Any Director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at any election of Directors.

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this certificate to be signed by Marc S. Hermelin, its Vice-Chairman and Chief Executive Officer, and attested by Alan G. Johnson, its Secretary, this 2nd day of December, 1980.

K-V PHARMACEUTICAL COMPANY
By	/s/ Marc S. Hermelin
	Marc S. Hermelin, Vice-Chairman and Chief Executive Officer

ATTEST:
By	/s/ Alan G. Johnson
	Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

* * * * * * * *

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation.

RESOLVED, that Paragraph 4 of the Certificate of Incorporation of the Company be amended in its entirety to read as follows:

4. The total number of shares of stock which the corporation shall have authority to issue is Four Million (4,000,000) shares, of the par value of Fifty Cents ($.50) each, amounting in the aggregate to Two Million Dollars ($2,000,000).

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of the General Corporation Law of the State of Delaware.

FOURTH: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on June 16, 1981.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and attested by Alan G. Johnson, its Secretary, this 11th day of May, 1981.

K-V PHARMACEUTICAL COMPANY
By	/s/ Marc S. Hermelin
	Marc S. Hermelin
	Vice Chairman of the Board of Directors and Chief Executive Officer

ATTEST:
By	/s/ Alan G. Johnson
	Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

* * * * * * * *

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation.

RESOLVED, that Paragraph 4 of the Certificate of Incorporation of the Company be amended in its entirety to read as follows:

4. The total number of shares of stock which the corporation shall have authority to issue is Eight Million (8,000,000) shares, of the par value of Twenty-Five Cents ($.25) each, amounting in the aggregate to Two Million Dollars ($2,000,000).

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of the General Corporation Law of the State of Delaware.

FOURTH: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on March 25, 1983.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and attested by Alan G. Johnson, its Secretary, this 21st day of February, 1983.

K-V PHARMACEUTICAL COMPANY

/s/ Marc S. Hermelin

Marc S. Hermelin

Vice Chairman of the Board of Directors

and Chief Executive Officer

ATTEST:
By	/s/ Alan G. Johnson
	Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

* * * * * * * *

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation.

RESOLVED, that Paragraph 4 of the Certificate of Incorporation of the Company be amended in its entirety to read as follows:

4. The total number of shares of stock which the corporation shall have authority to issue is Twelve Million (12,000,000) shares, of the par value of Seventeen Cents ($.17) each, amounting in the aggregate to Two Million Forty Thousand Dollars ($2,040,000).

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of the General Corporation Law of the State of Delaware.

FOURTH: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on July 21, 1986.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and attested by Alan G. Johnson, its Secretary, this 9th day of July, 1986.

K-V PHARMACEUTICAL COMPANY

/s/ Marc S. Hermelin

Marc S. Hermelin

Vice Chairman of the Board of Directors

and Chief Executive Officer

ATTEST:
By	/s/ Alan G. Johnson
	Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

* * * * * * * *

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation.

RESOLVED, that Article 4 of the Company’s Certificate of Incorporation be amended to read as follows in its entirety:

4. The aggregate number, class and par value of shares which the corporation shall have authority to issue shall be Twenty-Nine Million (29,000,000) shares, which shall be divided among the following classes:

Class of Stock	Par Value Per Share		Number of Shares
Preferred Stock	$	.01	5,000,000
Class A Common Stock	$	.01	12,000,000
Class B Common Stock	$	.01	12,000,000
Total			29,000,000

The number of authorized shares of Preferred Stock or any class of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of holders of a majority of the stock of the corporation entitled to vote, without the separate vote of holders of any class of Common Stock or any class or series of Preferred Stock, unless a vote of any such holders of a class or series of Preferred Stock is required pursuant to the certificate or certificates establishing such class or series.

Preferred Stock Provisions.

4.1 Authority of the Board of Directors to issue Preferred Stock in Series. The Preferred Stock may be issued from time to time in one or more series. Authority is hereby expressly granted to the board of directors, or any committee thereof designated by the board of directors expressly for such purpose, to authorize the issue of one or more series of Preferred Stock, and to fix by resolution or resolutions providing for the issue of each such series the number of shares to be included in such series and the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of such series, to the full extent now or hereafter permitted by law, including, but not limited to, the following:

(a) The number of shares of such series, which may subsequently be increased, except as otherwise provided by the resolution or resolutions of the board of directors or committees thereof providing for the issue of such series, or decreased, to a number not less than the number of shares then outstanding, by resolution or resolutions of the board of directors or committee thereof, and the distinctive designation thereof;

(b) The dividend rights of such series, the preferences, if any, over any other class or series of stock, or of any other class or series of stock over such series, as to dividends, the extent, if any, to which shares of such series shall be entitled to participate in dividends with shares of any other series or class of stock, whether dividends on shares of such series shall be fully, partially or conditionally cumulative, or a combination thereof, and any limitations, restrictions or conditions on the payment of such dividends;

(c) The rights of such series, and the preferences, if any, over any other class or series of stock, or of any other class or series of stock over such series, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation and the extent, if any, to which shares of any such series shall be entitled to participate in such event with any other series or class of stock;

(d) The time or times during which, the price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed;

(e) The terms of any purchase, retirement or sinking fund which may be provided for the shares of such series;

(f) The terms and conditions, if any, upon which the shares of such series shall be convertible into or exchangeable for shares of any other series, class or classes, or any other securities, to the full extent now or hereafter permitted by law; and

(g) The voting powers, if any, of such series in addition to the voting powers provided by law.

The Directors shall cause a certificate with respect to any such series to be filed pursuant to applicable law of the State of Delaware.

4.2 Limitation on dividends. No holders of any series of the Preferred Stock shall be entitled to receive any dividends thereon other than those specifically provided for by the Certificate of Incorporation or the resolution or resolutions of the board of directors or committee thereof providing for the issue of such series of Preferred Stock, nor shall any accumulated dividends on the Preferred Stock bear any interest.

4.3 Limitation on liquidation distributions. In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of Preferred Stock of each series shall be entitled to receive only such amount or amounts as shall have been fixed by the Certificate of Incorporation or by the resolution or resolutions of the board of directors or committee thereof providing for the issue of such series. A consolidation or merger of the corporation shall not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up, within the meaning of this Article 4.

Common Stock Provisions.

4.4 Rights of Common Stock. The relative rights, privileges, and limitations of the Class A Common Stock and Class B Common Stock shall be in all respects identical, share for share, except as to the dividend rights set forth in Section 4.5, the conversion rights set forth in Section 4.6 and the voting rights set forth in Section 4.7.

4.5 Dividends.

Subject to applicable provisions of law, the preferences of the Preferred Stock and of any other stock ranking prior to the Common Stock as to dividends, and the provisions of this Section 4.5, the holders of the Common Stock of all classes shall be entitled to receive dividends at such time and in such amounts as may be determined by the board of directors. Holders of one class of Common Stock shall be entitled to receive dividends, other than dividends payable in the capital stock of the corporation, only if dividends in the same type of property are simultaneously declared with respect to the other class of Common Stock. The amount of the dividend, other than dividends payable in the capital stock of the corporation, to be paid per share of Class A Common Stock shall equal 120% of the non-stock dividend per share declared and paid on each share of Class B Common Stock. No stock dividends may be paid or stock splits issued on the Common Stock other than stock dividends or stock splits of Class A Common Stock to holders of Class A Common Stock which are equal to simultaneous stock dividends or stock splits of Class B Common Stock to holders of Class B Common Stock. Dividends on the Class A Common Stock shall be distributed not later than the date upon which the dividend is distributed on the Class B Common Stock.

4.6 Conversion Rights of Class B Common Stock. Any holder of outstanding shares of Class B Common Stock shall be entitled to cause all or a portion of such shares to be converted, at any time or times at the option of such holder, into fully paid and non-assessable shares of Class A Common Stock of the corporation at the rate of one share of Class A Common Stock for each share of Class B Common Stock so converted.

Any holder of shares of Class B Common Stock desiring to convert the same into Class A Common Stock shall surrender the certificate or certificates for the Class B Common Stock being converted, duly assigned or endorsed for transfer, to the corporation, at the office of any transfer agent for the corporation for the Class B Common Stock, or to the corporation’s secretary at the principal executive office of the corporation if there is no transfer agent for the Class B Common Stock, and such certificate or certificates shall be accompanied by a written notice of conversion. Such notice shall specify the number of shares, which must be a number of whole shares, of Class B Common Stock to be converted and the name or names in which such holder wishes the certificate or certificates for Class A Common Stock and for any unconverted Class B Common Stock to be issued and shall be accompanied by the payment of any stock transfer tax payable by reason of the transfer of any such shares to any party other than the holder thereof at the time of such conversion.

As promptly as practicable after any such surrender of certificates for conversion accompanied by a notice in conformity with the preceding provisions and payment of any applicable stock transfer tax, the corporation shall issue and deliver to such holder, at the address of such holder on the stock transfer books of the corporation, or to such holder’s designee, a certificate or certificates for the number of whole shares of Class A Common Stock to which such holder or such holder’s designee shall be entitled upon conversion. Each such conversion shall be deemed to have been made immediately prior to the close of business on the day of surrender of the Class B Common Stock for conversion, and all rights of the converting holder as a holder of the shares of Class B Common Stock surrendered for conversion shall cease at such time and the person or persons in whose name or names the certificate(s) for the shares of Class A Common Stock issuable upon conversion are to be issued shall be treated for all purposes as having become the record holder or holders thereof at such time. In case there shall have been surrendered a certificate or certificates for Class B Common Stock converted in part only, the corporation shall issue and deliver to such holder or such holder’s designee a new certificate or certificates for the number of shares of Class B Common Stock which shall have not been converted.

The Corporation shall at all times reserve and keep available out of its authorized Class A Common Stock, solely for issuance, free from any preemptive rights, upon the conversion of shares of Class B Common Stock as herein provided, such number of shares of Class A Common Stock as shall from time to time be issuable upon the conversion of all the shares of Class B Common Stock at the time outstanding. The corporation shall obtain and keep in force such permits or other authorizations as may be required by law, and shall comply with all requirements as to qualification, in order to enable the corporation lawfully to issue and deliver such number of shares of its Class A Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Class B Common Stock from time to time outstanding.

All shares of Class B Common Stock converted or surrendered for conversion into shares of Class A Common Stock as provided in this Section 4.6 shall be retired and cancelled and thereupon restored to the status of authorized but unissued shares of Class B Common Stock.

4.7 Voting. Each share of Class A Common Stock shall be entitled to cast one-twentieth (1/20) vote per share for the election of directors and in respect of each other matter submitted to a vote of stockholders of the corporation, and each share of Class B Common Stock shall be entitled to cast one (1) vote per share for the election of directors and in respect of each other matter submitted to a vote of stockholders of the corporation. All shares of Common Stock of all classes shall vote together as a single class on all matters, except as otherwise required by Delaware law.”

SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice.

THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of sections 242 and 228 of the General Corporation Law of the State of Delaware.

FOURTH: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on June 8, 1987.

IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this Certificate to be signed by Mark S. Hermelin, its Vice-Chairman of the Board of Directors, and attested by Alan G. Johnson, its Secretary this 4th day of June, 1987.

K-V PHARMACEUTICAL COMPANY
By	/s/ Marc S. Hermelin
	Marc S. Hermelin
	Vice Chairman of the Board of Directors and Chief Executive Officer

ATTEST:

/s/ Alan G. Johnson

Alan G. Johnson, Secretary

CERTIFICATE OF DESIGNATION OF RIGHTS

AND PREFERENCES OF THE

7% CUMULATIVE CONVERTIBLE PREFERRED STOCK

OF

K-V PHARMACEUTICAL COMPANY

PAR VALUE $.01 PER SHARE

LIQUIDATION VALUE $25.00 PER SHARE

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

The undersigned, the Vice Chairman of K-V Pharmaceutical Company, a Delaware corporation (the “Company”), DOES HEREBY CERTIFY that the following resolutions have been duly adopted by the Board of Directors of the Company:

RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by the provisions of the Certificate of Incorporation, this Board of Directors hereby authorizes the issuance of a series of the Preferred Stock of the Company (the “Preferred Stock”) which shall consist of 840,000 shares of the Company’s Preferred Stock, and this Board of Directors hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation of the Company which are applicable to the Preferred Stock) as follows:

(i) Designation. The designation of said series of the Preferred Stock shall be 7% Cumulative Convertible Preferred Stock, $.01 par value per share (“this Series”). The number of shares of this Series shall be 840,000. The liquidation value of this Series shall be $25.00 per share.

(ii) Dividends. The dividend rate on shares of this Series shall be $1.75 per share per annum. Dividends on shares of this Series shall be fully cumulative and shall begin to accrue, without interest, as of April 1, 1988, and shall be payable quarterly, when and as declared by the Board of Directors out of funds legally available for the payment of dividends, on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 1988. Holders of shares of this Series shall be entitled to receive such dividends in preference to and in priority over dividends upon the Common Shares and all Junior Shares. Shares of this Series shall be on a parity as to dividends with all Parity Shares. Shares of this Series shall be junior as to dividends to all Senior Shares, and if at any time the Company has failed to pay accrued dividends on any Senior Shares outstanding at the times such dividends are payable or has failed to make a sinking fund or mandatory redemption payment with respect to Senior Shares, the Company shall not declare or pay any dividend on shares of this Series or redeem any shares of this Series. The holders of shares of this Series shall not be entitled to any dividends other than the cash dividends provided in this Clause (ii).

If at any time the Company has failed to pay accrued dividends on any shares of this Series or any Parity Shares at the time outstanding at the times such dividends are payable, the Company shall not

(a) declare or pay any dividend on the Common Shares or on any Junior Shares or make any payment on account of, or set apart money for, a sinking or other analogous fund for the purchase, redemption or other retirement of any Common Shares or any Junior Shares or make any distribution in respect thereof, either directly or indirectly and whether in cash or property or in obligations or shares of the Company (other than in Common Shares or Junior Shares),

(b) purchase any shares of this Series or Parity Shares (except for a consideration payable in Common Shares or Junior Shares) or redeem fewer than all of the shares of this Series and Parity Shares then outstanding, or

(c) permit any corporation or other entity directly or indirectly controlled by the Company to purchase any Common Shares, Junior Shares, shares of this Series or Parity Shares, unless, in the case of any such dividend, payment, distribution, purchase or redemption, all dividends accrued and payable but unpaid on shares of this Series and any Parity Shares have been or contemporaneously are declared and paid in full or declared and a sum sufficient for the payment thereof set aside for such payment. Unless and until all dividends accrued and payable but unpaid on shares of this Series and any Parity Shares at the time outstanding have been paid in full, all dividends declared by the Company upon shares of this Series or Parity Shares shall be declared pro rata with respect to all shares of this Series and Parity Shares then outstanding, so that the amounts of any dividends declared on shares of this Series and such Parity Shares shall in all cases bear to each other the same ratio that, at the time of such declaration, all accrued and payable but unpaid dividends on shares of this Series and such other Parity Shares, respectively, bear to each other.

(iii) Optional Redemptions for Cash. Subject to the restrictions in Clause (ii) above, shares of this Series shall be redeemable at the option of the Company at any time or some of them from time to time at the redemption prices (expressed in percentages of the liquidation value per share) set forth below, if redeemed during the 12-month period ending March 31 of the years indicated below:

Year	Percentage		Year	Percentage		Year	Percentage
1988	107	%	1992	105	%	1996	101	%
1989	107	%	1993	104	%	1997 and
1990	107	%	1994	103	%	thereafter	100	%
1991	106	%	1995	102	%

plus, in each case, an amount equal to the dividends accrued and unpaid thereon to the redemption date: provided, however, that shares of this Series may not be so redeemed before March 31, 1990, unless the Market Price equals or exceeds 140% of the conversion price per share of Class A Common Stock for at least 20 of 30 consecutive trading days ending within five days prior to the notice of redemption.

Not less than 30 nor more than 60 days prior to the date fixed for any redemption of shares of this Series pursuant to this Clause (iii), a notice specifying the time and place of such redemption and the number of shares to be redeemed shall be given by first class mail, postage prepaid, to the holders of record of the shares of this Series to be redeemed at their respective addresses as the same shall appear on the books of the Company, but neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular holder shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the holder receives the notice.

If a notice of redemption has been given pursuant to this Clause (iii) and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares so called for redemption, then on and after the redemption date, notwithstanding that any certificates for such shares have not been surrendered for cancellation, dividends shall cease to accrue on the shares of this Series to be redeemed and the holders of such shares shall cease to be shareholders with respect to such shares and shall have no interest in or claims against the Company by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon such redemption, without interest thereon, upon surrender (and endorsement, if required by the Company) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Company and unclaimed at the end of six years from the redemption date shall revert to the general funds of the Company after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Company for the payment of the redemption price. Any interest accrued on funds so deposited shall be paid to the Company from time to time.

If after a notice of redemption has been given pursuant to this Clause (iii), any holder of shares of this Series shall, prior to the close of business on the last business day preceding the date fixed for redemption, give written notice to the Company pursuant to Clause (v) below of the conversion of any or all of the shares to be redeemed held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Company, and any necessary transfer tax payment, as required by Clause (v) below), then such redemption shall not become effective as to such shares to be converted and such conversion shall become effective as provided in Clause (v) below.

In every case of redemption of less than all of the outstanding shares of this Series pursuant to this Clause (iii), the shares to he redeemed shall be selected by lot or by such other manner as may be prescribed by resolution of the Board of Directors, provided that only whole shares shall be selected for redemption.

(iv) Liquidation.

(A) The liquidation price of shares of this Series, in case of the voluntary or involuntary liquidation, dissolution or winding-up of the Company, shall be $25.00 per share, plus an amount equal to the dividends accrued and unpaid thereon to the payment date.

(B) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the holders of shares of this Series (1) shall not be entitled to receive the liquidation price of such shares held by them until the liquidation price of all Senior Shares shall have been paid in full and (2) shall be entitled to receive the liquidation price of such shares held by them in preference to and in priority over any distributions upon the Common Shares and all Junior Shares. Upon payment in full of the liquidation price to which the holders of shares of this Series are entitled, the holders of shares of this Series will not be entitled to any further participation in any distribution of assets by the Company. If the assets of the Company are not sufficient to pay in full the liquidation price payable to the holders of shares of this Series and the liquidation price payable to the holders of all Parity Shares, the holders of all such shares shall share ratably in such distribution of assets in accordance with the amounts which would be payable on such distribution if the amounts to which the holders of shares of this Series and the holders of Parity Shares are entitled were paid in full.

(C) Neither a consolidation or merger of the Company with or into any other corporation, nor a merger of any other corporation with or into the Company, nor a sale or transfer of all or any part of the Company’s assets for cash or securities shall be considered a liquidation, dissolution or winding-up of the Company within the meaning of this Clause (iv).

(v) Conversion.

(A) Subject to the provisions for adjustment hereinafter set forth, each share of this Series shall be convertible at the option of the holder thereof, in the manner hereinafter set forth, into fully paid and nonassessable Class A Common Shares at the conversion price, determined as hereinafter provided, in effect on the date of conversion. The price at which Class A Common Shares shall be delivered upon conversion (hereinafter referred to as the “conversion price”) shall be initially $22.00 per Class A Common Share. The conversion price shall be adjusted in certain instances as provided in subclause (B) of this Clause (v).

Any holder of shares of this Series desiring to convert the same into Class A Common Shares shall surrender the certificate or certificates for the shares of this Series being converted, duly endorsed or assigned to the Company or in blank, at the principal office of the Company or at a bank or trust company appointed by the Company for that purpose, accompanied by a written notice of conversion specifying the number (in whole shares) of shares of this Series to be converted and the name or names in which such holder wishes the certificate or certificates for Class A Common Shares to be issued; in case such notice shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issue of Class A Common Shares in such name or names. In case less than all of the shares of this Series represented by a certificate are to be converted by a holder, upon such conversion the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the shares of this Series not so converted. The right to convert shares of this Series called for redemption shall terminate at the close of business on the last business day preceding the date fixed for redemption pursuant to Clause (iii) above. The holders of shares of this Series at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares (except shares called for redemption on a redemption date between such record date and the dividend payment date) on the corresponding dividend payment date notwithstanding the conversion thereof or the Company’s default on payment of the dividend due on such dividend payment date. However, shares of this Series surrendered for conversion during the period from the close of business on any record date for the payment of dividends on such shares of this Series to the opening of business on the corresponding dividend payment date (except shares called for redemption on a redemption date during such period) must be accompanied by payment of an amount equal to the dividend payable on such shares on such dividend payment date. A holder of shares of this Series on a dividend payment record date who (or whose transferee) tenders shares of this Series on a dividend payment date will receive the dividend payable on such shares by the Company on such date, and the converting holder need not include payment in the amount of such dividend upon surrender of shares of this Series for conversion. Except as provided above, no payment or adjustment will be made on account of accrued or unpaid dividends upon the conversion of shares of this Series.

(B) The conversion price shall be adjusted from time to time as follows:

(1) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company in Class A Common Shares, the conversion price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of Class A Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this subclause (B)(1), the number of Class A Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Class A Common Shares held in the treasury of the Company.

(2) In case the Company shall issue rights or warrants to all holders of its Class A Common Shares or all holders of its Class B Common Shares entitling them to subscribe for or purchase Class A Common Shares at a price per share less than the current market price per share (determined as provided in subclause (C)) of the Class A Common Shares on the date fixed for the determination of stockholders entitled to receive such rights or warrants, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of Class A Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Class A Common Shares which the aggregate of the offering price of the total number of Class A Common Shares so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Class A Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Class A Common Shares so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this subclause (B)(2), the number of Class A Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company.

(3) In case outstanding Class A Common Shares shall be subdivided into a greater number of Class A Common Shares, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding Class A Common Shares shall each be combined into a smaller number of Class A Common Shares, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.

(4) In case the Company shall, by dividend or otherwise, distribute to all holders of its Class A Common Shares evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in subclause (B)(2), any dividend or distribution paid in cash out of the retained earnings of the Company and any dividend or distribution referred to in subclause (B)(1)), the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subclause (C)) of the Class A Common Shares on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed applicable to one Class A Common Share and the denominator shall be such current market price per share of the Class A Common Shares, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution.

(5) The reclassification of Class A Common Shares into securities other than Class A Common Shares (other than any reclassification upon a consolidation or merger to which clause (v)(F) applies) shall be deemed to involve (a) a distribution of such securities other than Class A Common Shares to all holders of Class A Common Shares (and the effective date of such reclassification shall be deemed to be “the date fixed for the determination of stockholders entitled to receive such distribution” and “the date fixed for such determination”) within the meaning of subclause (B)(4); and (b) a subdivision or combination, as the case may be, of the number of Class A Common Shares outstanding immediately prior to such reclassification into the number of Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be “the day upon which such subdivision becomes effective” or “the day upon which such combination becomes effective”, as the case may be, and “the day upon which such subdivision or combination becomes effective”) within the meaning of subclause (B)(3).

(C) For the purpose of any computation under subclause (B) above: (i) the current market price per Class A Common Share on any date shall be deemed to be the average of the daily Market Price for 15 consecutive Business Days selected by the Company commencing not more than 30 and not less than 20 Business Days before the date in question and (ii) in the event that any recapitalization, reclassification, dividend, stock split or other event contemplated in subclause (B) above occurs with respect to the Company’s Class B Common Shares which, pursuant to the Company’s Certificate of Incorporation, would trigger similar action with respect to the issued or outstanding Class A Common Stock but for the fact that no Class A Common Stock is then issued or outstanding, then solely for the determination of the adjustments in the conversion price described in subclause (B) above the Class A Common Stock shall be deemed issued and outstanding.

(D) Notwithstanding the provisions of subclause (B) above: (i) no adjustment shall be required by reason of the issuance of Class A Common Shares upon conversion of Class B Common Shares into Class A Common Shares, and (ii) no adjustment in the conversion price shall be required unless such adjustment (plus any adjustments not previously made by reason of this subclause (D)(ii)) would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this subclause (D)(ii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; and provided further, that adjustment shall be required and shall be made in accordance with the provisions of this Clause (v) (other than this subclause (D)(ii)) not later than the same time as may be required in order to preserve the tax-free nature of a distribution to the holder of any share of this Series. All calculations under this Clause (v) shall be made to the nearest cent.

(E) The Company may make such reductions in the conversion price, in addition to those required by this Clause (v), as it considers to be advisable in order to avoid or diminish any income tax to any holder of Class A Common Shares resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reasons. The Company shall have the power to resolve any ambiguity or correct any error in this Clause (v) and its actions in so doing shall be final and conclusive.

(F) In case the Company shall effect any capital reorganization or reclassification of its shares or shall consolidate or merge with or into any other corporation (other than a consolidation or merger in which the Company is the surviving corporation and each Class A Common Share outstanding immediately prior to such consolidation or merger is to remain outstanding immediately after such consolidation or merger) or shall sell or transfer all or substantially all its assets to any other corporation for a consideration consisting in whole or in part of equity securities of such other corporation, lawful provision shall be made as a part of the terms of such transaction whereby the holders of shares of this Series shall, if entitled to convert such shares at any time after the consummation of such transaction, receive upon conversion thereof in lieu of each Class A Common Share issuable upon conversion of such shares prior to such consummation the same kind and amount of stock (or other securities, cash or property, if any) as may be issuable or distributable in connection with such transaction with respect to each outstanding Class A Common Share, subject to adjustments for subsequent stock dividends and distributions, subdivisions or combinations of shares, capital reorganizations, reclassifications, consolidations or mergers, as nearly equivalent as possible to the adjustments provided for in this Clause (v).

(G) Whenever the conversion price is adjusted as herein provided:

(1) the Company shall compute the adjusted conversion price and shall cause to be prepared a certificate signed by a principal financial officer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the shares of this Series; and

(2) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall, as soon as practicable, be mailed to the holders of record of outstanding shares of this Series.

(H) In case:

(1) the Company shall declare a dividend or other distribution on its Class A Common Shares otherwise than in cash out of its earned surplus;

(2) the Company shall authorize the granting to the holders of its Class A Common Shares of rights or warrants entitling them to subscribe for or purchase any shares of capital stock of any class or of any other rights;

(3) of any reclassification of the Class A Common Shares (other than a subdivision or combination of its outstanding Class A Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all the assets of the Company; or

(4) of the voluntary or involuntary liquidation, dissolution or winding-up of the Company;

then the Company shall cause to be mailed to each transfer agent for the shares of this Series and to the holders of record of the outstanding shares of this Series, at least 20 days (or 10 days in any case specified in subclauses (1) or (2) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date as of which the holders of record of Class A Common Shares to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding-up is expected to become effective, and the date as of which it is expected that holders of record of Class A Common Shares shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding-up. Such notice shall also state whether such transaction will result in any adjustment in the conversion price applicable to the shares of this Series and, if so, shall state what the adjusted conversion price will be and when it will become effective. Neither the failure to give the notice required by this subclause (H), nor any defect therein, to any particular holder shall affect the sufficiency of the notice or the legality or validity of any such dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding-up, or the vote on any action authorizing such with respect to the other holders.

(I) The Company shall at all times reserve and keep available out of its authorized but unissued Class A Common Shares, for the purpose of issuance upon conversion of shares of this Series, the full number of Class A Common Shares then deliverable upon the conversion of all shares of this Series then outstanding and shall take all action necessary so that Class A Common Shares so issued will be validly issued, fully paid and nonassessable.

(J) The Company will pay any and all stamp or similar taxes that may be payable in respect of the issuance or delivery of Class A Common Shares on conversion of shares of this Series. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of Class A Common Shares in a name other than that in which the shares of this Series so converted were registered, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax or has established to the satisfaction of the Company that such tax has been paid.

(K) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of shares of this Series. If any such conversion would otherwise require the issuance of a fractional share, an amount equal to such fraction multiplied by the Market Price per Class A Common Share (determined as provided in subclause (C) above) on the day of conversion shall be paid to the holder in cash by the Company.

(L) The certificate of any independent firm of public accountants of recognized standing selected by the Board of Directors shall be presumptive evidence of the correctness of any computation made under this Clause (v).

(vi) Other Preference Shares. So long as any shares of this Series remain outstanding, the Company shall not issue any Preference Shares which are not Senior Shares, Parity Shares or Junior Shares. All shares of this Series which are at any time redeemed pursuant to Clause (iii) above or converted pursuant to Clause (v) above and all shares of this Series which are otherwise reacquired by the Company and subsequently cancelled by the Board of Directors shall have the status of authorized but unissued Preferred Shares, without designation as to series, subject to reissuance by the Board of Directors as shares of this Series or shares of any one or more other series.

(vii) Voting Rights. Except as otherwise required by law, holders of shares of this Series shall have no voting rights; provided, however:

(A) Dividend Defaults.

(1) If and whenever accrued dividends on the shares of this Series or any Parity Shares shall not have been paid in an aggregate amount equal to or greater than eight quarterly dividends on the shares of this Series or such Parity Shares at the time outstanding, then, and in any such event, the number of Directors then constituting the entire Board of Directors of the Company shall automatically be increased by one Director and the holders of shares of this Series and the holders of such Parity Shares, voting together as a single class, shall be entitled to fill such newly created directorship. Such right to vote as a single class to elect one Director shall, when vested, continue until all dividends in default on the shares of this Series and such Parity Shares, as the case may be, shall have been paid in full and, when so paid, such right to elect one Director separately as a class shall cease, subject, always, to the same provisions for the vesting of such right to elect one Director separately as a class. The Company may, and upon the written request of the holders of record of not less than 20% of the total number of shares of this Series and such Parity Shares then outstanding shall, call a special meeting of the holders of such shares to fill such newly created directorship for the election of Directors. In the case of such a written request, such special meeting shall be held within 90 days after the delivery of such request and, in either case, at the place and upon the notice provided by law and in the Bylaws of the Company, provided that the Company shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual meeting of stockholders of the Company, at which meeting such newly created directorship shall be filled by the holders of such shares of this Series and such Parity Shares.

(2) So long as any shares of this Series are outstanding, the Bylaws of the Company shall contain provisions ensuring that the number of Directors of the Company shall at all times be such that the exercise, by the holders of shares of this Series and the holders of Parity Shares, of the right to elect a Director under the circumstances provided in paragraph (1) of this subclause (A) will not contravene any provisions of the Company’s Certificate of Incorporation.

(3) Any Director elected pursuant to paragraph (1) of this subclause (A) shall serve until the earlier of (x) the next annual meeting of the stockholders of the Company and the election (by the holders of shares of this Series and the holders of Parity Shares) and qualification of their respective successors or (y) the next annual meeting of the stockholders of the Company following the date upon which all dividends in default on the shares of this Series and such Parity Shares shall have been paid in full. If, prior to the end of the term of any Director elected as aforesaid, a vacancy in the office of such Director shall occur during the continuance of a default in dividends on the shares of this Series or such Parity Shares by reason of death, resignation or disability, such vacancy shall be filled in the same manner as set forth in paragraph (1) of this subclause (A).

(B) Miscellaneous.

Without the affirmative vote of the holders of at least sixty percent (60%) of the outstanding shares of this Series and outstanding Parity Shares, voting as a single class (or, if less than all shares of this Series and all series of Parity Shares then outstanding would be adversely affected thereby, without the affirmative vote of the holders of at least sixty percent (60%) of the outstanding shares of each series adversely affected thereby, voting as a separate class), the Company may not

(1) amend the Company’s Certificate of Incorporation or this Certificate so as to adversely affect the rights or preferences of shares of this Series or the Class A Common Shares;

(2) authorize, create or issue any Senior Shares;

(3) authorize, create or issue Parity Shares; or

(4) effect the merger or consolidation of the Company with or into another corporation or the sale, exchange or transfer of all or substantially all of the Company’s assets, except that no vote shall be required hereunder if the rights, preferences and privileges of this Series are not adversely affected or the holders of this Series receive a security with substantially similar rights, preferences and privileges of this Series.

(viii) Certain Definitions. As used in this Certificate, the following terms shall have the following respective meanings:

“Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close.

“Class A Common Shares” shall mean the shares of the Company’s Class A Common Stock, $.01 par value.

“Class B Common Shares” shall mean the shares of the Company’s Class B Common Stock, $.01 par value.

“Common Shares” shall mean any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, Common Shares issuable upon conversion of shares of this Series shall include only shares of the class designated as Class A Common Shares as of the original date of issuance of shares of this Series, or shares of the Company of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from such reclassifications bears to the total number of shares of all classes resulting from all such reclassifications.

“Junior Shares” shall mean Preference Shares of any series or class of the Company which are by their terms expressly made junior to shares of this Series at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Company.

“Market Price” on any day shall mean (i) the last reported sales price regular way per such Common Share on such day or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or (ii) if such Common Shares are not listed or admitted to trading on the New York Stock Exchange, the last reported sales price regular way, or in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, on the principal national securities exchange on which such Common Shares are admitted for trading, or (iii) if such Common Shares are not listed or admitted for trading on any national securities exchange, (a) the last reported sales price of such Common Shares as reported by NASDAQ, National Market System, or (b) if not so reported, the average of the closing bid and asked prices as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose; provided, however, in the event the price of the Class A Common Stock is not determinable in any manner specified above, the Market Price of the Class A Common Stock shall be deemed to be the same as the Class B Common Stock.

“Parity Shares” shall mean Preference Shares which are by their terms on a parity with the shares of this Series at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Company.

“Preference Shares” shall mean any class of shares of the Company ranking prior to at least one other class of shares of the Company as to the payment of dividends or the distribution of assets on any voluntary or involuntary liquidation of the Company.

“Senior Shares” shall mean any Preference Shares of any series or class of the Company which are by their terms expressly made senior to shares of this Series at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Company.

IN WITNESS WHEREOF, the Company has caused this Certificate to be duly executed on its behalf by its undersigned Vice Chairman and attested to by its Secretary this 4th day of June, 1987.

/s/ Marc S. Hermelin

Marc S. Hermelin, Vice Chairman

[Corporate Seal]

ATTEST:

/s/ Alan G. Johnson

Alan G. Johnson, Secretary

CERTIFICATE OF CORRECTION FILED TO CORRECT

CERTAIN ERRORS IN THE CERTIFICATE OF DESIGNATION OF RIGHTS

AND PREFERENCES OF THE 7% CUMULATIVE CONVERTIBLE

PREFERRED STOCK OF K-V PHARMACEUTICAL COMPANY

FILED IN THE OFFICE OF THE SECRETARY OF STATE

OF DELAWARE ON JUNE 9, 1987

K-V Pharmaceutical Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

1. That the name of the corporation is K-V Pharmaceutical Company.

2. That a Certificate of Designation of Rights and Preferences of the 7% Cumulative Convertible Preferred Stock of K-V Pharmaceutical Company was filed by the Secretary of State of Delaware on June 9, 1987 and that said certificate requires correction as permitted by subsection (F) of section 103 of The General Corporation Law of the State of Delaware.

3. That the inaccuracies or defects of said certificate to be corrected are as follows: the dates upon which dividends on the 7% Cumulative Convertible Preferred Stock (“Stock”) commence to accrue and are first payable and the price at which the Stock is convertible into the Company’s Class A Common Stock are to be corrected and the provisions respecting redemption of the Stock are to be clarified, as specified in detail below.

4 (a) The second sentence of Clause (ii), captioned “Dividends,” on page 1 of the Certificate is corrected to read as follows:

“Dividends on shares of this Series shall be fully cumulative, shall begin to accrue on shares of this Series on the date of issuance thereof and shall be payable quarterly, when and as declared by the Board of Directors out of funds legally available for the payment of dividends, on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 1987.”

(b) The first paragraph of Clause (iii), captioned “Optional Redemptions for Cash,” on page 2 of the Certificate, is corrected to read as follows:

“Subject to the restrictions in Clause (ii) above, shares of this Series shall be redeemable at the option of the Company at any time or some of them from time to time at the redemption prices (expressed in percentages of the liquidation value per share) set forth below, if redeemed during the 12-month period ending March 31 of the years indicated below:

Year	Percentage		Year	Percentage		Year	Percentage
1988	107	%	1992	105	%	1996	101	%
1989	107	%	1993	104	%	1997 and
1990	107	%	1994	103	%	thereafter	100	%
1991	106	%	1995	102	%

plus, in each case, an amount equal to the dividends accrued and unpaid thereon to the redemption date; provided, however, that shares of this Series may not be so redeemed before March 31, 1990, unless the Market Price of Class B Common Shares equals or exceeds 140% of the conversion price of shares of this Series into Class A Common Stock for at least 20 of 30 consecutive trading days ending within five days prior to the notice of redemption.”

(c) The second sentence of Clause (v), captioned “Conversion,” paragraph (A), on page 4 of the Certificate, is corrected to read as follows:

“The price at which Class A Common Shares shall be delivered upon conversion (hereinafter referred to as the “conversion price”) shall be initially $20.00 per Class A Common Share.”

IN WITNESS WHEREOF, said K-V Pharmaceutical Company has caused this certificate to be signed by Gerald R. Mitchell, its Vice President, and attested by Alan G. Johnson, its Secretary, this 17th day of June, 1987.

	K-V PHARMACEUTICAL COMPANY
[Corporate Seal]
	By:	/s/ Gerald R. Mitchell
		Gerald R. Mitchell, Vice President

ATTEST:
By:	/s/ Alan G. Johnson
	Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation”),

DOES HEREBY CERTIFY:

FIRST: That at a meeting of the Board of Directors of K-V Pharmaceutical Company resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended by adding the following new Article 12 to read as follows:

“12. No director shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty by such director as a director; provided, however, that this Article 12 shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article 12 shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.”

SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

THIRD: That said amendment was duly adopted in accordance with provisions of Section 242 of the General Corporation Law of the State of Delaware.

FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment.

IN WITNESS WHEREOF, said K-V Pharmaceutical Company caused its corporate seal to be hereunto affixed and this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and Chief Executive Officer, and Alan G. Johnson, its Secretary, this 9^th day of September, 1987.

K-V PHARMACEUTICAL COMPANY
By:	/s/ Marc S. Hermelin
	Marc S. Hermelin
	Vice Chairman of the Board of Directors and Chief Executive Officer

(Corporate Seal)

ATTEST:

/s/ Alan G. Johnson

Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation”),

DOES HEREBY CERTIFY:

FIRST: That at a meeting of the Board of Directors of K-V Pharmaceutical Company resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the first two unnumbered paragraphs of Article 4 of the Company’s Certificate of Incorporation be amended to read as follows in their entirety:

“4. The aggregate number, class and par value of shares which the corporation shall have authority to issue shall be One Hundred and Twenty-Five Million (125,000,000), which shall be divided among the following classes:

Class of Stock	Par Value Per Share		Number of Shares
Preferred Stock	$	.01	5,000,000
Class A Common Stock	$	.01	60,000,000
Class B Common Stock	$	.01	60,000,000
Total			125,000,000

The number of authorized shares of Preferred Stock or any class of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative majority vote of the stock of the corporation entitled to vote, without the separate vote of holders of any class of Common Stock or any class or series of Preferred Stock, unless a vote of any such holders of a class or series of Preferred Stock is required pursuant to the certificate or certificates establishing such class or series.”

FURTHER RESOLVED, that Section 4.5 of Article 4 of the Company’s Certificate of Incorporation be amended to read as follows in its entirety:

“4.5. Dividends and Distributions.

Subject to applicable provisions of law, the preferences of the Preferred Stock and of any other stock ranking prior to the Common Stock as to dividends, and the provisions of this Section 4.5, the holders of the Common Stock of all classes shall be entitled to receive dividends at such time and in such amounts as may be determined by the board of directors. Holders of one class of Common Stock shall be entitled to receive dividends, other than dividends payable in the capital stock of the Corporation, only if dividends in the same type of property are simultaneously declared with respect to the other class of Common stock. The amount of any dividend, other than a dividend payable in the capital stock of the corporation, to be paid per share of Class A Common Stock shall equal 120% of the non-stock dividend per share declared and paid on each share of Class B Common Stock. No Common Stock dividend may be paid or stock splits issued on the Common Stock other than stock dividends or stock splits of Class A Common Stock to the holders of Class A Common Stock which are equal to simultaneous stock dividends or stock splits of Class B Common Stock to holders of Class B Common Stock. Dividends on the Class A Common stock shall be distributed not later than the date upon which the dividend is distributed on the Class B Common Stock. Notwithstanding the foregoing, stock dividends of either class of Common stock may be payable to the holders of both classes of Common stock so long as such distribution is made equally on a per share basis, regardless of class, and simultaneously to both classes of Common Stock.”

SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

THIRD: That said amendment was duly adopted in accordance with provisions of Section 242 of the General Corporation Law of the State of Delaware.

FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment.

IN WITNESS WHEREOF, said K-V Pharmaceutical Company caused its corporate seal to be hereunto affixed and this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and Chief Executive Officer, and Alan G. Johnson, its Secretary, this 23^rd day of December, 1991.

K-V PHARMACEUTICAL COMPANY
By:	/s/ Marc S. Hermelin
	Marc S. Hermelin
	Vice Chairman of the Board of Directors and Chief Executive Officer

(Corporate Seal)

ATTEST:

/s/ Alan G. Johnson

Alan G. Johnson, Secretary

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation”),

DOES HEREBY CERTIFY:

FIRST: That at a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling for a vote on the amendment at the annual meeting of the stockholders of the Corporation. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the first paragraph of Article 4 of the Corporation’s Certificate of Incorporation be amended in its entirety to read as follows:

4. The aggregate number, class and par value of shares which the Corporation shall have authority to issue shall be Two Hundred and Thirty Million (230,000,000), which shall be divided among the following classes:

Class of Stock	Par Value Per Share		Number of Shares
Preferred Stock	$	.01	5,000,000
Class A Common Stock	$	.01	150,000,000
Class B Common Stock	$	.01	75,000,000
Total			230,000,000

SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

FOURTH: That the capital of the Corporation shall not be reduced under or by reason of said amendment.

IN WITNESS WHEREOF, said K-V Pharmaceutical Company caused this Certificate of Amendment to be signed by Marc S. Hermelin, its Vice Chairman of the Board and Chief Executive Officer, and attested by Alan G. Johnson, its Secretary, this 31^st day of August, 1998.

K-V PHARMACEUTICAL COMPANY
By:	/s/ Marc S. Hermelin
	Marc S. Hermelin
	Vice Chairman of the Board and Chief Executive Officer

ATTEST:

/s/ Alan G. Johnson

Alan G. Johnson, Secretary

STATE OF DELAWARE

CERTIFICATE OF AMENDMENT

OF CERTIFICATE OF INCORPORATION

K-V Pharmaceutical Company

K-V Pharmaceutical Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify:

FIRST: That the Board of Directors of K-V Pharmaceutical Company duly adopted resolutions setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and presenting said amendment to the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing Paragraph 8 thereof so that, as amended, said Paragraph shall be and read in its entirety as follows:

8. All directors shall be of one class and shall serve for a term ending at the next annual meeting of stockholders. Each director elected or appointed thereafter shall serve for a term ending at the next annual meeting of stockholders to occur after such director was elected or appointed.

At each succeeding annual meeting of stockholders, directors shall be eligible for re-election if otherwise qualified and shall in any event continue in office until their successors shall have been duly elected or appointed.

In the event of any vacancy however caused occurring on the board, such vacancy may be filled either by the stockholders at a general meeting called for the purpose or by the board if the remaining directors constitute a quorum. Any director elected or appointed to fill any such vacancy shall hold office until the next annual meeting of stockholders and until his or her successor has been duly elected and qualified.

Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at any election of directors.

SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said corporation has caused this certificate to be signed this 5th day of September, 2008.

By:	/s/ Ronald J. Kanterman
	Ronald J. Kanterman,
	Vice President and Chief Financial Officer

EX-10.13

Exhibit 10.13

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO

K-V PHARMACEUTICAL COMPANY

2001 INCENTIVE STOCK OPTION PLAN

* * *

INCENTIVE STOCK OPTION AGREEMENT (the “Agreement”) made as of the      day of             , 20    , (the “Grant Date”) between K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the “Company”), and                     , an employee of the Company or of a subsidiary of the Company (the “Optionee”).

W I T N E S S E T H:

WHEREAS, the Company desires, by affording the Optionee an opportunity to purchase shares of its Class A Common Stock, $.01 par value per share (the “Common Stock”), as hereinafter provided, to carry out the purpose of the Company’s 2001 Incentive Stock Option Plan (the “Plan”):

NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter contained, the parties hereto mutually covenant and agree as follows:

1. Grant of Option. The Company hereby grants to the Optionee an incentive stock option (the “Option”) to purchase all or any part of an aggregate of          shares of Common Stock (such number being subject to adjustment as provided in Paragraph 6) on the terms and conditions hereinafter set forth.

2. Purchase Price. The purchase price of the shares of Common Stock issuable upon exercise of the Option (the “Option Price”) shall be $         per share, which is not less than one hundred percent (100%) of the Fair Market Value Per Share of Common Stock on the Grant Date. Payment shall be made in the form and manner prescribed in Paragraph 7 hereof.

3. Term of Option. The term of the Option shall be for a period of ten (10) years from the Grant Date, subject to earlier termination as provided in Paragraph 5. The Option is exercisable during its term only in accordance with the provisions of this Agreement, including Exhibit A attached hereto. Except as provided in Paragraph 5, the Option may not be exercised unless, at the time the Option is exercised and at all times from the Grant Date, the Optionee shall then be and shall have been, an employee of the Company or any subsidiary.

4. Nontransferability. The Option shall not be transferable otherwise than by will or the laws of descent and distribution to the extent provided in Paragraph 5, and the Option may be exercised, during the lifetime of the Optionee, only by the Optionee. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred (except as provided above), pledged or hypothecated in any way, shall not be assignable by operation of law, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof and of the Plan, and the levy of any execution, attachment, or similar process upon the Option, shall be null and void and without effect; provided, however, that if the Optionee shall die while an employee of the Company or any subsidiary, the Optionee’s estate, personal representative, or beneficiary shall have the right to exercise the Option to the extent provided in Paragraph 5.

5. Termination of Option.

(a) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal without cause, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) months after such time, but in no event beyond ten (10) years after the Grant Date.

(b) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal for cause then the Option shall terminate immediately. If “cause” is defined in the Optionee’s employment, retention or other similar contractual arrangement, that definition shall control. If no employment agreement exists or if one exists but is silent as to a definition of “cause,” then “cause” shall mean: (1) commission of a criminal act in respect of the Optionee’s employment or conviction of, or plea of guilty or no contest to, a felony; (2) willful misconduct, gross negligence or breach of fiduciary duty in respect of the Optionee’s employment; or (3) continuing neglect or failure of the Optionee to perform the duties reasonably assigned to the Optionee by the Company and after notice from the Company of such neglect or failure, the Optionee’s failure to cure such neglect or failure within thirty (30) days of such notice.

(c) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s disability, as such term is defined in the Plan, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within twelve (12) months after such time, but in no event beyond ten (10) years after the Grant Date.

(d) If the Optionee shall voluntarily terminate the Optionee’s employment with the Company or any subsidiary, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) months after such time; provided that, if the Optionee fails to comply with any notice of termination requirement to which the Optionee is subject as the result of a written agreement between such Optionee and the Company, such three (3) month post-termination exercise period shall be reduced to thirty (30) days; provided further that the Option may in no event be exercised beyond ten (10) years after the Grant Date.

(e) If the Optionee shall die while an employee of the Company or any subsidiary, the Optionee’s estate, personal representative, or beneficiary shall have the right, subject to the provisions of Paragraph 3, to exercise the Option (to the extent that the Optionee would have been entitled to do so at the time of the Optionee’s death) at any time within twelve (12) months from the date of the Optionee’s death, but in no event beyond ten (10) years after the Grant Date.

2

(f) If the Optionee is not subject to an employment, retention or other similar agreement addressing the treatment of Options in connection with a Change of Control and notwithstanding anything in this Paragraph 5 to the contrary, if, in the 12-month period following a Change of Control, Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal without cause, then the Option shall become immediately exercisable in full, whether or not the dates set forth in Exhibit A have passed, and may be exercised by the Optionee within three (3) months after such termination of employment, but in no event beyond ten (10) years after the Grant Date. For the avoidance of doubt, if following a Change of Control, Optionee’s employment shall terminate as a result of the Optionee’s death or disability, the provisions of (c) and (e) above shall apply, respectively. For purposes of this Agreement, “Change of Control” will have the meaning set forth on Exhibit B.

6. Changes in Capital Stock. Upon any readjustment or recapitalization of the Company’s capital stock whereby the character of the Common Stock shall be changed, appropriate adjustments shall be made so that the capital stock issuable upon exercise of the Option after such readjustment or recapitalization shall be the substantial equivalent of the Common Stock issuable upon exercise of the Option. In the case of a merger, sale of assets or similar transaction which results in a replacement of the Common Stock with stock of another corporation, the Company will make a reasonable effort, but shall not be required, to replace any outstanding Options granted under the Plan with comparable options to purchase the stock of such other corporation, or will provide for immediate maturity of all outstanding Options, with all Options not being exercised within the time period specified by the Company’s Board of Directors being terminated; provided, however, that in the event of Optionee’s termination of employment as described in Paragraph 5(f), the terms set forth in Paragraph 5(f) shall control.

7. Method of Exercising Option.

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by written notice to the Company at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Such notice shall state that the Option is being exercised thereby and the number of shares of Common Stock in respect of which it is being exercised. It shall be signed by the person or persons so exercising the Option and shall be accompanied by payment in full of the Option Price for such shares of Common Stock (1) in cash, (2) by certified check, (3) in shares of Common Stock (including shares issuable on exercise of the Option), (4) by delivery (on a form prescribed by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell the shares issuable on exercise of the Option and to deliver all or part of the sale proceeds to the Company in payment of the Option Price and any withholding taxes or (5) by delivery of such other documentation as the Company may reasonably request as a condition to the Optionee’s exercise of the Option on a “cashless basis,” provided such exercise price is paid promptly thereafter.

(b) If shares of Common Stock are tendered as payment of the Option Price (or are withheld from the shares issuable on exercise of the Option), the value of such shares shall be their Fair Market Value Per Share as of the date of exercise. If such tender would result in the issuance of fractional shares of Common Stock, the Company shall instead return the balance in cash or by check to the Optionee. The Company shall issue, in the name of the person or persons exercising the Option, and deliver a certificate or certificates representing such shares as soon as practicable after notice and payment shall be received.

3

(c) In the event the Option shall be exercised by any person or persons other than the Optionee, pursuant to Paragraph 5, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option.

(d) The Optionee shall have no rights of a stockholder with respect to shares of Common Stock to be acquired by the exercise of the Option until a certificate or certificates representing such shares are issued to the Optionee. All shares of Common Stock purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.

(e) The Optionee will not be permitted to exercise the Option unless the Optionee makes acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or sale of Common Stock acquired under the Option. Any of the methods described in Paragraph 7(a) above will be considered acceptable arrangements for paying such taxes.

8. No Holding Period. The Option shall not be subject to the provisions of Section 14 of the Plan, entitled “Holding Period and Forfeiture of Stock,” including the holding period restrictions and related provisions therein. Such Section 14 of the Plan shall have no applicability or effect with respect to the Options.

9. General. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement, shall pay all original issue taxes, if any, with respect to the issuance of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and shall, from time to time, use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

10. Representations of Optionee. The Optionee hereby represents that the Optionee and any related persons or entities, within the meaning of Section 425(d) of the Internal Revenue Code of 1986, do not own as much as ten percent (10%) of the total combined voting power of all classes of capital stock of the Company, and in accepting the Option herein granted to the Optionee, agrees to the terms of such Option as of the Grant Date.

11. Notices. Each notice relating to this Agreement shall be in writing and delivered in person or by first class mail, postage prepaid, to the address as hereinafter provided. Each notice shall be deemed to have been given on the date it is received. Each notice to the Company shall be addressed to it at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Each notice to the Optionee or other person or persons then entitled to exercise the Option shall be addressed to the Optionee or such other person or persons at the Optionee’s last known address.

12. Reimbursement of Expenses. If the Optionee is not a citizen or resident of the United States, the Optionee, as a condition hereof, agrees to reimburse the Company at its request for any foreign exchange premiums or license, transfer taxes or similar sums of money payable outside the United States by the Company in connection with the exercise of the Option under this Agreement.

13. Incorporation of Plan. A copy of the Plan has been delivered to the Optionee and is hereby incorporated by reference.

4

14. Continuance of Employment. The granting of the Option is in consideration of the Optionee’s continuing employment by the Company or any subsidiary; provided, however, nothing in this Agreement shall confer upon the Optionee the right to continue in the employ of the Company or any subsidiary or affect the right of the Company or any subsidiary to terminate the Optionee’s employment at any time in the sole discretion of the Company or any subsidiary, with or without cause.

15. Interpretation. The interpretation and construction of any terms or conditions of the Plan, or of this Agreement or other matters related to the Plan by the Compensation Committee shall be final and conclusive.

16. Enforceability. This Agreement shall be binding upon the Optionee, the Optionee’s estate, the Optionee’s personal representatives and beneficiaries.

*    *    *    *    *

5

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly exercised by its officer thereunto duly authorized, and the Optionee has hereunto set his or her hand all as of the day and year first above written.

K-V PHARMACEUTICAL COMPANY	OPTIONEE
By:	By:
Name:	Printed Name:
Title:	Address:

6

EXHIBIT A

TO

INCENTIVE STOCK OPTION AGREEMENT

The Option is exercisable during its term only in accordance with the provisions of the Agreement, including the following:

	Percentage Exercisable
	Per Time Period	Cumulative
First Anniversary of Grant Date	33% =              sh.	33% =              sh.
Second Anniversary of Grant Date	33% =              sh.	66% =              sh.
Third Anniversary of Grant Date	34% =              sh.	100% =              sh.

A-1

EXHIBIT B

TO

INCENTIVE STOCK OPTION AGREEMENT

A “Change of Control” shall mean the occurrence of any of the following:

(1) an acquisition by any individual, entity or group (within the meaning of Section 13d-3 or 14d-1 of the Securities Exchange Act of 1934, as amended (the “Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board (the “Outstanding Company Voting Securities”); provided, however, that “Change of Control” shall not include (i) the acquisition by any corporation pursuant to a reorganization, merger, consolidation or similar corporate transaction (in each case, a “Corporate Transaction”) if, pursuant to such Corporate Transaction, the conditions described in (A) and (B) of clause (3) below are satisfied, and (ii) for the avoidance of doubt, any acquisition after the Grant Date by any Person who beneficially owned 50% or more of the combined voting power of the Outstanding Company Voting Securities prior to the Grant Date;

(2) a change in the composition of the Board such that the individuals who, as of the Grant Date, constitute the Board (the Board as of the Grant Date shall be hereinafter referred to as the (“Incumbent Board”)) cease for any reason to constitute at least a majority of the Board; provided that, for purposes of this clause (2), any individual who becomes a member of the Board subsequent to the Grant Date and whose election, or nomination for election by the Company’s stockholders, was approved by a majority of the members of the Board who also are members of the Incumbent Board (or so deemed to be pursuant to this proviso) shall be deemed a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office is in connection with a Change of Control described in clause (1), (3) or (4) or whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so deemed a member of the Incumbent Board; or

(3) the consummation of a Corporate Transaction; excluding, however, such a Corporate Transaction pursuant to which (A) the beneficial owners of the outstanding shares of the Company’s common stock, par value of $.01 per share (the “Shares”) and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than fifty-one percent (51%) of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (B) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or

B-1

(4) the approval of the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all the assets of the Company; excluding, however, such a sale or other disposition to a corporation with respect to which, following such sale or other disposition, (y) more than fifty-one percent (51%) of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (z) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of such corporation.

B-2

EX-10.14

Exhibit 10.14

NONQUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO

K-V PHARMACEUTICAL COMPANY

2001 INCENTIVE STOCK OPTION PLAN

* * *

NONQUALIFIED STOCK OPTION AGREEMENT (the “Agreement”) made as of the      day of             , 20    , (the “Grant Date”) between K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the “Company”), and                     , an employee of the Company or of a subsidiary of the Company (the “Optionee”).

W I T N E S S E T H:

WHEREAS, the Company desires, by affording the Optionee an opportunity to purchase shares of its Class A Common Stock, $.01 par value per share (the “Common Stock”), as hereinafter provided, to carry out the purpose of the Company’s 2001 Incentive Stock Option Plan (the “Plan”):

NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter contained, the parties hereto mutually covenant and agree as follows:

1. Grant of Option. The Company hereby grants to the Optionee a nonqualified stock option (the “Option”) to purchase all or any part of an aggregate of          shares of Common Stock (such number being subject to adjustment as provided in Paragraph 6) on the terms and conditions hereinafter set forth.

2. Purchase Price. The purchase price of the shares of Common Stock issuable upon exercise of the Option (the “Option Price”) shall be $          per share, which is not less than one hundred percent (100%) of the Fair Market Value Per Share of Common Stock on the Grant Date. Payment shall be made in the form and manner prescribed in Paragraph 7 hereof.

3. Term of Option. The term of the Option shall be for a period of ten (10) years from the Grant Date, subject to earlier termination as provided in Paragraph 5. The Option is exercisable during its term only in accordance with the provisions of this Agreement, including Exhibit A attached hereto. Except as provided in Paragraph 5, the Option may not be exercised unless, at the time the Option is exercised and at all times from the Grant Date, the Optionee shall then be and shall have been, an employee of the Company or any subsidiary.

4. Nontransferability. The Option shall not be transferable otherwise than by will or the laws of descent and distribution to the extent provided in Paragraph 5, and the Option may be exercised, during the lifetime of the Optionee, only by the Optionee. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred (except as provided above), pledged or hypothecated in any way, shall not be assignable by operation of law, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof and of the Plan, and the levy of any execution, attachment, or similar process upon the Option, shall be null and void and without effect; provided, however, that if the Optionee shall die while an employee of the Company or any subsidiary, the Optionee’s estate, personal representative, or beneficiary shall have the right to exercise the Option to the extent provided in Paragraph 5.

5. Termination of Option.

(a) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal without cause, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) months after such time, but in no event beyond ten (10) years after the Grant Date.

(b) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal for cause then the Option shall terminate immediately. If “cause” is defined in the Optionee’s employment, retention or other similar contractual arrangement, that definition shall control. If no employment agreement exists or if one exists but is silent as to a definition of “cause,” then “cause” shall mean: (1) commission of a criminal act in respect of the Optionee’s employment or conviction of, or plea of guilty or no contest to, a felony; (2) willful misconduct, gross negligence or breach of fiduciary duty in respect of the Optionee’s employment; or (3) continuing neglect or failure of the Optionee to perform the duties reasonably assigned to the Optionee by the Company and after notice from the Company of such neglect or failure, the Optionee’s failure to cure such neglect or failure within thirty (30) days of such notice.

(c) If the Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s disability, as such term is defined in the Plan, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within twelve (12) months after such time, but in no event beyond ten (10) years after the Grant Date.

(d) If the Optionee shall voluntarily terminate the Optionee’s employment with the Company or any subsidiary, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be an employee of the Company or any subsidiary, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) months after such time; provided that, if the Optionee fails to comply with any notice of termination requirement to which the Optionee is subject as the result of a written agreement between such Optionee and the Company, such three (3) month post-termination exercise period shall be reduced to thirty (30) days; provided further that the Option may in no event be exercised beyond ten (10) years after the Grant Date.

(e) If the Optionee shall die while an employee of the Company or any subsidiary, the Optionee’s estate, personal representative, or beneficiary shall have the right, subject to the provisions of Paragraph 3, to exercise the Option (to the extent that the Optionee would have been entitled to do so at the time of the Optionee’s death) at any time within twelve (12) months from the date of the Optionee’s death, but in no event beyond ten (10) years after the Grant Date.

2

(f) If the Optionee is not subject to an employment, retention or other similar agreement addressing the treatment of Options in connection with a Change of Control and notwithstanding anything in this Paragraph 5 to the contrary, if, in the 12-month period following a Change of Control, Optionee shall cease to be an employee of the Company or any subsidiary as the result of the Optionee’s dismissal without cause, then the Option shall become immediately exercisable in full, whether or not the dates set forth in Exhibit A have passed, and may be exercised by the Optionee within three (3) months after such termination of employment, but in no event beyond ten (10) years after the Grant Date. For the avoidance of doubt, if following a Change of Control, Optionee’s employment shall terminate as a result of the Optionee’s death or disability, the provisions of (c) and (e) above shall apply, respectively. For purposes of this Agreement, “Change of Control” will have the meaning set forth on Exhibit B.

6. Changes in Capital Stock. Upon any readjustment or recapitalization of the Company’s capital stock whereby the character of the Common Stock shall be changed, appropriate adjustments shall be made so that the capital stock issuable upon exercise of the Option after such readjustment or recapitalization shall be the substantial equivalent of the Common Stock issuable upon exercise of the Option. In the case of a merger, sale of assets or similar transaction which results in a replacement of the Common Stock with stock of another corporation, the Company will make a reasonable effort, but shall not be required, to replace any outstanding Options granted under the Plan with comparable options to purchase the stock of such other corporation, or will provide for immediate maturity of all outstanding Options, with all Options not being exercised within the time period specified by the Company’s Board of Directors being terminated; provided, however, that in the event of Optionee’s termination of employment as described in Paragraph 5(f), the terms set forth in Paragraph 5(f) shall control.

7. Method of Exercising Option.

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by written notice to the Company at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Such notice shall state that the Option is being exercised thereby and the number of shares of Common Stock in respect of which it is being exercised. It shall be signed by the person or persons so exercising the Option and shall be accompanied by payment in full of the Option Price for such shares of Common Stock (1) in cash, (2) by certified check, (3) in shares of Common Stock (including shares issuable on exercise of the Option), (4) by delivery (on a form prescribed by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell the shares issuable on exercise of the Option and to deliver all or part of the sale proceeds to the Company in payment of the Option Price and any withholding taxes or (5) by delivery of such other documentation as the Company may reasonably request as a condition to the Optionee’s exercise of the Option on a “cashless basis,” provided such exercise price is paid promptly thereafter.

(b) If shares of Common Stock are tendered as payment of the Option Price (or are withheld from the shares issuable on exercise of the Option), the value of such shares shall be their Fair Market Value Per Share as of the date of exercise. If such tender would result in the issuance of fractional shares of Common Stock, the Company shall instead return the balance in cash or by check to the Optionee. The Company shall issue, in the name of the person or persons exercising the Option, and deliver a certificate or certificates representing such shares as soon as practicable after notice and payment shall be received.

(c) In the event the Option shall be exercised by any person or persons other than the Optionee, pursuant to Paragraph 5, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option.

3

(d) The Optionee shall have no rights of a stockholder with respect to shares of Common Stock to be acquired by the exercise of the Option until a certificate or certificates representing such shares are issued to the Optionee. All shares of Common Stock purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.

(e) The Optionee will not be permitted to exercise the Option unless the Optionee makes acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or sale of Common Stock acquired under the Option. Any of the methods described in Paragraph 7(a) above will be considered acceptable arrangements for paying such taxes.

8. No Holding Period. The Option shall not be subject to the provisions of Section 14 of the Plan, entitled “Holding Period and Forfeiture of Stock,” including the holding period restrictions and related provisions therein. Such Section 14 of the Plan shall have no applicability or effect with respect to the Options.

9. General. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement, shall pay all original issue taxes, if any, with respect to the issuance of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and shall, from time to time, use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

10. Notices. Each notice relating to this Agreement shall be in writing and delivered in person or by first class mail, postage prepaid, to the address as hereinafter provided. Each notice shall be deemed to have been given on the date it is received. Each notice to the Company shall be addressed to it at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Each notice to the Optionee or other person or persons then entitled to exercise the Option shall be addressed to the Optionee or such other person or persons at the Optionee’s last known address.

11. Reimbursement of Expenses. If the Optionee is not a citizen or resident of the United States, the Optionee, as a condition hereof, agrees to reimburse the Company at its request for any foreign exchange premiums or license, transfer taxes or similar sums of money payable outside the United States by the Company in connection with the exercise of the Option under this Agreement.

12. Incorporation of Plan. A copy of the Plan has been delivered to the Optionee and is hereby incorporated by reference.

13. Continuance of Employment. The granting of the Option is in consideration of the Optionee’s continuing employment by the Company or any subsidiary; provided, however, nothing in this Agreement shall confer upon the Optionee the right to continue in the employ of the Company or any subsidiary or affect the right of the Company or any subsidiary to terminate the Optionee’s employment at any time in the sole discretion of the Company or any subsidiary, with or without cause.

14. Interpretation. The interpretation and construction of any terms or conditions of the Plan, or of this Agreement or other matters related to the Plan by the Compensation Committee shall be final and conclusive.

4

15. Enforceability. This Agreement shall be binding upon the Optionee, the Optionee’s estate, the Optionee’s personal representatives and beneficiaries.

*    *    *    *    *

5

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly exercised by its officer thereunto duly authorized, and the Optionee has hereunto set his or her hand all as of the day and year first above written.

K-V PHARMACEUTICAL COMPANY	OPTIONEE
By:	By:
Name:	Printed Name:
Title:	Address:

6

EXHIBIT A

TO

NONQUALIFIED STOCK OPTION AGREEMENT

The Option is exercisable during its term only in accordance with the provisions of the Agreement, including the following:

	Percentage Exercisable
	Per Time Period	Cumulative
First Anniversary of Grant Date	33% =              sh.	33% =              sh.
Second Anniversary of Grant Date	33% =              sh.	66% =              sh.
Third Anniversary of Grant Date	34% =              sh.	100% =              sh.

A-1

EXHIBIT B

TO

NONQUALIFIED STOCK OPTION AGREEMENT

A “Change of Control” shall mean the occurrence of any of the following:

(1) an acquisition by any individual, entity or group (within the meaning of Section 13d-3 or 14d-1 of the Securities Exchange Act of 1934, as amended (the “Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board (the “Outstanding Company Voting Securities”); provided, however, that “Change of Control” shall not include (i) the acquisition by any corporation pursuant to a reorganization, merger, consolidation or similar corporate transaction (in each case, a “Corporate Transaction”) if, pursuant to such Corporate Transaction, the conditions described in (A) and (B) of clause (3) below are satisfied, and (ii) for the avoidance of doubt, any acquisition after the Grant Date by any Person who beneficially owned 50% or more of the combined voting power of the Outstanding Company Voting Securities prior to the Grant Date;

(2) a change in the composition of the Board such that the individuals who, as of the Grant Date, constitute the Board (the Board as of the Grant Date shall be hereinafter referred to as the (“Incumbent Board”)) cease for any reason to constitute at least a majority of the Board; provided that, for purposes of this clause (2), any individual who becomes a member of the Board subsequent to the Grant Date and whose election, or nomination for election by the Company’s stockholders, was approved by a majority of the members of the Board who also are members of the Incumbent Board (or so deemed to be pursuant to this proviso) shall be deemed a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office is in connection with a Change of Control described in clause (1), (3) or (4) or whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so deemed a member of the Incumbent Board; or

(3) the consummation of a Corporate Transaction; excluding, however, such a Corporate Transaction pursuant to which (A) the beneficial owners of the outstanding shares of the Company’s common stock, par value of $.01 per share (the “Shares”) and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than fifty-one percent (51%) of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (B) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or

B-1

(4) the approval of the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all the assets of the Company; excluding, however, such a sale or other disposition to a corporation with respect to which, following such sale or other disposition, (y) more than fifty-one percent (51%) of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (z) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of such corporation.

B-2

EX-10.15

Exhibit 10.15

NONQUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO

K-V PHARMACEUTICAL COMPANY

2001 INCENTIVE STOCK OPTION PLAN

* * *

NONQUALIFIED STOCK OPTION AGREEMENT (the “Agreement”) made as of the      day of             , 20    , (the “Grant Date”) between K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the “Company”), and                     , a member of the Company’s Board of Directors (the “Optionee”).

W I T N E S S E T H:

WHEREAS, the Company desires, by affording the Optionee an opportunity to purchase shares of its Class A Common Stock, $.01 par value per share (the “Common Stock”), as hereinafter provided, to carry out the purpose of the Company’s 2001 Incentive Stock Option Plan (the “Plan”):

NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter contained, the parties hereto mutually covenant and agree as follows:

1. Grant of Option. The Company hereby grants to the Optionee a nonqualified stock option (the “Option”) to purchase all or any part of an aggregate of          shares of Common Stock (such number being subject to adjustment as provided in Paragraph 6) on the terms and conditions hereinafter set forth.

2. Purchase Price. The purchase price of the shares of Common Stock issuable upon exercise of the Option (the “Option Price”) shall be $         per share, which is not less than one hundred percent (100%) of the Fair Market Value Per Share of Common Stock on the Grant Date. Payment shall be made in the form and manner prescribed in Paragraph 7 hereof.

3. Term of Option. The term of the Option shall be for a period of ten (10) years from the Grant Date, subject to earlier termination as provided in Paragraph 5. The Option is exercisable during its term only in accordance with the provisions of this Agreement, including Exhibit A attached hereto. Except as provided in Paragraph 5, the Option may not be exercised unless, at the time the Option is exercised and at all times from the Grant Date, the Optionee shall then be and shall have been, a Director of the Company.

4. Nontransferability. The Option shall not be transferable otherwise than by will or the laws of descent and distribution to the extent provided in Paragraph 5, and the Option may be exercised, during the lifetime of the Optionee, only by the Optionee. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred (except as provided above), pledged or hypothecated in any way, shall not be assignable by operation of law, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof and of the Plan, and the levy of any execution, attachment, or similar process upon the Option, shall be null and void and without effect; provided, however, that if the Optionee shall die while a Director of the Company, the Optionee’s estate, personal representative, or beneficiary shall have the right to exercise the Option to the extent provided in Paragraph 5.

5. Termination of Option.

(a) If the Optionee shall cease to be a Director of the Company, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be a Director of the Company, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) years after such time, but in no event beyond ten (10) years after the Grant Date.

(b) If the Optionee shall cease to be a Director of the Company as the result of the Optionee’s disability, as such term is defined in the Plan, then the Option, to the extent that it is exercisable by the Optionee at the time the Optionee ceases to be a Director of the Company, and only to the extent that the Option is exercisable as of such time, may be exercised by the Optionee within three (3) years after such time, but in no event beyond ten (10) years after the Grant Date.

(c) If the Optionee shall die while a Director of the Company, the Optionee’s estate, personal representative, or beneficiary shall have the right, subject to the provisions of Paragraph 3, to exercise the Option (to the extent that the Optionee would have been entitled to do so at the time of the Optionee’s death) at any time within three (3) years from the date of the Optionee’s death, but in no event beyond ten (10) years after the Grant Date.

(d) Notwithstanding anything in this Paragraph 5 to the contrary, if, in the 12-month period following a Change of Control, Optionee shall cease to be a Director of the Company, the Option shall become immediately exercisable in full, whether or not the dates set forth in Exhibit A have passed, and may be exercised by the Optionee within three (3) years after such termination of service, but in no event beyond ten (10) years after the Grant Date. For the avoidance of doubt, if following a Change of Control, Optionee’s service shall terminate as a result of the Optionee’s death or disability, the provisions of (b) and (c) above shall apply, respectively. For purposes of this Agreement, “Change of Control” will have the meaning set forth on Exhibit B.

6. Changes in Capital Stock. Upon any readjustment or recapitalization of the Company’s capital stock whereby the character of the Common Stock shall be changed, appropriate adjustments shall be made so that the capital stock issuable upon exercise of the Option after such readjustment or recapitalization shall be the substantial equivalent of the Common Stock issuable upon exercise of the Option. In the case of a merger, sale of assets or similar transaction which results in a replacement of the Common Stock with stock of another corporation, the Company will make a reasonable effort, but shall not be required, to replace any outstanding Options granted under the Plan with comparable options to purchase the stock of such other corporation, or will provide for immediate maturity of all outstanding Options, with all Options not being exercised within the time period specified by the Company’s Board of Directors being terminated; provided, however, that in the event Optionee shall cease to be a Director as described in Paragraph 5(d), the terms set forth in Paragraph 5(d) shall control.

2

7. Method of Exercising Option.

(a) Subject to the terms and conditions of this Agreement, the Option may be exercised by written notice to the Company at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Such notice shall state that the Option is being exercised thereby and the number of shares of Common Stock in respect of which it is being exercised. It shall be signed by the person or persons so exercising the Option and shall be accompanied by payment in full of the Option Price for such shares of Common Stock (1) in cash, (2) by certified check, (3) in shares of Common Stock (including shares issuable on exercise of the Option), (4) by delivery (on a form prescribed by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell the shares issuable on exercise of the Option and to deliver all or part of the sale proceeds to the Company in payment of the Option Price and any withholding taxes or (5) by delivery of such other documentation as the Company may reasonably request as a condition to the Optionee’s exercise of the Option on a “cashless basis,” provided such exercise price is paid promptly thereafter.

(b) If shares of Common Stock are tendered as payment of the Option Price (or are withheld from the shares issuable on exercise of the Option), the value of such shares shall be their Fair Market Value Per Share as of the date of exercise. If such tender would result in the issuance of fractional shares of Common Stock, the Company shall instead return the balance in cash or by check to the Optionee. The Company shall issue, in the name of the person or persons exercising the Option, and deliver a certificate or certificates representing such shares as soon as practicable after notice and payment shall be received.

(c) In the event the Option shall be exercised by any person or persons other than the Optionee, pursuant to Paragraph 5, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option.

(d) The Optionee shall have no rights of a stockholder with respect to shares of Common Stock to be acquired by the exercise of the Option until a certificate or certificates representing such shares are issued to the Optionee. All shares of Common Stock purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable.

8. No Holding Period. The Option shall not be subject to the provisions of Section 14 of the Plan, entitled “Holding Period and Forfeiture of Stock,” including the holding period restrictions and related provisions therein. Such Section 14 of the Plan shall have no applicability or effect with respect to the Options.

9. General. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement, shall pay all original issue taxes, if any, with respect to the issuance of shares of Common Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and shall, from time to time, use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto.

3

10. Notices. Each notice relating to this Agreement shall be in writing and delivered in person or by first class mail, postage prepaid, to the address as hereinafter provided. Each notice shall be deemed to have been given on the date it is received. Each notice to the Company shall be addressed to it at its offices at One Corporate Woods Drive, Bridgeton, Missouri 63044 (Attention: VP, Human Resources). Each notice to the Optionee or other person or persons then entitled to exercise the Option shall be addressed to the Optionee or such other person or persons at the Optionee’s last known address.

11. Reimbursement of Expenses. If the Optionee is not a citizen or resident of the United States, the Optionee, as a condition hereof, agrees to reimburse the Company at its request for any foreign exchange premiums or license, transfer taxes or similar sums of money payable outside the United States by the Company in connection with the exercise of the Option under this Agreement.

12. Incorporation of Plan. A copy of the Plan has been delivered to the Optionee and is hereby incorporated by reference.

13. Interpretation. The interpretation and construction of any terms or conditions of the Plan, or of this Agreement or other matters related to the Plan by the Compensation Committee shall be final and conclusive.

14. Enforceability. This Agreement shall be binding upon the Optionee, the Optionee’s estate, the Optionee’s personal representatives and beneficiaries.

*    *    *    *    *

4

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly exercised by its officer thereunto duly authorized, and the Optionee has hereunto set his or her hand all as of the day and year first above written.

K-V PHARMACEUTICAL COMPANY	OPTIONEE
By:	By:
Name:	Printed Name:
Title:	Address:

5

EXHIBIT A

TO

NONQUALIFIED STOCK OPTION AGREEMENT

The Option is exercisable during its term only in accordance with the provisions of the Agreement, including the following:

	Percentage Exercisable
Date	Per Time Period	Cumulative
March 31, 20	25% =              shares	25% =              shares
June 30, 20	25% =              shares	50% =              shares
September 30, 20	25% =              shares	75% =              shares
December 31, 20	25% =              shares	100% =              shares

A-1

EXHIBIT B

TO

NONQUALIFIED STOCK OPTION AGREEMENT

A “Change of Control” shall mean the occurrence of any of the following:

(1) an acquisition by any individual, entity or group (within the meaning of Section 13d-3 or 14d-1 of the Securities Exchange Act of 1934, as amended (the “Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board (the “Outstanding Company Voting Securities”); provided, however, that “Change of Control” shall not include (i) the acquisition by any corporation pursuant to a reorganization, merger, consolidation or similar corporate transaction (in each case, a “Corporate Transaction”) if, pursuant to such Corporate Transaction, the conditions described in (A) and (B) of clause (3) below are satisfied, and (ii) for the avoidance of doubt, any acquisition after the Grant Date by any Person who beneficially owned 50% or more of the combined voting power of the Outstanding Company Voting Securities prior to the Grant Date;

(2) a change in the composition of the Board such that the individuals who, as of the Grant Date, constitute the Board (the Board as of the Grant Date shall be hereinafter referred to as the (“Incumbent Board”)) cease for any reason to constitute at least a majority of the Board; provided that, for purposes of this clause (2), any individual who becomes a member of the Board subsequent to the Grant Date and whose election, or nomination for election by the Company’s stockholders, was approved by a majority of the members of the Board who also are members of the Incumbent Board (or so deemed to be pursuant to this proviso) shall be deemed a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office is in connection with a Change of Control described in clause (1), (3) or (4) or whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so deemed a member of the Incumbent Board; or

(3) the consummation of a Corporate Transaction; excluding, however, such a Corporate Transaction pursuant to which (A) the beneficial owners of the outstanding shares of the Company’s common stock, par value of $.01 per share (the “Shares”) and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than fifty-one percent (51%) of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (B) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or

B-1

(4) the approval of the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all the assets of the Company; excluding, however, such a sale or other disposition to a corporation with respect to which, following such sale or other disposition, (y) more than fifty-one percent (51%) of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (z) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of such corporation.

B-2

EX-10.30

Exhibit 10.30

SEPARATION AGREEMENT

AND GENERAL RELEASE

This Separation Agreement and General Release (“Agreement”) is entered into effective as of the 2nd day of September, 2009, by and between Ronald J. Kanterman (“Executive”) and KV Pharmaceutical Company, a Delaware corporation (the “Company” or “KV”, and, together with Executive, the “Parties”).

RECITALS

WHEREAS, Executive has been employed by the Company as Vice President, Chief Financial Officer, and Treasurer of the Company pursuant to the Employment and Confidential Information Agreement, dated January 26, 2004, as amended March 23, 2008 (the “Employment Agreement”);

WHEREAS, Executive tendered his resignation on September 2, 2009 (i) as Vice President, Chief Financial Officer and Treasurer of KV, (ii) from all other officer, committee, and employee positions with KV and each of its affiliates and (iii) as KV’s representative to any corporate, industry or trade association, or their boards (his “Resignation”), and the Company has accepted Executive’s Resignation, and, in connection with such termination, settle any and all related agreements between the Executive and the Company and their affiliates (the “Parties”) in the manner set forth herein;

WHEREAS, The Company in part is entering into this Agreement in recognition of the positive contributions made by Executive as Vice President, Chief Financial Officer, and Treasurer of the Company; and in part because Executive will provide services to the Company on a prospective basis;

WHEREAS, The Company and the Executive have entered into a separate Indemnification Agreement dated October 24, 2008, which is and remains in effect;

WHEREAS, The Company and the Executive have entered into a separate Consulting Agreement of even date herewith, pursuant to which Executive has become a consultant to the Company at an annual compensation rate equal to his final salary at the Company; and,

NOW THEREFORE, in consideration of the promises and mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are expressly acknowledged, the Parties agree and promise as follows:

1. TERMINATION. Executive’s Resignation is effective as of September 2, 2009 (the “Separation Date”). The period from the Separation Date through and including September 2, 2010 is hereinafter referred to as the “Consulting Period.”

2. PAYMENTS.

a. The Company shall immediately pay to Executive an amount equal to three weeks and three days of accrued but unpaid vacation pay due on September 2, 2009. At the same time, or as soon as practicable thereafter, the Company shall pay to Executive an amount equal to any unpaid expense reimbursements due to Executive (subject, however, to Executive’s obligation to provide adequate documentation of such expenses in the normal course). All of Executive’s expenses were submitted current through September 3, 2009.

b. With respect to any benefits or rights that Executive has accrued or earned under any of the Company’s employee benefit plans as of the Separation Date, Executive shall be entitled to such benefits pursuant to the terms of such plans.

3. TERMINATION BENEFITS. Subject to Executive abiding by the terms of this Agreement and in consideration of Executive’s release of claims and Executive’s other covenants and agreements contained herein, Executive shall be entitled to the following benefits:

a. The Company shall enter into a Consulting Agreement with Executive at an annual compensation rate equal to his final annual salary, payable in equal monthly installments as more fully set out therein.

b. The Company shall pay Executive the additional sum of Forty Thousand Dollars ($40,000), representing the Retention Bonus to which Executive would have become entitled had his employment continued. It shall be payable on 30 June 2010, and upon the condition that the Executive satisfactorily performs his duties under this Agreement, the Consulting Agreement, and Company’s policies; the approval for payment of this sum shall not be unreasonably withheld;

c. The Company shall continue to provide, or cause its affiliates to provide, health (including medical, vision and dental), life, and disability insurance to Executive and his family on terms and conditions available to the executive officers of the Company through the Consulting Period (which terms and conditions may change as and when the terms of any applicable plan change).

d. Except as set forth in this Agreement, and with respect to any benefits or rights under any of the Company’s “employee benefit plans” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), Executive acknowledges and agrees that he is not entitled to receive any other compensation or benefits of any sort from the Company or any of its plans, direct or indirect subsidiaries, or other entities controlled by the Company, including, without limitation, salary, vacation, bonuses, annual incentives, stock options, short-term or long-term disability benefits.

4. SETTLEMENT OF EQUITY BASED AWARDS. Executive waives any and all right to stock options held by Executive immediately prior to the Separation Date. In lieu thereof Executive shall receive a payment of $50,000] (“Initial Payment”) plus an additional payment (the “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes, including federal, state, local, foreign and employment taxes, (collectively the “Taxes”) imposed on the Initial Payment and Gross-Up Payment, the Executive retains an amount equal to the Initial Payment. The Gross-Up Payment shall be made at the same time as the Initial Payment, and the amount of applicable Taxes shall be based on the assumption that Executive pays taxes at the highest applicable marginal rate, and shall not be later adjusted. The determination of the Company as to the amount of the Gross-Up Payment shall be final and conclusive and binding on the Executive and his beneficiaries, successors and assigns.

2

5. COMPENSATION AS A DIRECTOR. Executive shall waive all cash compensation as a member of the Board to which he is entitled during the period of his Board service from September 2, 2009 until the date this Agreement is executed, as provided in the directors’ compensation plan. Executive shall resign from the Board effective as of the date this Agreement is executed.

6. INDEMNITY. The Company and the Executive have entered into a separate Indemnification Agreement dated October 24, 2008, which is and will remain in effect. The existing rights of the Executive with regard to indemnification, advancement of expenses, insurance, and exculpation from liability as described in the October 24, 2008 Indemnification Agreement are unaffected by this Agreement.

7. COMPLETE RELEASE. The Parties intend to release and discharge each other from any and all claims they have or may have one against the other, and that such releases and discharges extend to themselves and to the Released Parties, as defined below. Therefore, the Parties agree:

a. For purposes of this Agreement, the “Released Parties” of Executive are Executive and his heirs, successors, assigns and attorneys, and the “Released Parties” of the Company are the Company and all related and affiliated entities of the Company (including corporations, limited liability companies, partnerships, and joint ventures) as well as, with respect to the Released Parties of the Company, each of their respective predecessors and successors, and past, present and future employees, officers, directors, stockholders, owners, partners, members, representatives, assigns, attorneys, agents, insurers, employee benefit programs and plans (and the trustees, administrators, fiduciaries, and insurers of such programs and/or plans), and any other persons acting by, through, under, or in concert with any of the foregoing identified Released Parties.

b. Except as otherwise provided in this Agreement, the Executive voluntarily releases all claims, promises, causes of action, or similar rights of any type, whether known or unknown, unforeseen, unanticipated, unsuspected or latent he has or may have against the Released Parties of Company, and the Company voluntarily releases all claims, promises, causes of action, or similar rights of any type, whether known or unknown, unforeseen, unanticipated, unsuspected or latent it has or may have against the Released Parties of Executive.

3

c. This release specifically extends to, without limitation, claims or causes of action for wrongful termination, failure by either Party to provide notice of termination pursuant to the Employment Agreement, impairment of ability to compete in the open labor market, breach of an express or implied contract, breach of any collective bargaining agreement, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation, defamation, slander, infliction of emotional distress, disability, loss of future earnings, and claims under the Missouri Constitution, the United States Constitution, and applicable state and federal fair employment laws, federal equal employment opportunity laws, and federal and state labor statutes and regulations, and other federal and state laws, including, but not limited to, the Civil Rights Act of 1964, as amended, the Sarbanes-Oxley Act of 2002, the Securities Act Of 1933, the Securities Exchange Act of 1934, any federal or state corporation or securities laws, the Fair Labor Standards Act, as amended, the National Labor Relations Act, as amended, the Labor-Management Relations Act, as amended, the Worker Retraining and Notification Act of 1988, as amended, the Americans with Disabilities Act of 1990, as amended, the Rehabilitation Act of 1973, as amended, ERISA, and the Age Discrimination in Employment Act of 1967, as amended.

d. Notwithstanding the foregoing, the parties are not releasing or waving any right to enforce the terms of this Agreement.

e. Executive understands that Executive is releasing claims of which Executive may not be aware. Likewise, the Company understands that it is releasing claims of which Company may not be aware. It is further understood and agreed that both Executive and Company are waiving all rights under any statute or common law principle which otherwise limit application of a general release to claims which the releasing party does not know or suspect to exist in his favor at the time of signing the release which, if known by him, would have materially affected his settlement with the party being released/releasee.

f. Neither the Executive nor the Company, nor his or its respective heirs, successors, agents, representatives or attorneys has filed or caused to be filed any lawsuit, complaint, or charge with respect to any claim that such party/entity is releasing in this Agreement. Except as prohibited by law or public policy, each party promises never (i) to file or prosecute a lawsuit or complaint based on the claims released by it in this Agreement, or (ii) to seek any damages, remedies, or other relief for him or it by filing or prosecuting a claim or charge with any administrative, judicial, or other governmental body, or in any arbitration proceeding with respect to any claim released by such party/entity in this Agreement. Each Party hereto promises to request any governmental body or arbitration tribunal assuming jurisdiction of any such lawsuit, complaint, or charge to withdraw from the matter or dismiss the matter against any and all Released Parties with prejudice against it. Neither the Executive nor the Company has assigned or transferred any claim that it is releasing, nor has such party/entity purported to do so.

g. Revocation Period. Executive acknowledges: (a) that Executive has hereby been advised in writing to consult with an attorney before signing this Release, and (b) that Executive has had at least twenty-one (21) days after receipt of this Release to consider whether to accept or reject this Release. Executive understands that Executive may sign this Release prior to the end of such twenty-one (21) day period, but is not required to do so. In addition, under ADEA, Executive has seven (7) days after Executive signs this Release to revoke it. Such revocation must be in writing and delivered either by hand or mailed and postmarked within the seven (7) day period. If sent by mail, it is requested that it be sent by certified mail, return receipt.

4

8. RETURN OF THE COMPANY’S DOCUMENTS AND PROPERTY. Executive agrees to return all records, documents, proposals, notes, lists, files, and any and all other materials including, without limitation, computerized and/or electronic information (collectively, “Information”) that refers, relates or otherwise pertains to the Company and its affiliates, and/or their respective partners, principals, officers, directors, stockholders, managers, employees, agents, representatives, or insurance companies, or their respective predecessors, successors or assigns at any time. In addition, Executive shall return to the Company all property or equipment of the Company that he has been issued during the course of his employment or which he otherwise currently possesses. At Executive’s expense, Executive shall deliver to the Company at its St. Louis offices immediately following the date hereof all of the Company’s Information and property and equipment that are in his possession. Executive is not authorized to retain any copies of any such Information in any format, whether physical or electronic. Notwithstanding the forgoing, KV acknowledges and consents to the retention, by the law firm of Dowd Bennet LLP, of such documents as are reasonably necessary for the defense of lawsuits arising from Executives’ prior employment with KV. Material so retained by counsel shall be returned when no longer required for pending or threatened litigation.

9. CONFIDENTIALITY; NON-DISPARAGEMENT.

a. Executive acknowledges and agrees that he is subject to the terms and conditions of the “Confidential Information” and “Publication” and “Right to Work Product” provisions set forth in Sections 6 – 8 of the Employment Agreement and agrees to continue to be bound by those terms and conditions in accordance therewith.

b. The parties agree that their professional and personal reputations are important and should not be impaired by either party after this Agreement is executed. Executive therefore agrees to not make any oral or written communication to any person or entity which disparages, or has the effect of damaging the reputation of, or otherwise working in any way to the detriment of, the Company, its officers, shareholders, directors, or management. The Company agrees that it will likewise not make any oral or written communication to any person or entity which disparages, or has the effect of damaging the reputation of, or otherwise working in any way to the detriment of Executive’s professional or personal reputation.

c. Nothing in Sections 6 – 8 of the Employment Agreement or this Section 9 shall prevent either Party from giving truthful testimony or information to law enforcement entities, administrative agencies or courts or in any other legal proceedings as required by law, including, but not limited to, assisting in an investigation or proceeding brought by any governmental or regulatory body or official related to alleged violations of any law relating to fraud or any rule or regulation of the Securities and Exchange Commission, or in asserting, enforcing, prosecuting or defending any rights or claims of Company or Executive under this Agreement or otherwise.

5

d. Confidentiality. Executive and his attorneys agree that they will keep this Separation Agreement confidential, and will not disclose any of the terms of this Separation Agreement, and any of the negotiations preceding or following it, to any third party, except (a) with the prior written consent of KV; (b) pursuant to an order or direction of court or agency or other governmental body having jurisdiction to issue such order; (c) to tax advisors or accounting professionals themselves bound by ethical restraints of confidentiality; (e) to counsel from the firm of Dowd Bennett, LLP, or (d) as may be necessary for the Parties to establish or enforce rights under this agreement. Executive and his attorneys warrant that as of the execution of this document, they have no recollection of having made any disclosures which would have violated this provision had it been in force as of September 2, 2009. This confidentiality provision is a material provision of this agreement.

10. COVENANT NOT TO COMPETE. Executive acknowledges and agrees that he is subject to the terms and conditions of the “Restrictive Covenants” provisions contained in the Employment Agreement and agrees to continue to be bound by those terms and conditions until September 2, 2010, at which point Executive will be relieved of any and all Restrictive Covenants, including covenants to not compete. However, if the Company fails to pay a timely monthly payment to Executive pursuant to this Agreement, then Executive shall be immediately released from any and all Restrictive Covenants, including covenants not to compete.

11. COOPERATION BY EXECUTIVE. Executive will cooperate in all reasonable respects with the Company and its affiliates in connection with any and all existing or future litigation, actions, investigations or proceedings (whether civil, criminal, administrative, regulatory or otherwise) brought by or against the Company or any of its affiliates or otherwise, to the extent the Company reasonably deems Executive’s cooperation necessary. Executive shall be promptly reimbursed for all reasonable out-of-pocket expenses incurred by him as a result of such cooperation, including, without limitation, his attorneys’ fees and expenses.

12. NON-ADMISSION OF LIABILITY. Nothing in this Agreement shall be construed as an admission of liability by Executive, any member of the Company or any of the Released Parties; rather, Executive, the Company and the Released Parties are resolving all matters arising out of their employer-employee relationship and all other relationships between them, as to which the Released Parties and the Company and Executive each deny any liability.

13. NECESSARY ACTIONS. The parties will take or cause to be taken such actions as are necessary to authorize, approve and take and/or carry out the actions contemplated by this Agreement.

6

14. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Parties, and their respective heirs, administrators, representatives, executors, attorneys, successors and assigns.

15. SEVERABILITY. While the provisions contained in this Agreement are considered by the Parties to be reasonable in all circumstances, it is recognized that some provisions may fail for technical reasons. Accordingly, it is hereby agreed and declared that if any of such provisions shall, either by itself or themselves or taken with others, be adjudged to be invalid as exceeding what is reasonable in all circumstances for the protection of the interests of the Company, but would be valid if any particular restrictions or provisions were deleted or restricted or limited in a particular manner, then said provisions shall apply with any such deletions, restrictions, limitations, reductions, curtailments, or modifications as may be necessary to make them valid and effective, and the remaining provisions shall be unaffected thereby, so long as both parties obtain the essential benefits of this Agreement notwithstanding such deletions, restrictions, limitations, reductions, curtailments, or modifications.

16. ENTIRE AGREEMENT; MODIFICATION. Except as set out herein, this Agreement constitutes the entire understanding among the Parties with respect to the matters set forth herein. This Agreement supersedes all prior written and/or oral and all contemporaneous oral agreements, understandings and negotiations regarding the subject matter hereof.

17. INTERPRETATION; GOVERNING LAW. This Agreement shall be construed as a whole according to its fair meaning and shall not be construed strictly for or against either Party. Any uncertainty or ambiguity shall not be construed against the drafter. Captions are intended solely for convenience of reference and shall not be used in the interpretation of this Agreement. This Agreement shall be governed by and construed and enforced pursuant to the laws of the State of Missouri applicable to contracts made and entirely to be performed therein without regard to rules relating to conflicts of law.

18. VOLUNTARY AGREEMENT; NO INDUCEMENTS. Each Party to this Agreement acknowledges and represents that he or it (a) has fully and carefully read this Agreement prior to signing it, (b) has been, or has had the opportunity to be, advised by independent legal counsel of his or its own choice as to the legal effect and meaning of each of the terms and conditions of this Agreement, and (c) is signing and entering into this Agreement as a free and voluntary act without duress or undue pressure or influence of any kind or nature whatsoever and has not relied on any promises, representations or warranties regarding the subject matter hereof other than as set forth in this Agreement.

19. EXPENSES. The Company shall pay Executive’s reasonably incurred expenses incurred in connection with any investigations and litigations as requested by the Company.

7

20. NOTICES. Any notice or other communications required or permitted to be given hereunder shall be in writing and shall be sufficiently given if delivered in person or transmitted by facsimile or similar means of recorded electronic communication to the relevant Party as follows:

a. In the case of the Executive, to the address set forth below:

Ronald J. Kanterman
[Address intentionally omitted]
Telephone:	[Intentionally omitted]
E-Mail:	[Intentionally omitted]
with a copy to:
Edward L. Dowd, Jr.
Dowd Bennett LLP
7733 Forsyth Blvd., Suite 1410
Clayton, MO 63105
Telephone:	(314) 889-7311
Fax:	(314) 863-2111
Email:	edowd@dowdbennett.com

b. In the case of KV to:

KV Pharmaceutical Company

1 Corporate Woods

Bridgeton, Missouri 63044

Attn: General Counsel

Telephone:  (314) 645-6600

Fax:  (314) 645-6732

With a Copy to:

Stephen H. Rovak

SONNENSCHEIN NATH & ROSENTHAL LLP

One Metropolitian Sq., Ste 3000

Saint Louis, Missouri 63102

314 259 5886

Fax:  314 259 5959

Any such notice or other communication shall be deemed to have been given and received on the day on which it is delivered or faxed (or, if day is not a business day or if the notice or other communication is not faxed during business hours, at the place of receipt, on the next following business day.) Any Party may change its address for the purposes of this Section by giving notice to the other parties in accordance with the foregoing.

8

IN WITNESS WHEREOF, the Parties have set their hand as of the date first written above.

EXECUTIVE
/s/ Ronald J. Kanterman
Ronald J. Kanterman
KV Pharmaceutical Company
/s/ David A. Van Vliet
Title:	Interim President/CEO

9

EX-10.31

Exhibit 10.31

CONSULTING AND CONFIDENTIALITY AGREEMENT

This Agreement is entered into this 2d day of Sept., 2009 (“Effective Date”) by and between KV Pharmaceutical Company (“KV”), 2503 South Hanley Road, St. Louis, MO 63144, a Delaware corporation, and Ronald J. Kanterman, [Address intentionally omitted] (“Kanterman” or “Consultant”).

WHEREAS, KV possesses confidential information and trade secrets relating to its business which is confidential and proprietary, as more fully set forth in paragraph 5(a) of this Agreement (hereinafter referred to as “Trade Secrets and Confidential Information”);

WHEREAS, in addition to the Trade Secrets and Confidential Information, KV also possesses and enjoys the benefit of sound customer relationships and good will in the marketplace;

WHEREAS, Consultant was an executive at KV until September of 2009;

WHEREAS, KV and Kanterman desire to enter into an agreement whereby Kanterman will serve as a consultant, providing advice, information, and other assistance on various projects for KV; and

WHEREAS, KV has a number of subsidiaries and related companies (hereafter referred to individually and collectively as “Companies”), for which Kanterman may provide consulting services;

THEREFORE, KV and Consultant agree as follows:

1. TERM OF AGREEMENT

The term of this Agreement shall be for one (1) years, beginning on the Effective Date.

2. DESCRIPTION OF SERVICES

Beginning the Effective Date, Consultant will provide consulting services to KV in the financial field, as requested by KV. Such consulting services may include, but are not necessarily limited to the following:

Kanterman will provide reasonable and necessary services including but not limited to:

i) assistance in preparing financial reports of Companies of various natures,

ii) assistance in investigations of past practices or events at Companies,

iii) assistance in transition of responsibilities and ongoing continuity of his former job functions.

Kanterman will use his best efforts to provide to KV management a monthly report on the status of these projects and attend relevant meetings at the request of KV. In rendering the Services, Kanterman will devote his best efforts to assist KV in a manner consistent with the policies and procedures of KV.

Kanterman will not be asked to provide Consulting Services on matters occurring after September 2, 2009 except as such matters are relevant to financial reporting of events occurring before that date.

During the term of this agreement, Kanterman agrees that KV projects will take priority over any other projects in which he may be engaged, in that Kanterman agrees not to commit to any projects that will conflict with his ability to honor his obligations under this Agreement.

3. PERFORMANCE OF SERVICES

During the term of this Agreement, Consultant agrees to provide Consulting Services to Companies at such times as are reasonably requested by KV, and to devote sufficient time to Consulting Services as are reasonably necessary to accomplish them appropriately. In rendering the Consulting Services, Consultant shall comply with all laws and regulations applicable to all activities undertaken by Consultant in connection with this Agreement.

4. COMPENSATION FOR SERVICES

A. Compensation

During the term of this Agreement, KV will pay Consultant at the same rate of base pay as he received as of the time of his leaving the employment at KV. Consultant acknowledges receipt of salary from KV for the months of September and October of 2009, and that such salary constitutes consideration under this agreement for those two months.

B. Reimbursement for Expenses

KV will reimburse Consultant for all travel and related expenses incurred as a result of his Consulting Services, provided KV has approved such expenses in advance.

5. CONFIDENTIALITY

A. Trade Secrets and Confidential Information

Consultant agrees that Companies are engaged in a highly competitive business and have expended, and continue to expend, significant resources to develop and maintain valuable customer relationships, good will, trade secrets, and confidential and proprietary information. Consultant further agrees that the covenants in this Agreement are reasonable and necessary to protect Companies’ legitimate business interests in their customer relationships, good will, trade secrets, and confidential and proprietary information. Consultant further agrees that as a result of its investments of money, skill, and time, Companies have developed and will continue to develop certain valuable trade secrets and confidential information that are peculiar to their business and the disclosure of which would cause Companies significant and irreparable harm.

(a) The term “Trade Secrets” refers to the following:

(i) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, products planning information, marketing strategies, plans, finance, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of KV, and its customers, clients, and suppliers;

2

(ii) any scientific or technical information, design, process, procedure, formula, or improvement that is not generally known to the public and is commercially valuable and secret in the sense that its confidentiality affords KV a competitive advantage over its competitors;

(iii) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, information, know-how, show-how and trade secrets not generally known to the public, whether or not patentable or copyrightable; and

(iv) all documents, inventions, substances, engineering and laboratory notebooks, drawings, diagrams, specifications, bills of material, equipment, prototypes and models relating to any of the foregoing, confidential or proprietary information not generally known to the public and stored on any computer system and software used by KV in connection with the business or operations of KV, and any other tangible manifestation of the foregoing which now exist or come into Consultant’s control or possession as a result of Consultant’s provision of Consulting Services.

(b) The term “Confidential Information” means any data or information and documentation other than Trade Secrets which is valuable to KV and not generally known to the public, including but not limited to:

(i) Financial information, including but not limited to earnings, assets, debts, prices, fee structures, volumes of purchase or sales, or other financial data, whether relating to KV generally, or to particular products, services, geographic areas, or time periods;

(ii) Supply and service information, including but not limited to information concerning the goods and services utilized or purchased by KV, the names and addresses of suppliers, terms of supplier service contracts, or of particular transactions, or related information about potential suppliers, to the extent that such information is not generally known to the public, and to the extent that the combination of suppliers or use of particular suppliers, though generally known or available, yields advantages to KV the details of which are not generally known;

(iii) Marketing information, including but not limited to details about ongoing or proposed marketing programs or agreements by or on behalf of KV, marketing forecasts, results of marketing efforts or information about impending transactions;

(iv) Personnel information, including but not limited to KV employees’ personal or medical histories, compensation or other terms of employment, actual or proposed promotions, hiring, resignations, disciplinary actions, terminations or reasons therefore, training methods, performance or other personnel information; and

3

(v) Customer information, including but not limited to any compilations of past, existing or prospective customers, customer proposals or agreements between customers and KV, status of customer accounts or credit, or related information about actual or prospective customers.

(c) Consultant further acknowledges that Consultant will have or may have regular and significant contact with KV customers. Consultant also acknowledges that Consultant will have and may acquire knowledge of said customers’ specialized business requirements and that Consultant would not have had such contact or acquire such knowledge but for Consultant’s employment by KV.

(d) Consultant agrees that he will not use, disclose or disseminate to any other person, organization, or entity or otherwise employ any Trade Secrets or Confidential Information. The obligations set forth herein shall not apply to any Trade Secrets or Confidential Information which shall have become generally known to competitors of KV through no act or omission of Consultant.

(e) All documents, agreements, records, notebooks, patent filings, memos, and correspondence, including copies thereof, relating to the business of KV or the Companies, whether prepared by KV, the Companies, Consultant, or others, and whether presently existing or hereafter prepared (“Company Records”), are and will continue to be the property of KV. Upon request by KV or upon termination of this Agreement by either party, Consultant immediately will return to KV all materials (in whatever form) in the Consultant’s possession relating to KV’s Trade Secrets, Confidential Information, and Company Records.

6. RELATIONSHIP OF PARTIES

It is understood by the parties that Consultant is an independent contractor with respect to, and not an employee or agent of, KV or the Companies.

A. Payroll Taxes.

Neither state or federal income tax, nor payroll tax of any kind shall be withheld or paid by KV on behalf of Consultant. Instead, since Consultant is an independent contractor, he will be solely responsible for such taxes.

B. KV not Responsible for Workers’ Compensation Insurance

No Workers’ Compensation insurance shall be obtained by KV on account of Consultant. Instead, since Consultant is an independent contractor, he will be solely responsible for obtaining any necessary workers’ compensation insurance.

C. Authority to Bind the Company

Consultant has no authority to enter into contracts or agreements on behalf of KV or the Companies.

4

D. Ineligibility for Benefits.

As an independent contractor, Consultant shall not be eligible for any benefits provided by KV and/or the Companies. However, nothing in this Consulting and Confidentiality Agreement shall impair or diminish any right of Consultant under that certain Separation Agreement and General Release dated Sept. 2, 2009.

7. NOTICES

All notices required or permitted under this Agreement shall be in writing and shall be deemed delivered when delivered in person, deposited in the United States mail, first-class postage prepaid, or sent by generally recognized next business day delivery service (such as Federal Express), addressed as set forth in the first paragraph of this Agreement. A party’s address may be changed by said party from time to time by providing written notice to the other in the manner set forth herein.

9. ENTIRE AGREEMENT

This Agreement contains the entire agreement of the parties as to the Consulting Services to be provided hereunder and there are no other promises or conditions between them related to such services in any other agreement, whether oral or written. This Agreement supersedes any prior written or oral agreements between the parties on the subject of the Consulting Services. However, the parties expressly acknowledge the existence and continued viability of that certain Separation Agreement and General Release. The parties further agree that in the event of a conflict between the provisions of this agreement and any provision of the Separation Agreement and General Release, the provisions of the Separation Agreement and General Release shall control.

10. RIGHT OF COURT TO MODIFY THIS AGREEMENT

The parties agree that, if the scope or enforceability of this Agreement is in any way disputed at any time, a court or other trier of fact may modify and enforce the Agreement to the extent it believes to be reasonable under the circumstances.

11. AMENDMENT

This Agreement may be modified or amended only in writing signed by both parties.

12. SEVERABILITY

If any provision of this Agreement is determined to be in violation of any law, rule or regulation or otherwise unenforceable, and cannot be modified to be enforceable, such determination shall not effect the validity of any other provision of this Agreement, but such other provisions shall remain in full force and effect. Each provision, paragraph and subparagraph of this Agreement is severable from every other provision, paragraph and subparagraph and constitutes a separate distinct covenant. It is the parties’ express intention that, should a court of competent jurisdiction find any provision of this Agreement to be unenforceable as written, then such court should reform the offending provision so as to render it enforceable to the fullest extent deemed reasonable by the court.

5

13. WAIVER

The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver of limitation of that party’s rights to subsequently enforce and compel strict compliance with each and every provision of this Agreement.

14. ASSIGNMENT

Neither this agreement nor the rights or obligations of Consultant hereunder shall be assigned, subcontracted or otherwise transferred by Consultant to any other person or entity, by operation of law or otherwise.

15. APPLICABLE LAW

This Agreement shall be governed by the laws of the State of Missouri, without regard to principles of conflict of law which would otherwise make the laws of any other jurisdiction applicable hereto.

In witness whereof, the parties have duly executed this Agreement as of the date first set forth above.

Agreed to this 2nd day of Sept., 2009, by:

Consultant
/s/ Ronald J. Kanterman
Ronald J. Kanterman
KV Pharmaceutical Company
By:	/s/ David A. Van Vliet
Title:	Interim President/CEO

6

EX-10.38

Exhibit 10.38

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (“Agreement”), dated as of January 11, 2010 (the “Effective Date”), made and entered into by and between K-V Pharmaceutical Company, a Delaware corporation (the “Company”), and Janice C. Forsyth (the “Executive”).

RECITALS

WHEREAS, the Company desires to employ the Executive to provide services pursuant to the terms and conditions of this Agreement; and

WHEREAS, the Executive desires to provide such services to the Company pursuant to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows:

1. Employment Duties.

(a) Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve, as General Counsel, and as an executive officer of the Company.

(b) Duties. The Executive will have full authority to act on behalf of the Company in a manner that is consistent with his or her position. The Executive shall have such power and authority and perform such duties, functions and responsibilities as are associated with and incident to his or her position, and as the Board of Directors of the Company (the “Board”) may from time to time require of him or her; provided, however, that such authority, duties, functions and responsibilities are generally commensurate with the power, authority, duties, functions and responsibilities generally performed by General Counsels of public companies which are similar in size and nature to, and the financial position of, the Company. During the Term (as defined herein), the Executive shall:

(1) devote substantially all of his or her business time, attention and abilities to the business of the Company (including its subsidiaries or affiliates, when so required); and

(2) faithfully serve the Company and use his or her best efforts to promote and develop the interests of the Company.

2. Term of Employment. Unless earlier terminated as provided in Section 4 below, the term of the Executive’s employment hereunder shall be for a period commencing on the Effective Date and expiring on December 31, 2011 (the “Term”); provided, however, the Term will be automatically extended for successive periods of twelve (12) months, unless either the Executive or the Company gives written notice to the other at least one hundred eighty (180) days prior to the expiration of the then current Term and that he, she or it, as the case may be, does not wish to extend the Term for an additional twelve-month period. In addition, if a Change of Control (as defined herein) shall occur during the Term, this Agreement shall not expire prior to the second anniversary of the date of consummation of the Change of Control, and the Term shall automatically be extended to such second anniversary, as necessary, to give effect to this provision as of such consummation date.

3. Compensation. Subject to the terms of this Agreement and until the termination of the Term as provided in Section 2, the Company shall pay compensation and provide benefits to the Executive as follows:

(a) Base Salary. The Company shall pay to the Executive a base salary of $340,000 per annum during the Term (the “Base Salary”). The Base Salary shall be reviewed no less frequently than annually and may be increased at the discretion of the Board or the Compensation Committee of the Board (the “Committee”), as applicable. Except as otherwise agreed in writing by the Executive, the Base Salary shall not be reduced from the amount previously in effect. The Executive shall receive his or her salary in equal installments in accordance with the Company’s payroll practices in effect from time to time.

(b) Benefit Continuation and Perquisites. The Executive shall participate during the Term in such pension, life insurance, health, disability and medical insurance plans, and such other employee benefit plans and programs for the benefit of employees of the Company, as well as any executive perquisites provided to executives with the prior approval of the Committee, as may be maintained from time to time during the Term, in each case to the extent and in the manner available to other executives or officers of the Company of comparable level or position and subject to the terms and provisions of such plans or programs.

(c) Annual Cash Incentive. During the Term, the Executive shall be eligible to receive an annual cash bonus based on performance objectives established by the Committee each year (the “Annual Cash Incentive”), provided that the Company, in its sole discretion, elects to put into effect an annual cash incentive plan or similar policy with respect to any applicable year. The Executive’s target Annual Cash Incentive amount will be the percentage of Base Salary designated as the target by the Committee, equal to a percentage of the Base Salary then in effect for each applicable year, which percentage may be increased or decreased by the Committee in its discretion. Notwithstanding the preceding, Executive’s Annual Cash Incentive, if any, may be below (including zero), at, or above the target based upon the achievement of the performance objectives. In addition to the Annual Cash Incentive, the Company, in its sole discretion, may pay an additional bonus to the Executive as determined by the Company in accordance with the Company’s incentive plan or policies as in effect from time to time.

(d) Equity Incentives. From time to time as so approved by the Board, the Executive may become eligible for the grant of equity awards to acquire shares of the Company’s common stock, par value of $.01 per share (the “Shares”), pursuant to and subject to the terms and conditions of the Company’s equity incentive plan in place from time to time and any equity award agreement entered into by the Executive and the Company. The terms of any applicable equity award agreement, as it may be amended from time to time, and any applicable Company equity incentive plan shall govern the treatment of the Executive’s equity awards, if any, upon a termination of the Executive’s employment.

2

(e) Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable expenses incurred personally by him or her on behalf of the Company in accordance with the policies and procedures applicable to similarly situated executives of the Company.

(f) Vacation. The Executive shall be entitled to not less than twenty (20) paid vacation days during each year of the Term at such times as are mutually agreed upon by the Executive and the Company, subject to annual increases in accordance with the Company’s vacation policy. The Company’s vacation policy, as in effect on the relevant date, shall govern the treatment of Executive’s use, accrual, carry-over and cashout, if any, of paid vacation days.

(g) Committee Action or Approval. References in this Agreement to actions and approvals by the Committee shall mean those actions and approvals by the Committee that have been ratified or approved by the Board to the extent that a Board ratification or approval is required by the Company’s certificate of incorporation or by-laws.

4. Termination or Resignation; Compensation Payable Upon Termination or Resignation.

(a) Earlier Termination of Term. The Executive’s employment with the Company may terminate prior to the expiration of the Term as follows:

(1) The Company may terminate the Executive’s employment hereunder for Cause (as defined below) immediately upon written notice to the Executive, and it may terminate Executive’s employment hereunder without Cause or upon the Executive’s Disability (as defined below) upon giving the Executive at least thirty (30) days’ advance written notice;

(2) The Executive’s employment hereunder shall terminate automatically upon his or her death without any further notice or action required;

(3) Other than upon Relocation (as defined below), the Executive may resign his or her employment hereunder upon giving the Company at least one hundred twenty (120) days’ advance written notice; or

(4) The Executive may resign from his or her employment with the Company upon Relocation, as set forth in Section 4(d) below.

The Executive’s last day of employment with the Company, whether upon expiration of the Term or earlier termination as provided above, shall be the “Termination Date”. During some or all of any notice period provided above, the Company may, in its sole discretion, direct the Executive to perform some or none of his or her regular duties, provided that, notwithstanding any election by the Company to direct the Executive to perform none of his or her regular duties during the notice period, the Executive shall be entitled to compensation at the Base Salary for the entire notice period.

3

(b) Definition of “Cause”. As used herein, “Cause” shall mean, during the Term, the occurrence of any of the following:

(1) commission of a criminal act in respect of the Executive’s employment or conviction of, or plea of guilty or no contest to, a felony;

(2) willful misconduct, significant dishonesty, gross negligence or breach of fiduciary duty in respect of the Executive’s employment;

(3) continuing neglect or failure of the Executive to perform the duties reasonably assigned to the Executive by the Company and after notice from the Company of such neglect or failure, the Executive’s failure to cure such neglect or failure within thirty (30) days of such notice, provided that the Executive shall be provided only one thirty (30) day cure period for the same neglect or failure.

Any determination that the Executive should be terminated for Cause may be made during or after the Term of this Agreement and must be approved by no fewer than sixty-six and two-thirds (66-2/3) percent of the directors then serving on the Board; provided, however, that if the Executive is a member of the Board, he or she shall not participate in such vote, and a determination of cause may be made by no fewer than sixty-six and two-thirds (66-2/3) percent of the remaining directors then serving on the Board.

(c) Definition of “Disability”. The Executive shall be considered to have a “Disability” if he or she satisfies the definition set forth in the Company’s long-term disability benefit plan in which he or she is enrolled at the time of the determination or, if there is no such plan, he or she is unable to perform his or her duties under this Agreement for a continuous period of six (6) months for reasons of health, and, in the opinion of a physician appointed by the Company, such disability will continue for a prolonged period of time.

(d) Definition of “Relocation”. As used herein, “Relocation” shall mean the relocation of the Executive’s principal place of employment to a place more than seventy-five (75) miles from the Executive’s principal place of employment as of the Effective Date without the Executive’s prior written consent.

In order to invoke a termination for Relocation, the Executive must provide written notice to the Company within ninety (90) days of the occurrence of an event that constitutes Relocation, the Company must have thirty (30) days to cure the event and Executive must terminate his or her employment, if at all, within thirty (30) days of the end of the thirty (30) day cure period if the Company has failed to implement a cure.

4

(e) Definition of “Change of Control” and “Change of Control Event”.

As used herein, “Change of Control” shall mean the occurrence of any of the following:

(1) an acquisition by any individual, entity or group (within the meaning of Section 13d-3 or 14d-1 of the Securities Exchange Act of 1934, as amended (the “Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board (the “Outstanding Company Voting Securities”); provided, however, that “Change of Control” shall not include (i) the acquisition by any corporation pursuant to a reorganization, merger, consolidation or similar corporate transaction (in each case, a “Corporate Transaction”) if, pursuant to such Corporate Transaction, the beneficial owners of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than fifty-one percent (51%) of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be, and (ii) for the avoidance of doubt, any acquisition after the date hereof by any Person who beneficially owned 50% or more of the combined voting power of the Outstanding Company Voting Securities prior to the date hereof; or

(2) the consummation of a Corporate Transaction; excluding, however, such a Corporate Transaction pursuant to which the beneficial owners of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than fifty-one percent (51%) of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be; or

(3) the approval of the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all the assets of the Company; excluding, however, such a sale or other disposition to a corporation with respect to which, following such sale or other disposition, more than fifty-one percent (51%) of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors will be then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the outstanding Shares and Outstanding Company Voting Securities, as the case may be.

A “Change of Control Event” shall mean the earlier of (i) a Change of Control, or (ii) the execution and delivery by the Company of an agreement providing for a Change of Control.

5

(f) Payments to the Executive Upon Termination of Employment.

(1) In the event that the Executive’s employment hereunder terminates for any reason whatsoever (including for Cause), the Company shall pay to the Executive: (i) an amount equal to his or her accrued but unpaid Base Salary as of the Termination Date; (ii) any incentive compensation awarded to the Executive as of the Termination Date for the year preceding the year of termination but not yet paid; (iii) reimbursement for any unreimbursed business expenses incurred in accordance with Section 3(e) prior to the Termination Date; (iv) to the extent required by the Company’s vacation policy as in effect on the Termination Date, any accrued but unpaid vacation pay; and (v) any amounts or benefits due under any equity or benefit plan, grant or program in accordance with the terms of said plan, grant or program but without duplication, in each case as of the Termination Date (such amounts specified in clauses (i), (ii), (iii), (iv) and (v) referred to as “Accrued Obligations”).

(2) In the event that: (i) the Executive’s employment hereunder is terminated by the Company without Cause, or (ii) the Executive terminates his or her employment upon Relocation, in addition to the Accrued Obligations, and subject to the Executive’s continued compliance with the provisions of Section 7 below, the Company shall also pay or provide to the Executive: (A) an amount equal to one (1) times the sum of (x) Executive’s then-current Base Salary plus (y) Executive’s target Annual Cash Incentive for the then-current year of the Term (provided, however, solely for purposes of this Section 4(f)(2), that in the event the Company has not adopted an annual cash incentive plan or similar policy with respect to any applicable year, the Annual Cash Incentive for such year shall be an amount equal to 25 percent of the Executive’s then-current Base Salary; and, provided further, that if such termination occurs after the initial term of this Agreement, the average of the Annual Cash Incentive earned by the Executive for the two calendar years immediately preceding the year of the Termination Date shall replace “target Annual Cash Incentive”), payable over a period of twelve (12) months in equal bi-weekly installments, less deductions as required by law, the first installment to be paid on the first regular payroll date of the Company after the later of the date on which the general release of claims provided for in Section 4(g) below is executed by the Executive and delivered to the Company and the date on which any revocation period in the general release of claims has expired without its being revoked (the “Release Effective Date”) (the first such cash payment shall include payment of all amounts that otherwise would have been due prior to the Release Effective Date under the terms of this Agreement applied as though such payments commenced immediately upon the Termination Date); and (B) continued participation in the Company’s plans providing medical, dental, and vision insurance benefits, as applicable for the eighteen (18) month period following the Termination Date; provided that, such welfare plan coverage shall cease if the Executive obtains other full-time employment providing for comparable welfare plan benefits prior to the expiration of such eighteen (18) month period. Notwithstanding the foregoing, in the event that Executive’s employment with the Company is terminated without Cause by the Company or upon Relocation by the Executive, in either case, following a Change of Control Event that results in a completed Change of Control, the Executive will be entitled to the payments provided for in Section 4(f)(3) below, at the time or times specified in Section 4(f)(3) below, reduced by any payments already made to the Executive pursuant to this Section 4(f)(2).

6

(3) In the event that the Executive’s employment with the Company is terminated without Cause by the Company or upon Relocation by the Executive within twelve (12) months after the occurrence of a Change of Control, then in addition to the Accrued Obligations and in lieu of any other termination payment that would otherwise be payable to Executive hereunder, and subject to the Executive’s continued compliance with the provisions of Section 7 below, the Company shall pay or provide to the Executive (A) an amount equal to the sum of (a) an amount equal to one (1) times the sum of (x) the Executive’s then-current Base Salary, plus (y) Executive’s then-current target Annual Cash Incentive for the then-current year of the Term (provided, however, solely for purposes of this Section 4(f)(3), that in the event the Company has not adopted an annual cash incentive plan or similar policy with respect to any applicable year, the Annual Cash Incentive for such year shall be an amount equal to 25 percent of the Executive’s then-current Base Salary; and, provided further, that if such termination occurs after the initial term of this Agreement, the average of the Annual Cash Incentives earned by the Executive for the two calendar years immediately preceding the year of the Termination Date shall replace “target Annual Cash Incentive”), payable in a lump sum no later than ten (10) days following the Release Effective Date, and (B) continued participation in the Company’s plans providing medical, dental, and vision insurance benefits (as applicable) for the eighteen (18) month period following the Termination Date; provided that, such welfare plan coverage shall cease if the Executive obtains other full-time employment providing for comparable welfare plan benefits prior to the expiration of such eighteen (18) month period.

(4) Notwithstanding anything herein to the contrary, in the event that following a termination by the Company without Cause or a termination by the Executive upon Relocation, it is determined, in accordance with the procedures set forth in Section 4(b) above, that the Executive committed acts during the Term that constitute Cause, the payments provided for in Sections 4(f)(2) or (3) shall immediately cease.

(g) General Release of Claims. No payments will be made or benefits will be provided under Sections 4(f)(2) or (3), unless (x) the Executive first executes and delivers to the Company a general release of claims in substantially the same form as attached as Appendix A to this Agreement, and (y) to the extent any portion of such general release of claims is subject to the seven-day revocation period prescribed by the Age Discrimination in Employment Act, as amended, or to any similar revocation period in effect on the Termination Date, such revocation period has expired without the general release of claims being revoked. Such general release of claims shall be provided to Executive within five (5) days of his or her Termination Date and he or she shall execute the general release of claims within thirty (30) days. The Executive will forfeit all rights to the severance payments if the Executive fails to execute and deliver to the Company the general release of claims within 30 days of its delivery to the Executive or the Executive revokes the general release of claims. In the event the last sentence of Section 4(f)(2) becomes effective, Executive shall be required to execute, deliver to the Company, and not revoke, a second general release of claims in the manner specified by this Section 4(g) in order to receive the payments and benefits described in Section 4(f)(3).

(h) In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not Executive obtains other employment.

7

5. Maximum Payment. In the event Executive becomes entitled to any amounts or benefits payable in connection with a Change of Control or other change of control (whether or not such amounts are payable pursuant to this Agreement) (the “Total Payments”), if any of such Total Payments are subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (or any similar federal, state or local tax that may hereafter be imposed), the Company shall pay to Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments; provided, however that in the event the aggregate value of the Total Payments exceeds three times the Executive’s “base amount,” as defined in Section 280G(b)(3) of the Code, (the “Parachute Threshold”) by less than 10%, one or more of the Total Payments shall be reduced so that the aggregate value of the Total Payments is $1.00 less than the Parachute Threshold. The Company shall reduce or eliminate the Total Payments by first reducing or eliminating the portion of the Total Payments which are payable in cash and then by reducing or eliminating Total Payments which are not payable in cash, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Change of Control. The preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive’s rights and entitlements to any benefits or compensation. For the avoidance of doubt, in no event shall the Company be required to pay to Executive any amount under this Section 5 with respect to any taxes or interest that may arise as a result of Section 409A (as defined herein). Any Gross-Up Payment, as determined pursuant to this Section 5 shall be paid by the Company to the Executive within five days of receipt of the determination of liability for an Excise Tax, but in no event later than the end of the taxable year following the taxable year in which the related taxes are remitted by the Executive.

6. Section 409A.

(a) With respect to payments under this Agreement, for purposes of Section 409A of the Code (“Section 409A”), each severance payment and COBRA continuation reimbursement payment will be considered one of a series of separate payments.

(b) The Executive will be deemed to have a termination of employment for purposes of determining the timing of any payments that are classified as deferred compensation only upon a “separation from service” within the meaning of Section 409A.

(c) If at the time of Executive’s separation from service, (i) Executive is a specified employee (within the meaning of Section 409A and using the identification methodology selected by the Company from time to time), and (ii) the Company makes a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to avoid taxes or penalties under Section 409A, then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it in a lump sum on the first business day after such six-month period, together with interest for the period of delay, compounded annually, equal to the prime rate (as published in the Wall Street Journal) in effect as of the dates the payments should otherwise have been provided.

(d) Any amount that Executive is entitled to be reimbursed under this Agreement will be reimbursed to Executive as promptly as practical and in any event not later than the last day of the calendar year after the calendar year in which the expenses are incurred, and the amount of the expenses eligible for reimbursement during any calendar year will not affect the amount of expenses eligible for reimbursement in any other calendar year.

8

(e) Whenever a payment under this Agreement specifies a payment period with reference to a number of days (e.g., “payment shall be made within thirty (30) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Company.

(f) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “deferred compensation” for purposes of Section 409A be subject to offset, counterclaim or recoupment by any other amount payable to the Executive unless otherwise permitted by Section 409A.

(g) To the extent the Executive would be subject to the additional 20% tax imposed on certain deferred compensation arrangements pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such tax and the parties shall promptly execute any amendment reasonably necessary to implement this Section 6. The Executive and the Company agree to cooperate to make such amendments to the terms of this Agreement as may be necessary to avoid the imposition of penalties and additional taxes under Section 409A to the extent possible; provided however, that the Company agrees that any such amendment shall provide the Executive with economically equivalent payments and benefits, and the Executive agrees that any such amendment will not materially increase the cost to, or liability of, the Company with respect to any payments.

(h) Notwithstanding the foregoing, for purposes of the payment of any deferred compensation to Executive, an event shall not be considered to be a Change of Control hereunder unless such event is also a “change in ownership,” a “change in effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A.

7. Protection of the Company’s Interests.

(a) The parties agree that as of the Effective Date, the business of the Company was the development, manufacture, licensing and sale of pharmaceutical products using drug delivery technologies (hereafter “the business of the Company”). Executive agrees that during the thirty-six (36) consecutive months immediately following the Termination Date, regardless of how, when or why the Executive’s employment ends, Executive will not in any manner or in any capacity, directly or indirectly, for himself 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 Executive performed for the Company on behalf of a competitor that engages in the business of the Company.

(2) Solicit, contact, divert, interfere with or take away any customer of the Company and/or any of its parents, subsidiaries or affiliates (collectively, the “Company Entities,” and individually, a “Company Entity”) that has conducted business or negotiations with any Company Entity during the twelve (12) months immediately preceding the Termination Date.

9

(3) Interfere with any of the suppliers of any Company Entity, including, without limitation, reducing in any material way the willingness or capability of any supplier to continue supplying any Company Entity with their present or contemplated requirements.

(4) Solicit or interfere with any Company Entity’s relationship with any of its employees or agents, or provide the names of any Company Entity’s 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 the Company sold during the twelve (12) months immediately preceding the termination of employment, except as permitted in Section 8 below.

(b) Executive further agrees that he will not engage in any of the activities listed above while employed by the Company.

(c) Executive acknowledges and agrees that his experience, knowledge and capabilities are such that he can obtain employment in unrelated pharmaceutical, chemical, nutritional, food, industrial, household, confectionery or other businesses, and that the enforcement of this Section 7 by way of injunction would not prevent Executive from earning a livelihood. Executive further agrees that if he has any question(s) regarding the scope of activities restricted by this Section 7, he will, to avoid confusion or misunderstanding, submit the question(s) in writing to the Director, Human Resources of the Company for a written response. Executive additionally agrees to promptly inform and keep the Company advised of the identity of his employer (including any unit or division to which Executive is assigned), his work location, and his title and work responsibilities during the period covered by this Section 7.

(d) Executive agrees to fully disclose the terms of this Agreement to any person or entity by which or with whom he may hereafter become employed or to which he may hereafter render services, and agrees that the Company 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 Executive of any of the terms of Section 7, the period of time the obligations hereunder apply will be automatically extended for a period of time equal to the length of time Executive is in breach.

(f) The Executive recognizes and acknowledges that in the course of the Executive’s employment with the Company the Executive has obtained, or may obtain, confidential information, whether specifically designated as such or not, and the Executive agrees to maintain in confidence any confidential information obtained by or from the Company and will not, during the Term or any time thereafter, either directly or indirectly, disclose or use confidential information except with the prior written consent of the Company or until such confidential information will be in the public domain (other than as a result of an unauthorized disclosure by the Executive). For the avoidance of doubt, the parties agree that this Section 7(f) shall survive the termination or expiration of this Agreement for any reason.

10

(g) The Executive agrees not to publicly or privately disparage the Company or any of the Company’s products, services, divisions, affiliates, related companies or current or former officers, directors, trustees, employees, agents, administrators, representatives or fiduciaries. The Company agrees that it will not issue any official statements disparaging the Executive and will instruct its officers not to disparage the Executive. Notwithstanding the foregoing, neither the Executive nor the Company will be restricted from providing information about the other as required by a court or governmental agency or by applicable law. Further, the Company and the Executive shall not be restricted from reporting information regarding his or her performance while employed by the Company to internal or external auditors, special counsel or investigators, any applicable enforcement agencies, regulatory agencies, insurance carriers or in litigation involving the Executive or the Company. The parties agree that this Section 7(g) shall survive the termination or expiration of this Agreement for any reason.

(h) Remedies.

(i) The Executive acknowledges that a breach of any of the covenants contained in Sections 7(a), (f) or (g) may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injury precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to a temporary restraining order and/or a preliminary or permanent injunction, restraining the Executive from engaging in such prohibited activities or such other relief as may be required specifically to enforce any of the covenants contained therein. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach, including, without limitation, terminating payments to the Executive under Sections 4(f)(2) and (3).

(ii) The restrictions set forth in Sections 7(a), (f) and (g) are considered by the parties hereto to be reasonable for the purposes of protecting the business of the Company. However, if any such restriction is found by a court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it is the intention of the parties that such restriction shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

8. Investment Securities. Nothing in this Agreement shall limit the right of the Executive 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 the Executive’s interest in any such business entity does not exceed five percent (5%) of such entity’s ownership.

9. Indemnification. The Company agrees to indemnify, defend and hold harmless the Executive from and against any and all liabilities to which he or she may be subject as a result of his or her employment hereunder (as a result of his or her service as an officer or director of the Company or as an officer or director of any of its subsidiaries or affiliates), as well as the costs, including attorney’s and other professional fees and disbursements, of any legal action brought or threatened against him or her as a result of such employment in accordance with the indemnification policies of the Company to the fullest extent permitted by, and subject to the limitations of, applicable corporate law.

11

10. Arbitration.

(a) General. Except for an action for equitable relief that is permitted to be sought pursuant to Section 7(h), any controversy, dispute, or claim between the parties to this Agreement, including any claim arising out of, in connection with, or in relation to the formation, interpretation, performance or breach of this Agreement shall be settled exclusively by arbitration, before a single arbitrator, in accordance with this Section 10 and the then most applicable rules of the American Arbitration Association. Judgment upon any award rendered by the arbitrator may be entered by any state or federal court having jurisdiction thereof. Such arbitration shall be administered by the American Arbitration Association. Arbitration shall be the exclusive remedy for determining any such dispute, regardless of its nature. Notwithstanding the foregoing, either party may in an appropriate matter apply to a court for provisional relief, including a temporary restraining order or a preliminary injunction, on the ground that the award to which the applicant may be entitled in arbitration may be rendered ineffectual without provisional relief. Unless mutually agreed by the parties otherwise, any arbitration shall take place in St. Louis, Missouri.

(b) Selection of Arbitrator. In the event the parties are unable to agree upon an arbitrator, the parties shall select a single arbitrator from a list of nine persons (who shall be retired judges or corporate attorneys experienced in executive employment matters) provided by the office of the American Arbitration Association having jurisdiction over St. Louis, Missouri. If the parties are unable to agree upon an arbitrator from the list so drawn, then the parties shall each strike names alternately from the list, with the first to strike being determined by lot. After each party has used four strikes, the remaining name on the list shall be the arbitrator. If such person is unable to serve for any reason, the parties shall repeat this process until an arbitrator is selected.

(c) Applicability of Arbitration; Remedial Authority. This agreement to resolve any disputes by binding arbitration shall extend to claims against any parent, subsidiary or affiliate of each party, and, when acting within such capacity, any officer, director, stockholder, employee or agent of each party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law. In the event of a dispute subject to this section the parties shall be entitled to reasonable discovery subject to the discretion of the arbitrator. The remedial authority of the arbitrator (which shall include the right to grant injunctive or other equitable relief) shall be the same as, but no greater than, would be the remedial power of a court having jurisdiction over the parties and their dispute. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that he or it would be entitled to summary judgment if the matter had been pursued in court litigation. In the event of a conflict between the applicable rules of the American Arbitration Association and these procedures, the provisions of these procedures shall govern.

12

(d) Award Final and Binding. The arbitrator shall render an award and written opinion, and the award shall be final and binding upon the parties. If any of the provisions of this paragraph, or of this Agreement, are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Agreement, and this Agreement shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that the arbitration provisions of this Agreement are not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law.

11. Reimbursement of Legal and Related Expenses.

(a) In the event that any dispute shall arise between the Executive and the Company relating to his or her rights under this Agreement on or after a Change of Control, the Company shall reimburse Executive for one-half of all reasonable legal fees and expenses incurred in connection with such dispute, provided, that if it is finally determined that the Executive has substantially prevailed in such dispute, the Company shall reimburse Executive for all such reasonable legal fees and expenses.

(b) In the event that any dispute shall arise between the Executive and the Company relating to his or her rights under this Agreement prior to a Change of Control, the Company shall reimburse Executive for all reasonable legal fees and expenses incurred in connection with such dispute, so long as it is finally determined that the Executive has substantially prevailed with respect to at least one material claim in such dispute.

12. Successors, Binding Agreement.

(a) Assumption by Successor. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.

(b) Enforceability, Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the Executive (and his or her personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, by operation of law. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees or other beneficiaries. If the Executive should die while any amount would still be payable to him or her hereunder if he or she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his or her beneficiary.

13

13. Assignment. Neither party may assign this Agreement or any of his or her or its rights, benefits, obligations or duties hereunder to any other person, firm, corporation or other entity.

14. Withholding. The Company shall be authorized to withhold from any award or payment it makes under the Agreement, the amount of withholding taxes due with respect to such award or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the withholding of such taxes.

15. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when personally delivered or on the third business day after being placed in the mail, postage prepaid, addressed to the parties hereto as follows (provided that notice of change of address shall be deemed given only when actually received):

As to the Company:	K-V Pharmaceutical Company
	One Corporate Woods Drive
	Bridgeton, MO 63044
	Attention: VP, Human Resources
	As to the Executive: To the last known address of the
	Executive shown
	in the Company’s records

The address of any of the parties may be changed from time to time by such party serving notice upon the other parties.

16. Governing Law; Forum for Disputes. This Agreement shall be governed by the laws of the State of Missouri (other than Missouri’s principles of conflicts of laws).

17. Entire Agreement; Modification. Other than any stock option agreement between the Company and the Executive, this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and cancels all prior or contemporaneous oral or written agreements and understandings between them with respect to the subject matter hereof, including but not limited to any employment agreements and repayment agreements. This Agreement has been approved by the Company’s Board of Directors, and may not be amended or modified except by written amendment approved by the Company’s Board of Directors and the Executive.

14

18. Benefits of Other Plans and Agreements. If the Executive becomes entitled to receive severance benefits under the terms of this Agreement, such benefits will be reduced by other severance benefits payable under any plan, program, policy or practice of or agreement or other arrangement between the Executive and the Company. It is intended that the Agreement provide benefits that are supplemental to severance benefits that are actually received by the Executive pursuant to any plan, program, policy or practice of or agreement or arrangement between the Executive and the Company, such that the net effect to the Executive of entitlement to any similar benefits that are contained both in the Agreement and in any other existing plan, program, policy or practice of or agreement or arrangement between the Executive and the Company will be to provide the Executive with the greater of the benefits under the Agreement or under such other plan, program, policy, practice, or agreement or arrangement. For the avoidance of doubt, the Executive is not entitled to participate in that certain Special Retention Bonus Plan, made as of March 2009, or any similar plan.

19. Severability. Should any provision of this Agreement or any part thereof be held invalid or unenforceable, the same shall not affect or impair any other provision of this Agreement or any part thereof and the invalidity or unenforceable of any provision of this Agreement shall not have any effect on or impair the obligations of the Company or the Executive.

20. Rules of Construction. The captions in this Agreement are for convenience of reference only and in no way define, limit or describe the scope or intent of any provisions or Sections of this Agreement. All references in this Agreement to particular Sections are references to the Sections of this Agreement, unless some other reference is clearly indicated.

21. Execution. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement.

[SIGNATURE PAGE FOLLOWS]

15

IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the day and year first above written.

K-V PHARMACEUTICAL COMPANY
By:	/s/ David Van Vliet
Name:	David Van Vliet
Title:	Interim President/Chief Executive Officer
/s/ Janice C. Forsyth
Janice C. Forsyth

[SIGNATURE PAGE – EMPLOYMENT AGREEMENT]

APPENDIX A

GENERAL RELEASE OF CLAIMS

Consistent with Section 4(g) of the Employment Agreement dated                          , 20     (the “Employment Agreement”) between me and K-V Pharmaceutical Company (the “Company”) and in consideration for and as a condition of my receipt of the severance payments and benefits set forth in Section 4(f)(2) or (3) of the Employment Agreement, as the case may be, I, on behalf of myself and my agents, heirs, executors, administrators, successors, and assigns, do fully release and discharge forever the Company, all of its subsidiaries and affiliate corporations and entities, as well as all their respective predecessors, successors, assigns, directors, officers, partners, agents, employees, former employees, executors, attorneys, and administrators (hereinafter “the Company, et al.”), from all complaints, demands, lawsuits, causes of action, and claims of any nature whatsoever, whether known, unknown, or unforeseen, which I have or may have against the Company, et al., for any reason whatsoever, whether in law or in equity, under federal, state or other law, whether the same be upon statutory, tort, contract or other basis, including, but not limited to, all complaints, demands, lawsuits, causes of action, and claims arising out of: (1) my employment with the Company, (2) my separation from employment with the Company, (3) the Employment Agreement and/or any other agreement between me and the Company (except for obligations in such agreements that expressly survive my separation from employment), or (4) any event, transaction, or matter occurring or existing on or before the date of my executing this General Release.

This General Release specifically includes, but is not limited to, all claims of breach of contract, employment discrimination or harassment (including any claims coming within the scope of Title VII of the Civil Rights Act, the Civil Rights Act of 1866 (known as Section 1981), the Age Discrimination in Employment Act (as defined herein), the Older Workers Benefit Protection Act, the Equal Pay Act, the Americans with Disabilities Act, the Family and Medical Leave Act, and the Missouri Human Rights Act, all as amended, or any other applicable federal, state, or local law), claims under the Employee Retirement Income Security Act, as amended, claims under any applicable federal, state or local statute relating to payment of wages, claims concerning recruitment, hiring, termination, salary rate, severance pay, equity, stock options, benefits due, sick leave, vacation pay, life insurance, group medical insurance, any other fringe benefits, libel, slander, defamation, intentional or negligent misrepresentation and/or infliction of emotional distress, together with any and all tort or other claims which might have been asserted by me or on my behalf against the Company, et al., in any complaint, demand, lawsuit, cause of action, or claim.

Notwithstanding the foregoing or any other provision of this General Release, I am not releasing: (1) any claims that may not be released by a private agreement as a matter of law; and (2) any non-waivable right to file a charge with the United States Equal Employment Opportunity Commission (the “EEOC”); provided, however, that if the EEOC were to pursue any claims on my behalf against the Company, et al., I waive any right to recover monetary damages as a result thereof.

I agree not to file or otherwise institute any complaint, demand, lawsuit, cause of action, or claim seeking damages or other relief and not to otherwise assert any complaints, demands, lawsuits, causes of action, or claims that are lawfully released herein. I further hereby irrevocably and unconditionally waive any and all rights to recover any relief or damages concerning the complaints, demands, lawsuits, causes of action, and claims that are lawfully released herein. I represent and warrant that I have not previously filed or joined in any such complaints, demands, lawsuits, causes of action, or claims against any of the Company, et al.

A-1

Nothing in this General Release shall be construed to prohibit me from filing a charge with or participating or cooperating in any investigation or proceeding conducted by the EEOC, the National Labor Relations Board (NLRB) or any state or local agency. Notwithstanding the foregoing, I agree to waive my right to recover individual relief in any such charge, complaint or lawsuit filed by me or anyone on my behalf.

I hereby forever release the Company, et al., from any liability or obligation to reinstate or reemploy me in any capacity, and I waive any right to be hired or placed in any position or to any future employment of any nature with the Company, et al.

I agree and understand that I am specifically releasing all claims under the Age Discrimination in Employment Act, as amended, 29 U.S.C. § 621 et seq., a federal statute that prohibits employers from discriminating against employees who are age 40 or over. I acknowledge that:

(1) I have read and understand this General Release and execute it voluntarily and without coercion;

(2) I have been given an opportunity of twenty-one (21) days to consider this General Release;

(3) I have been encouraged by the Company to discuss fully the terms of this General Release with legal counsel of my own choosing; and

(4) For a period of seven (7) days following my execution of this General Release, I shall have the right to revoke the waiver of claims arising under the Age Discrimination in Employment Act.

If I elect to revoke the waiver of claims arising under the Age Discrimination in Employment Act within this seven-day period, I must inform the Company by delivering a written notice of revocation to the Company, c/o Vice President, Human Resources, K-V Pharmaceutical Company, One Corporate Woods Drive, Bridgeton, Missouri, 63044, no later than 11:59 p.m. on the seventh calendar day after I execute this General Release. I understand that, if I elect to exercise this revocation right, this General Release shall be voided in its entirety at the election of the Company and the Company shall be relieved of all obligations to provide the severance payments and benefits set forth in Sections 4(f)(2) and (3) of the Employment Agreement. I further understand that such severance payments and benefits will not begin to be provided unless and until the revocation period expires without my exercising the revocation right. I may, if I wish, elect to execute this General Release prior to the expiration of the 21-day consideration period, and I agree that if I elect to do so, my election is made freely and voluntarily and after having an opportunity to consult counsel.

[SIGNATURE PAGE FOLLOWS]

A-2

AGREED:
Janice C. Forsyth	Date

[SIGNATURE PAGE – GENERAL RELEASE]

A-3

EX-10.41

Exhibit 10.41

AGREEMENT AND RELEASE

This AGREEMENT AND RELEASE (hereinafter referred to as “Agreement”) is made and entered into this 2nd day of March, 2010, by and between Richard H. Chibnall (hereinafter “Releasee”), on his/her own behalf and KV PHARMACEUTICAL COMPANY (hereinafter “KV”).

WHEREAS Releasee’s employment ended on February 19, 2010, and he/she has received all contractual benefits due; and

WHEREAS KV is desirous of providing Releasee severance benefits in exchange for the promises he/she makes herein; and

WHEREAS it is the desire of the parties, among other things, to resolve any inchoate disputes between the parties relating to the terms of his/her employment and severance therefrom, and to provide payments to Releasee in exchange for which he/she makes certain pledges specified below;

NOW THEREFORE, in consideration of the promises and the covenants and representations made herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. Releasee hereby releases and relinquishes any and all claim of right to employment with, reinstatement, recall, seniority and any right to future employment with KV and any and all entities owning or owned by KV and any successors or assigns to KV.

1

2. Releasee hereby releases KV and any and all entities owning or owned by KV and any successors or assigns to KV from any and all claims arising out of his/her previous employment with KV including, but not limited to, any claims in the nature of claims for any tort and/or compensatory damages arising out of any act alleged to have occurred or not occurred during his/her employment relationship including but not limited to any and all claims for damages under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1886, as amended, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974, the Fair Labor Standards Act, the Worker Adjustment and Retraining Notification Act, and any and all claims generally arising from either Titles 29 or 42 of the United States Code, as well as but not limited to, any right, claim or cause of action, under the laws of the State of Missouri, the Missouri Human Rights Act, Chapter 213, RSMo., the Missouri Service Letter Statute, Chapter 290.140, RSMo., as well as all actions arising under federal, state or local law or regulation and all actions at common law, including contract claims and tort claims at common law, such as, but not limited to, defamation. Releasee further releases KV from any and all claims arising as a result of the circumstances leading to and Releasee’s severance from employment.

Other than as required by law or under power of subpoena, Releasee agrees not to assist, provide information acquired up to the date of this Agreement, aid, or in any way cooperate with anyone seeking to pursue claims against or otherwise litigate or initiate or file any claims or actions against KV other than claims advanced under the auspices of an Equal Employment Opportunity Commission (“EEOC”) investigation, hearing or proceeding. Specifically, Releasee agrees not to volunteer, provide information acquired up to the date of this Agreement, or cooperate with anyone intending to pursue any claim against KV other than claims advanced in an EEOC investigation, hearing or proceeding. Releasee agrees that he/she will not provide any third party with any information, statements, or anything else acquired up until the date of this Agreement which would be considered assistance to them in their efforts to pursue claims, other than claims advanced in an EEOC investigation, hearing or proceeding, against KV, whether in tort or in contract or pursuant to any other applicable theory of law or equity.

2

3. By execution of this Agreement, Releasee expressly waives any and all rights or claims arising under the Age Discrimination in Employment Act of 1967 (“ADEA”) and:

(a) Releasee acknowledges that his/her waiver of rights or claims arising under the ADEA is in writing and is understood by Releasee;

(b) Releasee expressly understands that this waiver refers to rights or claims arising under the ADEA;

(c) Releasee expressly understands that by execution of this Agreement, Releasee does not waive any rights or claims under the ADEA that may arise after the date the waiver is executed;

(d) Releasee acknowledges that the waiver of his/her rights or claims arising under the ADEA is in exchange for the consideration provided for and stated herein, which is beyond that to which Releasee is entitled, which is necessarily stated for ADEA and OWBPA purposes;

(e) Releasee acknowledges that KV expressly advised him/her on February 11, 2010 to consult with an attorney of his/her choosing prior to executing this Agreement;

(f) Releasee has been advised by KV that he/she is given a period not less than twenty-one (21) days from the date of receipt of this document, within which to consider this Agreement.

(g) Releasee acknowledges he/she has been advised by KV that he/she is entitled to revoke (in the event she executes this Agreement) his/her waiver of rights or claims arising under the ADEA within seven (7) days after executing this Agreement and that said waiver will not and does not become effective or enforceable until the seven (7) day revocation period has expired;

3

(h) Releasee understands that this waiver is not requested in connection with an exit incentive or other employment termination program;

(i) The parties agree that should Releasee exercise his/her right to revoke the waiver under subparagraph (h) hereof, this entire Agreement and its obligations are null and void and of no effect; and

(j) Releasee acknowledges, notwithstanding any other provision of this Agreement to the contrary, that no sums or benefits due him/her hereunder shall be paid or provided until the revocation period specified in subparagraph (g) hereof has expired or has been waived.

4. In accordance with the KV Pharmaceutical Company Employment and Confidential Information Agreement dated December 22, 1995, as amended, (the “Employment Agreement”) KV agrees to make severance payments to Releasee under Section 5(B) of the Amendment dated April 1, 2005. In exchange for all the promises made by Releasee under this Agreement and Release, KV further agrees to amend the Employment Agreement to exclude from the six month delay in the commencement of the payment of severance benefits, any severance that is excepted from the coverage of Section 409A of the Internal Revenue Code and additionally shall pay to Releasee the equivalent of one month of salary in the amount of $21,021, less standard withholdings, such amount to be paid at the end of the month in the month immediately following the last month in which payments are made pursuant to Releasee under the Employment Agreement. KV further agrees that upon inquiry from any potential employer or other legitimate inquiry, no statement shall be made concerning his/her period of employment or conclusion thereof, except to state the dates of his/her employment and the title of his/her last position.

4

5. The Parties above named to this Agreement and Release agree that this Agreement and Release shall be considered confidential and shall not be disclosed, mentioned or uttered to any person or organization in any manner whatsoever except that Releasee may make the terms of this Agreement known to assure his/her compliance with the law, and except as otherwise provided by law.

6. This Agreement and Release reflects the Parties’ entire Agreement, and it merges all prior and existing Agreements, representations and understandings between the Parties.

7. The laws of the State of Missouri shall govern the interpretation of this Agreement and Release.

8. Releasee acknowledges he/she has read the provisions of this Agreement and Release, that the only consideration for his/her signing this Agreement and Release are the terms stated above, that no other promise or agreement of any kind has been made to him/her by any person or entity whatsoever to cause him/her to sign this Agreement and Release, that he/she is competent to execute this Agreement and Release, that he/she hereby is advised to and has reviewed this Agreement and Release with his/her attorney unless he/she waives this right and fully understands its meaning and intent, and that he/she agrees to all of its terms of his/her own free will.

IN WITNESS OF THIS AGREEMENT AND RELEASE, THE PARTIES HAVE EXECUTED IT BELOW.

By:	/s/ Richard H. Chibnall	3/2/2010
		Date
KV PHARMACEUTICAL COMPANY
By:	/s/ Janice C. Forsyth	3/18/10
	Janice C. Forsyth	Date

5

EX-10.42

Exhibit 10.42

KV PHARMACEUTICAL COMPANY

FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT

THIS FOURTH AMENDMENT (this “Fourth Amendment”) is made and entered into as of March 2, 2010, by and among RICHARD H. CHIBNALL (“Employee”) and KV PHARMACEUTICAL COMPANY, a Delaware corporation (“KV”).

RECITALS

WHEREAS, KV and Employee entered into that certain KV Pharmaceutical Company Employment and Confidential Information Agreement dated December 22, 1995 (the “Agreement”), and to Amendments dated February 1, 2000 (the “Amendment”), April 1, 2005 (the “Second Amendment”) and December 31, 2008 (the “Third Amendment”) which, together with the Amendment and the Agreement are collectively referred to herein as the “Employment Agreement”); and

WHEREAS, KV and Employee want to amend the Employment Agreement to continue to comply with Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) while permitting payout without a six month delay for amounts not subject to Section 409A.

NOW THEREFORE, for and in consideration of the mutual covenants, agreements, understandings, undertakings, representations, warranties and promises hereinafter set forth, and intending to be legally bound thereby, KV and Employee do hereby amend the Employment Agreement and agree as follows:

1. Add the following Paragraph 23:

23. Specified Employee. Notwithstanding any provision to the contrary, if the employee is a “specified employee” (within the meaning of Section 409(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the “Code”)) at the time of termination of his employment with KV and he is entitled to the payments under Paragraph 5 or Paragraph 22(C), amounts payable to the Employee pursuant to Paragraph 5 or Paragraph 22(C) that are subject to Section 409A and not subject to an exception thereunder shall not commence until the first day of the seventh month immediately following the month in which payment of benefits would otherwise commence but for this Paragraph 23. In this event, the total of the monthly benefits, that would have otherwise been paid for the first six months but for this Paragraph 23, shall be paid in a single sum, along with the regular monthly payment for the seventh month, as of the first day of said seventh month with interest on such amounts at the prime rate (as published in the Wall Street Journal), compounded annually, as in effect on the first day such benefits would be paid out but for this Paragraph 23.

IN WITNESS WHEREOF, Employee and KV have executed and delivered this Fourth Amendment as of the date first above written.

EMPLOYEE:
/s/ Richard H. Chibnall	3-2-2010
RICHARD H. CHIBNALL	Date

KV PHARMACEUTICAL COMPANY
/s/ David A. Van Vliet		3-10-10
Name:	David A. Van Vliet	Date
Title:	Interim President/CEO

EX-10.48

Exhibit 10.48

January 8, 2010

Hologic, Inc.

35 Crosby Drive

Bedford, MA 01730

Attn: Robert Cascella

Dear Robert:

Pursuant to that certain Asset Purchase Agreement by and among K-V Pharmaceutical Company, a Delaware corporation (“Acquiror”), Cytyc Prenatal Products Corp., a Delaware corporation (“Cytyc”), and Hologic, Inc., a Delaware corporation (“Seller”), dated as of January 16, 2008 (as of immediately prior to the execution of this Amendment, the “Original Agreement”), and the disclosure schedule accompanying the Original Agreement (the “Disclosure Schedule”), the Acquiror and the Seller are entering into this amendment (this “Amendment”) to amend certain provisions of the Original Agreement and the Related Agreements as of the date hereof (the “Amendment Date”). In consideration of the terms set forth in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Acquiror and the Seller agree as follows:

1. The Closing occurred on February 19, 2008 and the conditions of Sections 5.1 and 5.2 and ARTICLE IX of the Original Agreement were satisfied in full. The Acquiror has paid in full the Initial Purchase Price Amount and the NDA Milestone Payment.

2. The Seller is aware of recent adverse developments with respect to the Acquiror, including as disclosed in the reports, schedules, forms, statements and other documents (including exhibits) filed by the Acquiror with, or furnished by the Acquiror to, the United States Securities and Exchange Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder), and publicly available since January 16, 2008. The Seller has also been afforded the opportunity to conduct certain due diligence with respect to the Acquiror’s current and anticipated financial position, and has satisfied itself with such matters.

3. At the Seller’s request, the Acquiror has provided to the Seller certain projections, estimates and draft financial information, including (a) with respect to anticipated tax refunds, (b) statements of cash flows and balance sheets for future periods, (c) estimates of anticipated proceeds from the expected settlement of various matters, (d) valuation information for various of the Acquiror’s assets and liabilities, and (e) various other forward-looking information regarding the Acquiror and its assets, liabilities, results of operations, financial condition and prospects (collectively, the “Financial Information”). The Financial Information has been prepared in good faith by the Acquiror’s senior management, and to the knowledge of Acquiror’s senior management does not contain any untrue statement of a material fact. The Seller agrees and acknowledges that:

(i) the Financial Information may be deemed to be material, non-public information, and as such, it is not to be used for any purpose other than for the limited purposes of providing the Seller with context for the transactions contemplated by this Amendment, and under no circumstances will the Seller use such information for any other purpose;

(ii) the Financial Information will be kept confidential and handled by the Seller and its representatives in a manner commensurate with how the Seller treats its most confidential and sensitive information;

(iii) there are uncertainties inherent in attempting to make any such projections, budgets, forecasts or other forward-looking financial information, and actual results of operations may differ materially from any such projections, budgets, forecasts or other forward-looking financial information;

(iv) except as expressly set forth in the second sentence of Paragraph 3 hereof, the Acquiror is not making, and shall not be deemed to have made any representations or warranties, express or implied, at law or in equity, of any kind or nature whatsoever concerning or as to the accuracy or completeness of any projections, budgets, forecasts or other forward-looking financial information concerning the future revenue, income, profit, cash flow, liabilities or other financial results of the Acquiror and its Subsidiaries;

(v) much of the Financial Information has not yet been reviewed by the Acquiror’s board of directors and outside advisors, and remains subject to further review and/or revision (any of which may significantly alter the content of such Financial Information);

(vi) the Acquiror is under no obligation to advise the Seller of any change and/or revision to the Financial Information;

(vii) the Financial Information has not been prepared in accordance with generally accepted accounting principles, nor have the Acquiror’s independent auditors, nor any other independent accountants, audited, compiled, examined or performed any procedures with respect to the Financial Information, nor have they expressed any opinion or any other form of assurance or comfort with respect thereto;

(viii) the Financial Information does not purport to be complete nor comprehensive in any manner;

(ix) the Financial Information is subjective in many respects, and is based on a variety of estimates and assumptions regarding the Acquiror’s business, industry performance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond the Acquiror’s control;

(x) except as expressly set forth in the second sentence of Paragraph 3 hereof, the Acquiror has not made nor shall it be deemed to have made, nor has Seller relied on, any representation or warranty whatsoever, express or implied, beyond those expressly given in ARTICLE VII of the Agreement;

2

(xi) the Seller shall not assert, except to the extent provided in ARTICLE XI of the Agreement, any claim against the Acquiror, its Subsidiaries or any of their respective partners, directors, officers, employees, advisors, agents, stockholders, consultants, investment bankers, brokers, representatives or controlling persons, or any Affiliate of any of the foregoing, or except to the extent provided in ARTICLE XI hold the Acquiror, its Subsidiaries or any such Persons liable for any inaccuracies, misstatements or omissions with respect to the Financial Information; and

(xii) the Seller acknowledges that it is not relying on any implied warranties and except for the representations and warranties expressly contained in the second sentence of Paragraph 3 hereof, it is not relying on any other representation or warranty whatsoever as to the prospects (financial or otherwise) or the viability or likelihood of success of the business, assets or results of operations of the Acquiror and its Subsidiaries as conducted after the Amendment Date.

Without limiting the generality of the foregoing, it is understood that any cost estimates, financial or other projections or other predictions that may be contained or referred to in the Financial Information, as well as any information, documents or other materials (including any such materials contained in any diligence request or reviewed by the Seller in connection herewith) or management presentations that have been or shall hereafter be provided to the Seller or any of its Affiliates, agents or representatives are not and will not be deemed to be representations or warranties of the Acquiror, and no representation or warranty is made by the Acquiror (whether with respect to the accuracy or completeness of any of the foregoing or otherwise), except as expressly set forth herein or in ARTICLE VII of the Agreement.

4. The following definitions in Section 1.1 of the Original Agreement are amended and restated in their entirety as follows:

“Additional Purchase Price Amount” means the amounts payable pursuant to Sections 4.2(b)(A)(ii)-(vi).

“Gestiva Inventory” means all inventories of Gestiva, together with all bulk active pharmaceutical ingredient, all other raw materials, components, parts, work in process and packaging materials. For clarity, Gestiva Inventory shall exclude raw materials, components, parts, work in process and packaging materials not specific to Gestiva.

“Initial Gestiva Inventory” means the release of no fewer than 15,000 5-milliliter vials of finished Gestiva suitable for final labeling, packing and commercial sale by the Acquiror.

“Knowledge” with respect to (i) the Seller means the actual knowledge of Robert Cascella, Robb Hesley, Catherine Williams, Mary Eckstein, Lynn Jones, Tom Umbel, Howard Doran, and Mark Casey (whose positions and operational responsibilities are listed on Schedule 1.1(e) hereto), following reasonable inquiry and (ii) the Acquiror means the knowledge of the officers, directors or senior managers, following reasonable inquiry.

“Liability Cap” means $8,200,000.

3

“Purchase Price” means the Initial Purchase Price, plus, the NDA Milestone Payment, plus, the Amendment Payment, plus, the Additional Purchase Price Amount.

“Reassumed Liabilities” means (i) all Liabilities arising under any Retransferred Contracts actually assigned by Acquiror to Seller (in the case of a Retransferred Contract requiring third party consent to assignment, where such consent has been obtained), but only to the extent such Liabilities arise from and after the Retransfer Date and specifically excluding any Liabilities arising under any Retransferred Contract that is a Shared Asset with respect to any interest in such Retransferred Contract retained by Acquiror, (ii) all Liabilities arising under any Retransfer Date Gestiva Governmental Permits that are Retransferred Assets, but only to the extent such Liabilities arise after the Retransfer Date and specifically excluding any Liabilities arising under any Retransfer Date Gestiva Governmental Permits that are Shared Assets with respect to any interest in such Retransfer Date Governmental Permit retained by Acquiror, and (iii) all Reassumed Product Liabilities.

“Reassumed Product Liabilities” mean all Liabilities resulting from product liability claims brought after the Retransfer Date and relating exclusively to Gestiva sold by Seller or its Affiliates after the Retransfer Date, for the avoidance of doubt, any Liabilities resulting from product liability claims brought after the Retransfer Date and relating exclusively to Gestiva sold by Acquiror or its Affiliates shall not be considered Reassumed Product Liabilities.

“Receivables” means all indebtedness and other obligations owed to the Acquiror or any of its Subsidiaries or in which the Acquiror or any of its Subsidiaries has a security interest or other interest, including any indebtedness, obligation or interest constituting an account, chattel paper, instrument or general intangible, arising in connection with the sale of goods (including the Gestiva Inventory) or the rendering of services by the Acquiror or any of its Subsidiaries.

“Related Agreements” means the (i) Trademark Assignment Agreement, Bill of Sale, Assignment and Assumption Agreement and duly executed and attested assignments of transfer, or such other instruments of conveyance as may be required by Law, sufficient to permit the proper recordation of transfer of title ownership in all Registered Gestiva Intellectual Property owned by the Seller from the Parent, the Seller or their Subsidiaries to Acquiror in accordance with this Agreement, (ii) the Transition Services Agreement, (iii) the License Agreement, (iv) the Retained License Agreement and (v) the Amendment.

4

“Retransfer Date Gestiva Books and Records” means all Gestiva Books and Records transferred by the Seller to the Acquiror on the Transfer Date and any other books, records, files, documents, data, information and correspondence related to the Retransfer Date Gestiva Business which are owned by the Acquiror or their Subsidiaries, including, without limitation, all records with respect to supply sources; all pre-clinical, clinical and process data and reports relating to research or development of products or of any materials used in the research, development, use, testing, manufacture, marketing or sale of products, including all raw data relating to clinical trials of products, all case report forms relating thereto and all statistical programs developed (or modified in a manner material to the use or function thereof) to analyze clinical data; all market research data, market intelligence reports and statistical programs (if any) used for marketing and sales research; promotional, advertising and marketing materials, sales forecasting models, medical education materials, sales training materials, web site content and advertising and display materials; all records, including vendor and supplier lists, manufacturing records, sampling records, standard operating procedures and batch records, related to the manufacturing process; all data contained in laboratory notebooks relating to products or relating to their biological, physiological, mechanical or formula properties; all adverse experience reports and files related thereto (including source documentation) and all periodic adverse experience reports and all data contained in electronic data bases relating to periodic adverse experience reports; all analytical and quality control data; all written correspondence with the FDA; and written records relating to the regulatory filings with the FDA or its foreign counterparts, including, but not limited to, the Retransfer Date Gestiva FDA Submission. Notwithstanding the foregoing, the Retransfer Date Gestiva Books and Records shall exclude any books, records, files, documents, data, information and correspondence relating to human resources or employees of the Acquiror and its Subsidiaries and in the case of any books, records, files, documents, data, information and correspondence also relating to the other businesses or assets of the Acquiror and its Subsidiaries, the Acquiror shall have the right to exclude or redact the same with respect to such other businesses and assets.

“Retransfer Date Gestiva Business” means the manufacture, distribution, marketing, sale and promotion of Gestiva as conducted as of the Retransfer Date.

“Retransfer Date Gestiva Copyrights” means (i) all Gestiva Copyrights transferred by the Seller to the Acquiror on the Transfer Date and (ii) all copyrightable works and copyrights, and any registrations, applications, and renewals in connection therewith worldwide, if any, including moral rights, website content, and other rights of authorship and exploitation in each case as necessary to, or used exclusively by the Acquiror in, the Retransfer Date Gestiva Business.

“Retransfer Date Gestiva FDA Submissions” means, collectively, the Gestiva Pre-IND, IND and Gestiva NDA and any submissions made to the FDA (or any foreign equivalent of the FDA) by the Acquiror and its Affiliates relating to Gestiva following the Transfer Date.

“Retransfer Date Gestiva Intellectual Property” means (i) all Gestiva Intellectual Property transferred by the Seller to the Acquiror on the Transfer Date, (ii) the Retransfer Date Gestiva Copyrights, (iii) the Retransfer Date Gestiva Patent Rights, (iv) the Retransfer Date Gestiva Know-How, (v) the Retransfer Date Gestiva Trademarks, (vi) the rights to exclude others from appropriating any of the foregoing, including the rights to sue for and remedies against past, present and future infringements of any or all of the foregoing and rights of priority and protection of interests therein and (vii) any other proprietary, intellectual property and other rights relating to any or all of the foregoing anywhere in the world.

5

“Retransfer Date Gestiva Know-How” means any and all Retransfer Date Gestiva Manufacturing Know-How and other Know-How that is owned or used under license by the Acquiror or its Subsidiaries on the Retransfer Date related to Gestiva or the Retransfer Date Gestiva Product Improvements as of the Retransfer Date. For the sake of clarity, none of the foregoing information shall be included in Retransfer Date Gestiva Know-How to the extent that such information is covered by any claim of any Retransfer Date Gestiva Patent Rights.

“Retransfer Date Gestiva Manufacturing Know-How” means any Know-How or other information relating to the manufacture of Gestiva or Retransfer Date Gestiva Product Improvements owned or used under license by the Acquiror or its Subsidiaries, including without limitation the identity, amounts and assurance quality of ingredients, the manufacturing processes and controls, specifications, technology, inventions, assays, quality control and testing procedures, Know-How and trade secrets used, held for use, or intended to be used in or necessary to manufacture, formulate, test and package Gestiva for use, sale, marketing and distribution as of the Retransfer Date. For sake of clarity, none of the foregoing information shall be included in the Retransfer Date Gestiva Manufacturing Know-How to the extent that such information is covered by any claim of any Retransfer Date Gestiva Patent Rights.

“Retransfer Date Gestiva Patent Rights” means (i) all Gestiva Patent Rights transferred by the Seller to the Acquiror on the Transfer Date, and (ii) those Retransfer Date Patent Rights owned or used under license by the Acquiror and its Subsidiaries, together with all registrations, applications and renewals thereof, and any other Retransfer Date Patent Rights that are owned or used under license by the Acquiror or any of its Subsidiaries and that would be infringed by the manufacture, sale, offer to sell or importation of Gestiva or any Retransfer Date Gestiva Product Improvement.

“Retransfer Date Gestiva Product Improvement” means any Gestiva Product Improvements transferred by the Seller to the Acquiror on the Transfer Date and, to the extent applicable, any: (i) line extension of Gestiva, (ii) new indication of Gestiva, (iii) composition of matter or article of manufacture consisting essentially of 17 alpha-hydroxyprogesterone caproate, (iv) pharmaceutical combination containing 17 alpha-hydroxyprogesterone caproate and another active ingredient, (v) new formulations comprising of 17 alpha-hydroxyprogesterone caproate and/or (vi) compositions of matter or articles of manufacture constituting any of the foregoing or components thereof, in the case of each of (i)-(vi) as necessary to and used in the Retransfer Date Gestiva Business.

“Retransfer Date Gestiva Product Registrations” means any Gestiva Product Registrations transferred by the Seller to the Acquiror on the Transfer Date and (i) the exemptions, approvals or registrations which have been received by the Acquiror or any of its Subsidiaries as of the date of the Retransfer Date, for the manufacturing, testing, investigation, sale, use, distribution and/or marketing of Gestiva or a Retransfer Date Gestiva Product Improvement (including any NDAs or INDs) and (ii) all dossiers, reports, data and other written materials filed as part of or referenced in any applications for such approvals or registrations, or maintained by the Acquiror or any of its Subsidiaries and relating to such approvals or registrations.

6

“Retransfer Date Gestiva Governmental Permits” means any Gestiva Governmental Permits transferred by the Seller to the Acquiror on the Transfer Date and all authorizations, licenses, permits, certificates, approvals, exemptions, consents, confirmations, orders, registrations, product registrations, concessions, franchises, waivers and clearances of a Governmental or Regulatory Authority (including all authorizations under the FDA Act, the Public Health Services Act, the Controlled Substances Act and the regulations of the FDA and the United States Drug Enforcement Agency promulgated thereunder) necessary for or used by the Acquiror to carry on the Retransfer Date Gestiva Business.

“Retransfer Date Gestiva Trademarks” means all Gestiva Trademarks transferred from the Seller to the Acquiror on the Transfer Date and all trademarks, trade names, product names, trade dress, service marks, logos and slogans, in each case, necessary to, or used exclusively by the Acquiror in, the Retransfer Date Gestiva Business whether registered or unregistered, including all common law rights, registrations and applications for registrations for any of the foregoing, and all internet domain names, and all registrations, applications and renewals thereof and the goodwill associated therewith.

“Retransfer Date Patent Rights” means any invention disclosure, patent application (including any provisionals, divisionals, continuations, continuations-in-part and substitutions thereof), patents issuing from or granted upon such invention disclosure or patent application (including patents of addition and substitutions thereof), reissues, extensions, reexaminations, renewal applications, supplemental patent certificates or any confirmation patent or registration patent) and all foreign counterparts of any of the foregoing.

“Retransferred Contracts” means all of the following in effect on the Retransfer Date, (i) any Gestiva Contracts transferred from the Seller to the Acquiror on the Transfer Date, (ii) Contracts pursuant to which Acquiror or its Affiliates purchases any materials from any third party for use in connection with the development, testing or manufacture of Gestiva, (iii) Contracts relating to any clinical trial involving Gestiva, (iv) Contracts constituting material transfer agreements involving the transfer of Gestiva, (v) Contracts relating to the marketing, sale or distribution of Gestiva, (vi) Contracts relating to the supply or manufacture of Gestiva or Retransfer Date Gestiva Product Improvements, (vii) Contracts constituting confidentiality agreements involving Gestiva or Retransfer Date Gestiva Intellectual Property, including non-compete or non-solicitation agreements with employees, independent contractors or agents of Acquiror with third parties, (viii) Contracts involving any royalty, licensing, partnering or similar arrangement involving Gestiva or Retransfer Date Gestiva Intellectual Property, (ix) Contracts pursuant to which any services are provided to Acquiror or its Affiliates with respect to Gestiva, and (x) Contracts pursuant to which any third party collaborates with Acquiror or its Affiliates in the performance of research or development of Gestiva.

7

5. For purposes of this Amendment and the Agreement, the following terms have meanings set forth as follows:

Term	Section
Acquiror	Introductory Paragraph of the Amendment
Agreement	Paragraph 33 of the Amendment
Amendment	Introductory Paragraph of the Amendment
Amendment Date	Introductory Paragraph of the Amendment
Amendment Payment	Section 4.2(b) of the Agreement
Baxter Supply Agreement	Section 4.2(b)(B) of the Agreement
Cytyc	Introductory Paragraph of the Amendment
Damages	Section 11.2 of the Agreement
Disclosure Schedule	Introductory Paragraph of the Amendment
Final Payment Date	Section 4.2(b)(A) of the Agreement
Financial Information	Paragraph 2 of the Amendment
First Additional Purchase Price Payment	Section 4.2(b)(A) of the Agreement
Inventory Delivery Milestones	Section 4.2(b)(B) of the Agreement
Liability Threshold	Section 11.3(a) of the Agreement
Lien Release Date	Section 8.13 of the Agreement
Original Agreement	Introductory Paragraph of the Amendment
Payment Default	Section 12.4(a) of the Agreement
Post-Approval Regulatory Documentation	Section 8.15 of the Agreement.
Purchased Assets	Section 2.2 of the Agreement
Retained License Agreement	Section 2.6 of the Agreement
Retransfer Date	Section 12.4 of the Agreement.
Retransferred Assets	Section 12.4 of the Agreement.
Rights of Reference	Section 8.14 of the Agreement
Seller Security Interest	Section 8.13 of the Agreement
Shared Asset	Section 12.4(c) of the Agreement
Supply Disruption	Section 4.2(b)(B) of the Agreement
Transfer Date	Section 5.3 of the Agreement

8

6. The introductory clause to Section 2.2 of the Original Agreement is amended and restated in its entirety as follows:

“Upon the terms and subject to the conditions set forth in this Agreement, on the Closing Date, Seller shall, or cause its Affiliates to, conditionally sell, convey and assign to the Acquiror, and the Acquiror shall conditionally purchase and acquire from Seller and its Affiliates, all of Seller’s and its Affiliates’ right, title and interest in and to all of the following assets, free and clear of all Encumbrances, other than the Seller Security Interest and the Retained License Agreement (which shall not apply to the Gestiva Inventory, the Receivables or any proceeds of the Gestiva Inventory or the Receivables) (collectively, the “Purchased Assets”), provided, however, that notwithstanding the foregoing, the conditions to the conditional sale, conveyance and assignment of the Purchased Assets shall only be satisfied and the Purchased Assets shall only be transferred and delivered by the Seller or its Affiliates to the Acquiror upon the Transfer Date (as defined herein):”

7. Section 2.2(c) of the Original Agreement is amended and restated in its entirety as follows:

“(c) all Gestiva Inventory;”

8. ARTICLE II of the Original Agreement is amended to include the following new Section 2.6:

“Section 2.6 Grant of Retained License. On the Transfer Date, the parties will enter into the Retained License Agreement attached hereto as Exhibit F without amendment or modification thereof unless such amendment or modification is mutually agreed upon by the Seller and the Acquiror (the “Retained License Agreement”).”

9. Section 4.2(b) of the Original Agreement is amended and restated in its entirety as follows:

“(b)(A) Subject to the terms and conditions of this Agreement:

(i) Concurrent with the execution of the Amendment, the Acquiror has paid to the Seller $70,000,000 (the “Amendment Payment”).

(ii) On the Transfer Date, the Acquiror shall pay to the Seller $25,000,000 (the “First Additional Purchase Price Payment”).

9

(iii) On the date that is twelve (12) months after the Gestiva NDA Approval Date, the Acquiror shall pay to the Seller $45,000,000, provided that the Transfer Date has already occurred.

(iv) On the date that is fifteen (15) months after the Gestiva NDA Approval Date, the Acquiror shall pay to the Seller $20,000,000, provided that the Transfer Date has already occurred.

(v) On the date that is eighteen (18) months after the Gestiva NDA Approval Date, the Acquiror shall pay to the Seller $20,000,000, provided that the Transfer Date has already occurred.

(vi) On the date that is twenty one (21) months after the Gestiva NDA Approval Date, the Acquiror shall pay to the Seller $10,000,000, provided that the Transfer Date has already occurred.

Notwithstanding anything to the contrary contained herein, the Acquiror may make any of the foregoing payments on or before their due dates. The date on which the Acquiror makes the final payment contemplated by Section 4.2(b)(A)(vi) above is the “Final Payment Date.”

(B) If, prior to the time any payment that is otherwise due pursuant to (iii) through (vi) above, there exists a “Supply Disruption”, then the due date for any subsequent payments will be extended for a period of time equal to the duration of the Supply Disruption provided that such period shall in no event extend for a period longer than twelve months with respect to any one Supply Disruption and provided further however, in no event will a Supply Disruption occur after the Inventory Delivery Milestone has occurred. For purposes of this Agreement, “Supply Disruption” means any event that materially delays, impairs or otherwise materially adversely affects the Acquiror’s ability to obtain sufficient quantities of Gestiva for sale, including any disruptions, shortages or delays in the manufacture, processing, testing, labeling, packaging, shipment and/or receipt of Gestiva for commercial sale. The Acquiror will take commercially reasonable efforts to mitigate the effects of any Supply Disruption, and will keep the Seller reasonably informed of such matters. For purposes of this Agreement, the “Inventory Delivery Milestone” will be deemed to have occurred once both of the following have occurred (i) the TTPP (as such term is defined in that certain Commercial Supply Agreement between Baxter Pharmaceutical Solutions LLC and Hologic, Inc. dated April 6, 2009, (the “Baxter Supply Agreement”)) has established a last required Production (as defined in the Baxter Supply Agreement) date of no earlier than September 30, 2011, and (ii) an engineering batch has been completed using the filling equipment intended for commercial introduction and the Seller and the Acquiror mutually agree to proceed with the manufacture of registration stability batches at the New Third Party Manufacturer (as defined in the Baxter Supply Agreement). Once both of the Inventory Delivery Milestones have been satisfied and evidence thereof has been presented by Seller to the Acquiror, at the request of the Seller, the Acquiror will promptly acknowledge in writing in a notice delivered to the Seller pursuant to Section 13.1 of the Agreement that both Inventory Delivery Milestones have been met and that from and after the date of such acknowledgment no Supply Disruption will occur under any circumstances and the provisions of Section 4.2(b)(B) will have no further force or effect, provided that nothing herein will obviate any extensions of the due dates of payments pursuant to Section 4.2(b)(A) due to any Supply Disruption occurring prior to the Inventory Delivery Milestones being satisfied.

10

10. Section 5.3 of the Original Agreement is amended and restated in its entirety as follows:

“Section 5.3 Time and Place of Transfer Date. Unless this Agreement is earlier terminated pursuant to ARTICLE XII, the transfer and sale of the Purchased Assets and Assumed Liabilities shall take place as promptly as practicable, but in no event later than five (5) Business Days following the satisfaction or waiver of the conditions set forth in ARTICLE X, at 9:00 a.m., Central Standard time, at the offices of Jenner & Block LLP, 353 North Clark Street, Chicago, Illinois, 60654, unless another time or place shall be agreed to by the parties (the “Transfer Date”).”

11. Section 5.4 of the Original Agreement is amended and restated in its entirety as follows:

“Section 5.4 Transfer Date Deliveries.

(a) Transfer Date Deliveries by the Seller. On the Transfer Date, the Seller shall deliver to the Acquiror:

(i) an unredacted, fully executed copy of each of the Assumed Contracts;

(ii) written evidence (including duly executed UCC-3 forms, as applicable) that all Encumbrances (other than the Seller Security Interest and the Retained License) related to the Purchased Assets, if any, have been released;

(iii) written evidence of the receipt of all Seller Governmental Consents set forth on Section 6.3(a) of the Seller Disclosure Schedule and Seller Third Party Consents set forth on Section 6.3(b) of the Seller Disclosure Schedule;

(iv) an original of each Related Agreement (excluding the License Agreement, the Amendment and, if waived by the Acquiror or previously executed pursuant to Section 8.5(b), the Transition Services Agreement) executed by the Seller and copies of all documents required to be delivered by the Seller pursuant thereto;

(v) the Gestiva Books and Records;

(vi) the FDA Transfer Letters, unless previously delivered pursuant to Section 8.5(b);

(vii) the certificates and other matters described in ARTICLE X;

11

(viii) conditional assumptions by the Seller from the Acquiror of the Reassumed Liabilities provided that any conditional assumptions shall only be effective upon the Retransfer Date; and

(ix) such other instruments or documents, in form and substance reasonably acceptable to the Seller and the Acquiror, as may be necessary to effect the Acquiror’s assumption of the Assumed Liabilities and the Assumed Contracts.

(b) Transfer Date Deliveries by the Acquiror. On the Transfer Date, the Acquiror shall deliver to the Seller:

(i) an original of each of the Related Agreements (excluding the Amendment and the License Agreement) executed by the Acquiror, and copies of all documents required to be delivered by the Acquiror pursuant thereto;

(ii) the certificates and other matters described in ARTICLE X;

(iii) such other instruments or documents, in form and substance reasonably acceptable to the Seller and the Acquiror, as may be necessary to effect the Acquiror’s assumption of the Assumed Liabilities and the Assumed Contracts;

(iv) the First Additional Purchase Price Payment and any Reimbursable Expenses owed to the Seller pursuant to the terms of this Agreement in immediately available funds by wire transfer to an account or accounts that shall have been designated by the Seller to the Acquiror not less than two (2) Business Days prior to the Transfer Date; and

(v) conditional assignments by Acquiror to Seller of any Retransferred Contracts which conditional assignments shall only be effective upon the Retransfer Date, provided that the Seller shall retain the right to reject the conditional assignment of any Retransferred Contracts which (A) constitute Shared Assets, (B) that obligate the Seller to expend more than $100,000 after the Retransfer Date, or (C) that may not be cancelled by the Seller on less than 91 days notice to the counterparty or counterparties thereto unless in the case of either (B) or (C) above the Seller specifically approved in writing Acquiror’s entry into such Retransferred Contracts prior to or concurrently with the Acquiror’s entry into such Retransferred Contracts.

(c) Further Deliveries of the Seller. At or promptly following the Transfer Date, but in no event later than ten (10) days thereafter, the Seller shall deliver or cause to be delivered to Acquiror any other Purchased Asset which was not delivered to Acquiror on the Transfer Date.”

12. The second sentence of Section 7.4 is deleted in its entirety.

13. Sections 8.1(b)(ii) of the Original Agreement is amended and restated in its entirety as follows:

“(ii) subject any Purchased Assets to any Encumbrances other than a Permitted Encumbrance, the Seller Security Interest or the Retained License.”

12

14. Section 8.6(a) of the Original Agreement is amended by deleting the references to the “Closing Date” and replacing them with the “Amendment Date.”

15. Section 8.6(e) of the Original Agreement is amended by deleting the reference to the “Additional Purchase Price Amount” and replacing it with the “First Additional Purchase Price Payment.”

16. Section 8.10(d) of the Original Agreement is amended and restated in its entirety as follows:

“(d) On the Transfer Date (prior to payment of the First Additional Purchase Price Payment), the Seller shall deliver to the Acquiror a duly executed and acknowledged Internal Revenue Service Form W-9 and a duly executed and acknowledged non-foreign status FIRPTA certificate prepared pursuant to Treasury Regulation Section 1.1445-2(b)(2) in a form satisfactory to the Acquiror.”

17. Section 8.10(f) of the Original Agreement is amended and restated in its entirety as follows:

“(f) On the Transfer Date (prior to payment of the First Additional Purchase Price Payment), the Seller shall deliver to the Acquiror a duly executed bulk sales and/or Tax clearance certificate or certificates as required by applicable Law or as reasonably requested by the Acquiror.”

18. ARTICLE VIII of the Original Agreement is amended to include the following new Section 8.12:

“Section 8.12 Security Interest in the Purchased Assets. To secure the payment of any remaining unpaid Additional Purchase Price Amount, on or after the Amendment Date, the Seller may file such Uniform Commercial Code financing statements as are necessary to evidence a first priority security interest (the “Seller Security Interest”) in the Purchased Assets (other than the Gestiva Inventory, any Receivables and the proceeds of the Gestiva Inventory or the Receivables). The Seller shall release the Seller Security Interest no later than 120 days after the Final Payment Date (the “Lien Release Date”). On or before the Lien Release Date, the Seller shall deliver to the Acquiror written evidence (including duly executed UCC-3 forms, as applicable) that the Seller Security Interest has been released. For the avoidance of doubt, and without limiting the foregoing and notwithstanding anything to the contrary in this Agreement, the Seller agrees that it shall not have, and hereby disclaims and/or releases, any interest, right, lien or security interest of any kind whatsoever in the Gestiva Inventory, the Receivables and the proceeds of the Gestiva Inventory or Receivables.”

13

19. Notwithstanding references in the Original Agreement regarding the transfer of the Purchased Assets free and clear of Encumbrances and representations and warranties to the effect that the Purchased Assets are free and clear of Encumbrances, the parties acknowledge that the Retained License Agreement may encumber the Purchased Assets (other than the Gestiva Inventory, Receivables and the proceeds of the Gestiva Inventory or Receivables) from the Transfer Date until the Lien Release Date and the Seller Security Interest may encumber the Purchased Assets (other than the Gestiva Inventory, Receivables and the proceeds of the Gestiva Inventory or Receivables) from the Amendment Date until the Lien Release Date.

20. ARTICLE VIII of the Original Agreement is amended to include the following Section 8.13:

“Section 8.13 Gestiva Inventory.

The Seller shall bear the costs related to formulation, filling and analytical release testing (excluding stability testing) for the Initial Gestiva Inventory. The parties shall cooperate in procuring final approved labeling from the FDA in accordance with Section 8.5(a) of the Agreement. The Seller and Cytyc shall cooperate with the Acquiror’s efforts to label the Initial Gestiva Inventory prior to the Transfer Date.”

21. ARTICLE VIII of the Original Agreement is amended to include the following Section 8.14:

“Section 8.14 Right of Reference to Purchased Assets.

Upon (i) Seller’s receipt from Acquiror of the First Additional Purchase Price Payment and (ii) transfer of the Purchased Assets by Seller to Acquiror, Acquiror grants to Seller a right of reference to each of the Gestiva IND, Gestiva NDA and the Gestiva Orphan Drug Designation (collectively the “Rights of Reference”). The Parties will expressly claim the Rights of Reference in notifying FDA of the transfer of each of the Purchased Assets. Such Rights of Reference will automatically expire and be of no further effect on the 120th day following the Final Payment Date. The Seller shall have no right to exercise, license, sublicense or otherwise transfer its Rights of Reference prior to the Retransfer Date.

22. ARTICLE VIII of the Original Agreement is amended to include the following Section 8.15:

“Section 8.15 Obligation Regarding Post-Approval Regulatory Documentation.

So long as the Rights of Reference to the Purchased Assets are held by Seller, Acquiror shall take all actions and make all payments and submissions necessary to maintain each of the Gestiva IND, Gestiva NDA and Gestiva Orphan Drug Designation in compliance with all applicable Laws. Acquiror shall provide to Seller copies of all Gestiva IND submissions and correspondence, all Gestiva NDA submissions and correspondence and all Gestiva Orphan Drug Designation correspondence (collectively, the “Post-Approval Regulatory Documentation”) occurring after the Transfer Date and until the termination of the Rights of Reference as provided in Section 8.14. The Post-Approval Regulatory Documentation shall be provided by Acquiror to Seller on a reasonably current basis.

14

23. Section 11.2(a) of the Original Agreement is amended and restated in its entirety as follows:

“(a) By the Seller. Subject to Section 11.1 and Section 11.3, from and after the Closing, the Seller shall indemnify, reimburse, defend and hold harmless the Acquiror, its Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all costs, losses, Liabilities, damages, fines, penalties, interest, judgments, lawsuits, deficiencies, claims, expenses (including reasonable fees and disbursements of attorneys and other professionals, including third party consultants) (collectively, “Damages”) incurred in connection with, arising out of, resulting from or incident to (i) any breach of, or inaccuracy in, any representation or warranty of the Seller set forth in this Agreement, any Related Agreement or any certificate of the Seller delivered to Acquiror at the Closing or the Transfer Date, (ii) the breach of or failure to perform any covenant or agreement of the Seller set forth in the Agreement (other than Section 8.1(b)(iii), the second or fourth sentences of Section 8.12, the last sentence of Section 8.14, Section 12.3 or Section 12.5), or in any of the Related Agreements (other than Section 2.2 of the Retained License Agreement), (iii) the breach of or failure to perform any covenant or agreement of the Seller set forth in Section 8.1(b)(iii), the second or fourth sentence of Section 8.12, the last sentence of Section 8.14, Section 12.3 or Section 12.5 of the Agreement or Section 2.2 of the Retained License Agreement, (iv) any Excluded Asset, (v) any Excluded Liability (including, but not limited to, any Excluded Tax Liability); and (vi) the fraud or willful misconduct of the Seller.”

24. Section 11.3(a) of the Original Agreement is amended and restated as follows:

“(a) Except for representations, warranties and covenants relating to Taxes or any Damages arising from or related to the Excluded Tax Liabilities or fraud, in no event shall the Seller or the Acquiror be liable for any Damages pursuant to

Section 11.2(a) or Section 11.2(b), as applicable, unless and until the aggregate amount of all such Damages exceeds $150,000 (the “Liability Threshold”), in which case the Seller or the Acquiror, as applicable, shall be liable for all such Damages in excess of the Liability Threshold, and then not for any Damages in excess of the Liability Cap for all claims made under such

Section 11.2(a) or Section 11.2(b), as applicable, in the aggregate; provided, however, that for purposes of claims made by the Acquiror under Section 11.2(a)(iii), Section 11.2(a)(iv), Section 11.2(a)(v) or Section 11.2(a)(vi), the Seller shall be liable for all Damages suffered by the Acquiror without regard to the Liability Threshold or Liability Cap; provided, further, that for purposes of claims made by the Seller under Section 11.2(b)(iii) or Section 11.2(b)(iv) or for claims made by the Seller relating to the Acquiror’s breach of its payment obligations in Section 4.1 or Section 4.2, the Acquiror shall be liable for all Damages suffered by the Seller without regard to the Liability Threshold or Liability Cap.”

25. Section 12.1(b) of the Original Agreement is deleted in its entirety.

26. Section 12.1(e) of the Original Agreement is amended and restated in its entirety as follows:

“(e) at any time prior to the Transfer Date by the Acquiror if the Seller has breached any material representation, warranty, covenant or agreement hereunder, such breach causes any condition to the transfer of the Purchased Assets and Assumed Liabilities on the Transfer Date set forth in ARTICLE X to not be satisfied, such breach has not been waived by the Acquiror, and the breach has not been cured within a period of thirty (30) days following the Acquiror’s written notice of such breach and the Seller is diligently proceeding to cure such breach during such period, unless such breach is not capable of cure, in which event the Acquiror may terminate immediately;”

15

27. Section 12.1 of the Original Agreement is amended to include the following new subsection (j):

“(j) by the Seller at any time prior to the Transfer Date, if the conditions to the Transfer Date set forth in Article X have been otherwise satisfied except that the Acquiror has failed to pay to the Seller the First Additional Purchase Price Payment, and such failure continues for a period of ten (10) days following Seller’s written notice to the Acquiror notifying the Acquiror that all other conditions precedent to the Transfer Date have been satisfied;”

28. Section 12.1 of the Original Agreement is amended to include the following new subsection (l):

“(l) at any time prior to the Transfer Date by the Seller (as the non-breaching party), if the Acquiror has materially breached its obligations under Section 8.2(a), the last sentence of Section 8.2(e), Section 8.3(c), and the last sentence of Section 8.5(a) hereunder, such breach causes the conditions to the transfer of the Purchased Assets and Assumed Liabilities on the Transfer Date specified in the first sentence of Section 10.1(b), or Sections 10.1(d), 10.2(d) and 10.2(e) to not be satisfied, such breach has not been waived by the Seller, and the breach has not been cured within a period of thirty (30) days following the Seller’s written notice of such breach and the Acquiror is diligently proceeding to cure such breach during such period, unless such breach is not capable of cure, in which event the Seller may terminate immediately;

29. Section 12.3 of the Original Agreement is amended and restated in its entirety as follows:

“Section 12.3 Termination Fee. In the event of termination of this Agreement by the Acquiror pursuant to Section 12.1(e), the Seller shall pay to the Acquiror an amount equal to the Initial Purchase Price Amount, the NDA Milestone Payment, the Amendment Fee, and an additional amount equal to all Reimbursable Expenses paid by the Acquiror to the Seller hereunder. All payments under this Section 12.3 will be made within five (5) Business Days from the termination of this Agreement. Notwithstanding Section 12.2(b) or any other provision of the Agreement to the contrary, this Section 12.3 shall survive the termination of this Agreement. For the avoidance of doubt, unless the Seller is required to pay the amounts required to be paid by it pursuant to this Section 12.3, no other amount paid by the Acquiror to the Seller hereunder shall be refundable upon termination of this Agreement by Seller or Acquiror.”

16

30. ARTICLE XII of the Original Agreement is amended to include the following new Section 12.4:

“Section 12.4 Retransfer of Assets from the Acquiror to the Seller.

(a) If, prior to the Final Payment Date, the Acquiror breaches its obligation to pay (i) any portion of the Additional Purchase Price Amount (other than the First Additional Purchase Price Payment) then due, and such breach has not been cured within a period of ten (10) days following the Seller’s written notice of such breach to the Acquiror, or (ii) any undisputed Reimbursable Expenses, and such breach has not been cured within a period of thirty (30) days following the Seller’s written notice of such breach to the Acquiror (a “Payment Default”), then for a period of sixty (60) days the Seller may notify the Acquiror in writing that Seller is electing to exercise its remedies pursuant to this Section 12.4.

(b) If Seller provides the notice contemplated by Section 12.4(a) to Acquiror, then in such notice Seller shall specify a date occurring within thirty (30) days of the expiration of the sixty (60) day notice period provided for in Section 12.4(a) (the “Retransfer Date”) on which the Acquiror shall, or cause its Affiliates to convey and assign to the Seller and the Seller shall acquire from the Acquiror and its Affiliates, subject to the provisions of Sections 12.4(c), (f) and (h) below, in consideration of Seller’s agreement to amend this Agreement on January 8, 2010 and as liquidated damages for Acquiror’s breach which gave rise to Seller’s ability to exercise its rights pursuant to Section 12.4, all of the Acquiror’s and its Affiliates’ right, title and interest in and to the following assets (collectively, the “Retransferred Assets”), free and clear of all Encumbrances (other than such Encumbrances that existed on any Retransferred Assets immediately prior to the transfer of such assets by the Seller to the Acquiror on the Transfer Date):

(i) any Retransferred Contracts;

(ii) all Retransfer Date Gestiva Books and Records;

(iii) all Retransfer Date Gestiva Intellectual Property;

(iv) all Retransfer Date Gestiva Product Registrations;

(v) all Retransfer Date Gestiva Product Improvements;

(vi) all Retransfer Date Gestiva Governmental Permits;

(vii) the Retransfer Date Gestiva FDA Submissions;

(viii) any other assets previously owned by Seller or its Affiliates related to the research (including all pre-clinical and clinical studies), development, manufacture, formulation, use, distribution, marketing, sale and promotion of Gestiva and/or Gestiva Product Improvements, including any equipment and tangible property related thereto and in each case transferred to Acquiror by Seller on the Transfer Date;

(ix) all customer and supplier relationships, goodwill and other intangible assets associated with the Retransfer Date Gestiva Business;

17

(x) all claims, causes of action or rights to collect, including for past, present or future infringement, misappropriation or violation of Retransfer Date Gestiva Intellectual Property rights;

(xi) all rights related to or arising out of or under any express or implied warranties from suppliers under any Retransferred Contracts actually assigned by Acquiror to Seller; and

(xii) all rights, claims and credits (including all guarantees, warranties, indemnities and similar rights and all refunds, credits and claims for refunds or credits relating to Taxes incurred during the Post-Transfer Tax Period), in favor of Acquiror or any of its Affiliates or any of their respective employees to the extent such rights, claims and credits were transferred to Acquiror by Seller on the Transfer Date.

(c) The parties agree and acknowledge that as of the Retransfer Date, there may be certain assets used in the Retransfer Date Gestiva Business (other than any assets transferred to the Acquiror by the Seller on the Transfer Date) which are not exclusively used by the Acquiror in the Retransfer Date Gestiva Business (e.g., assets, rights, etc. that are used in both the Retransfer Date Gestiva Business and other businesses of Acquiror and/or its Affiliates (referred to herein as the “Shared Assets”)). For the avoidance of doubt, such Shared Assets are not within the scope of the “Retransferred Assets” transferred pursuant to Section 12.4(b) above and it is impossible to identify at this time all of the various complications that may arise in connection with the transfer by the Acquiror to the Seller of certain rights with respect to such Shared Assets. For any of such Shared Assets, the parties agree to negotiate in good faith to reach a mutually agreeable accommodation in order to provide the Seller with the ability to use and/or obtain ownership of such Shared Assets without payment by the Seller of any additional consideration to the Acquiror and in a manner which does not materially adversely affect Acquiror and/or such Affiliates and their respective ability to use such Shared Assets for the non-Gestiva purposes for which such Shared Assets were used as of the Retransfer Date. By way of a non-exclusive example, it may be necessary to negotiate with third parties to separate contracts that apply to both the Retransfer Date Gestiva Business and other businesses of Acquiror and/or its Affiliates; consider subcontracting arrangements; explore possible licenses and/or joint ownership of certain intellectual property, etc., for assets similarly shared among those businesses. Each party will use commercially reasonable efforts to effect the foregoing in a manner consistent with the spirit and intent of this Section 12.4.

(d) On the Retransfer Date, the Acquiror will offer the Seller the opportunity to purchase any Gestiva Inventory then owned by the Acquiror or its Affiliates at a price equal to the reasonably documented cost of such inventories to the Acquiror or its Affiliates. Upon receipt of payment for such inventory in immediately available funds, Seller will be entitled to take possession and ownership of such inventory. Notwithstanding anything herein to the contrary, the Seller will take all actions necessary to assure that any Lien on the Gestiva Inventory arising on or after the Transfer Date will not prohibit the Acquiror’s compliance with the provisions of this Section 12.4(d).

18

(e) As a condition to the re-transfer of assets contemplated by this Section 12.4, Seller agrees to assume, satisfy, perform, pay and discharge each of the Reassumed Liabilities.

(f) Notwithstanding anything to the contrary contained herein, the parties agree and acknowledge that the Acquiror will be operating its business (including the Retransferred Assets and Shared Assets) after the Transfer Date, and that the condition and/or existence of various of the Retransferred Assets may change after the Transfer Date and prior to the Retransfer Date. By way of a nonexclusive example, it is possible that various contracts will expire or be terminated, certain assets may be used up and/or sold, and other assets may have changed. Notwithstanding anything to the contrary contained herein, (i) the Acquiror makes no representations, warranties or covenants of any kind with respect to any Retransferred Assets or Shared Assets transferred to the Seller on the Retransfer Date, such assets being transferred in an “as is/where is” condition as of Retransfer Date, and (ii) except as set forth in the first sentence of Section 8.15 and the last sentence of Section 12.4(d), after the Transfer Date the Acquiror is not required to take any steps to preserve and/or maintain the Retransferred Assets, the Shared Assets or the Gestiva Inventory in any shape or form other than what the Acquiror determines in its sole and absolute discretion in the operation of its business.

(g) Acquiror shall have no obligation to transfer or provide access to any of its employees in connection with the retransfer.

(h) Notwithstanding anything to the contrary contained herein, if Seller exercises its rights pursuant to Section 12.4(a) above, then effective as of the Retransfer Date:

(i) the Acquiror shall have the right to retain copies of, shall have access to and the right to duplicate any books or records related to the Retransferred Assets and Reassumed Liabilities to the same extent that the Seller would have otherwise had such or similar rights pursuant to Sections 2.4, 8.3(d) or 8.10(a) and such sections will be deemed to apply to the Retransferred Assets and Reassumed Liabilities;

(ii) Sections 2.5, 4.4, and 8.7 of the Agreement will also apply to any Retransferred Assets, with the intent that such provisions be applied to effectuate the provisions of this Section 12.4 with respect to the retransfer of the Retransferred Assets to Seller and the assumption of the Reassumed Liabilities by Seller, such that references in those sections to (w) “Seller” or “Parent” shall be deemed to be references to “Acquiror”, (x) “Acquiror” shall be deemed to be references to “Seller”, (y) “Purchased Assets” shall be deemed to be references to “Retransferred Assets” and “Assumed Liabilities” shall be deemed to be references to “Reassumed Liabilities”, and (z) “Transfer Date” shall be deemed to be references to “Retransfer Date”;

(iii) Sections 8.10(a), (c), (g) and (h) will remain in effect.

19

(iv) Section 11.2(a) is automatically amended and restated in its entirety as follows:

“(a) By the Seller. Subject to Section 11.1 and Section 11.3, from and after the Retransfer Date, the Seller shall indemnify, reimburse, defend and hold harmless the Acquiror, its Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all costs, losses, Liabilities, damages, fines, penalties, interest, judgments, lawsuits, deficiencies, claims, expenses (including reasonable fees and disbursements of attorneys and other professionals, including third party consultants) (collectively, “Damages”) incurred in connection with, arising out of, resulting from or incident to (i) any breach of, or inaccuracy in, any representation or warranty of the Seller set forth in Section 6.2, Section 6.12 and Section 6.14 of this Agreement prior to the date that is sixty (60) days following the expiration of the applicable statute of limitations (with extensions) with respect to the matters addressed in such sections (with the running of such statute of limitations deemed to have begun on January 16, 2008, the date of the Original Agreement), (ii) [INTENTIONALLY OMITTED], (iii) the breach of, or failure to perform any, covenant or agreement of the Seller set forth in Section 12.4 of the Agreement, (iv) any Excluded Asset, (v) any Retransferred Asset (other than with respect to any Liabilities relating to such Retransferred Assets that are not within the definition of Reassumed Liabilities), (vi) any Excluded Liability (including, but not limited to, any Excluded Tax Liability) or any Reassumed Liability; and (vii) the fraud or willful misconduct of the Seller.”

(v) Section 11.2(b) is automatically amended and restated in its entirety as follows:

“(b) By the Acquiror. Subject to Section 11.1 and Section 11.3, from and after the Retransfer Date, the Acquiror shall indemnify, defend and hold harmless the Seller, its Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to (i) the breach of, or failure to perform any, covenant or agreement of the Acquiror set forth in the first sentence of Section 8.15 or in Section 12.4 of this Agreement, (ii) any Assumed Liabilities and any other Liabilities of the Retransfer Date Gestiva Business that are not Reassumed Liabilities; (iii) any interest in any Shared Assets retained by Acquiror, and any other assets of the Acquiror not transferred to the Seller on the Retransfer Date, and (iv) the fraud or willful misconduct of the Acquiror.”

20

(vi) Section 11.3 is automatically amended and restated in its entirety as follows:

“Except for representations, warranties and covenants relating to Taxes or any Damages arising from or related to the Excluded Tax Liabilities or fraud, in no event shall the Seller or the Acquiror be liable for any Damages pursuant to Section 11.2(a) or Section 11.2(b), as applicable, unless and until the aggregate amount of all such Damages exceeds $150,000 (the “Liability Threshold”), in which case the Seller or the Acquiror, as applicable, shall be liable for all such Damages in excess of the Liability Threshold, and then not for any Damages in excess of the Liability Cap for all claims made under such Section 11.2(a) or Section 11.2(b), as applicable, in the aggregate; provided, however, that for purposes of claims made by the Acquiror under Section 11.2(a)(iii), Section 11.2(a)(iv), Section 11.2(a)(v), Section 11.2(a)(vi) or Section 11.2(a)(vii), the Seller shall be liable for all Damages suffered by the Acquiror without regard to the Liability Threshold or Liability Cap; provided, further, that for purposes of claims made by the Seller under Section 11.2(b)(i), Section 11.2(b)(ii), Section 11.2(b)(iii) or Section 11.2(b)(iv), the Acquiror shall be liable for all Damages suffered by the Seller without regard to the Liability Threshold or Liability Cap.”

(vii) The remainder of ARTICLE XI will remain in full force and effect.

(viii) The parties agree and acknowledge that the re-transfers contemplated by this Section 12.4 and the right to bring a claim for indemnification pursuant to the amended and restated version of ARTICLE XI that goes into effect on the Retransfer Date will be the exclusive remedies for any Payment Default, and no party nor any of its respective directors, officers, stockholders or Affiliates shall have any other remedy or right to recover for any losses or damages resulting from any breach by the Acquiror of any representation, warranty, covenant or other agreement contained herein.

(ix) ARTICLE II (other than Sections 2.4 and 2.5 thereof as modified by this Section 12.4), ARTICLE III, ARTICLE IV (other than Section 4.4 thereof as modified by this Section 12.4), ARTICLE V, ARTICLE VI (other than Sections 6.2, 6.12, and 6.14 which shall survive until the expiration of the applicable statute of limitations), ARTICLE VIII (other than Sections 8.3(d), 8.7 and 8.10(a), (c), (g) and (h), as modified by this Section 12.4 and Sections 8.12, 8.14 and 8.15), ARTICLE IX, ARTICLE X and Sections 12.1, 12.2 and 12.3 shall be of no further force and effect. Any remaining provisions of this Agreement will remain in full force and effect but only to the extent necessary to effectuate, and not inconsistent with, the terms of this Section 12.4.

21

31. ARTICLE XII of the Original Agreement is amended to include the following new Section 12.5:

“Section 12.5 Power of Attorney. Subject to the remaining terms hereof, by execution of this Agreement, from and after the occurrence of any Payment Default, Acquiror hereby constitutes and appoints Seller as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, acknowledge and deliver or file all instruments, documents and certificates that may be required to effectuate the transfer of the Retransferred Assets as contemplated by Section 12.4 and the transactions contemplated thereby. The foregoing grant of authority, which may only be exercised by the Seller after the occurrence of any Payment Default, is a special power of attorney coupled with an interest in favor of Seller and as such shall be irrevocable prior to the Final Payment Date and shall survive the merger, dissolution or other termination of the existence of Acquiror. The foregoing grant of authority shall automatically expire and be of no further force and effect on the date that is 120 days following the Final Payment Date. Notwithstanding the foregoing, the Seller may not, and shall not exercise the power of attorney granted pursuant to this Section 12.5 if at any time prior to a Payment Default, the Acquiror has notified the Seller in writing of the existence of a bona fide dispute between the Acquiror and the Seller as to whether or not a Supply Disruption had occurred such that a Payment Default had not occurred and such notice sets forth in reasonable detail the particulars of such Supply Disruption, it being acknowledged that no Supply Disruption will be in effect or continuing from and after the occurrence of the Inventory Delivery Milestones and that thereafter the provisions of Section 4.2(b)(B) will be of no further force and effect, provided that nothing herein will obviate any extensions of the due dates of payments pursuant to Section 4.2(b)(A) due to any Supply Disruption occurring prior to the Inventory Delivery Milestones being satisfied.

32. Section 13.1 of the Original Agreement is amended so that copies of all notices to be sent to the Acquiror thereunder shall no longer be directed to Latham & Watkins LLP as provided in the Original Agreement but instead shall be directed to:

Jenner & Block LLP

353 N. Clark Street

Chicago, Illinois, 60654

Facsimile: (312) 840-7313

Attn: Thaddeus J. Malik, Esq.

33. The Original Agreement as amended by this Amendment is hereby ratified and confirmed. The terms of this Amendment shall govern and control in the event of any conflict between the terms of this Amendment and the terms of (a) any correspondence, discussions or other oral arrangements, agreements or understandings between the parties regarding the subject matter contained herein, and/or (b) the Original Agreement. On a go-forward basis, references to the “Agreement” shall mean references to the Original Agreement, as modified by this Amendment.

34. The provisions of ARTICLE XIII of the Original Agreement shall apply to this Amendment, mutatis mutandis, as if such provisions were set forth herein (with such non-substantive modifications to such provisions as are necessary to effectuate the terms of this Amendment, without varying the substantive terms hereof).

35. Capitalized terms used and not otherwise defined herein have the meanings assigned to them in the Original Agreement. This Amendment may be executed in one or more counterparts, each of which will be deemed an original copy of this Amendment and all of which, when taken together, will be deemed to constitute one and the same agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

22

Sincerely yours,

	ACQUIROR:
	K-V PHARMACEUTICAL COMPANY, a Delaware corporation
	By:	/s/ David A. Van Vliet
	Name:	David A. Van Vliet
	Title:	Interim Chief Executive Officer
Acknowledged and agreed as of the date first written above:
	SELLER:
	HOLOGIC, INC., a Delaware corporation (on its own behalf and as the successor to Cytyc Prenatal Products Corp.)
	By:	/s/ Robert Cascella
	Name:	Robert Cascella
	Title:	Chief Executive Officer

The following is inserted as Exhibit F to the Agreement:

Exhibit F

Retained License Agreement

EXHIBIT F

LICENSE AGREEMENT

This LICENSE AGREEMENT (this “License Agreement”) is made and entered into effective as of             , 20     (the “Effective Date”) by and between K-V Pharmaceutical Company (“Licensor”), a Delaware corporation, and Hologic, Inc. (“Licensee”), a Delaware corporation.

RECITALS

WHEREAS, Licensor, Licensee, and Cytyc Prenatal Products Corp. (“Cytyc”) entered into an asset purchase agreement dated January 16, 2008 (“Original Purchase Agreement”), providing for the transfer of certain assets to Licensor (the “Purchased Assets”); and

WHEREAS, Licensor and Licensee are entering into an amendment to the Original Purchase Agreement dated January 8, 2010 (“Amendment”) providing for, inter alia, extended payment terms; and

WHEREAS, the parties have agreed pursuant to the Amendment that Licensee should retain certain rights to the Purchased Assets until the date that is 120 days after the Final Payment Date pursuant to the Purchase Agreement as amended (the Original Purchase Agreement as amended by the Amendment being referred to herein as the “Purchase Agreement”) has occurred; and

WHEREAS, the Licensor wishes to license the Licensed Product and Licensed IP, as hereinafter defined, to Licensee in order to effect the aforesaid retention of rights,

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge, the parties agree as follows:

SECTION 1.

DEFINITIONS

All capitalized terms that are not defined herein shall have the meaning ascribed thereto in the Purchase Agreement.

1.1 “Licensed IP” shall mean (i) the Gestiva Retransfer Date Patent Rights, (ii) the Retransfer Date Gestiva Copyrights, (iii) the Retransfer Date Gestiva Know-How and (iv) the Retransfer Date Gestiva Trademarks.

1.2 “Licensed Product” shall mean Gestiva (as such term is defined in the Purchase Agreement).

1

SECTION 2.

LICENSE; EXCLUSIVITY

2.1 License. Licensor hereby grants Licensee paid-up, royalty-free, worldwide exclusive rights and license to (i) make, have made, use, and sell the Licensed Product under the Retransfer Date Gestiva Patent Rights, (ii) use the Retransfer Date Gestiva Trademarks for the manufacture, registration, promotion and/or distribution of the Licensed Product, (iii) reproduce, distribute, make derivative works, publicly display and publicly perform the Retransfer Date Gestiva Copyrights, and (iv) use the Retransfer Date Gestiva Know How (collectively, the “Retained License Rights”), and to license the Retained License Rights to third parties. The “Retransfer Date Gestiva Patent Rights” and the “Retransfer Date Gestiva Trademarks” shall include, but are not limited to, those set forth on Exhibits A and B, respectively.

2.2 Exercise of Rights. Licensee agrees not to exercise the Retained License Rights unless and until the Licensor breaches its obligation to pay any portion of the Additional Purchase Price Amount (other than the First Additional Purchase Price Payment) then due or any undisputed Reimbursable Expenses and such payment failure continues beyond the applicable cure period provided for in the Purchase Agreement (a “Payment Default”). Pursuant to Section 8.14 of the Purchase Agreement, Licensor has granted to Licensee a right of reference to each of the Gestiva IND, Gestiva NDA and the Gestiva Orphan Drug Designation (collectively the “Rights of Reference”). Licensor will retain such Rights of Reference for the term of this License Agreement. Licensee will not exercise, license, sublicense or otherwise transfer its Rights of Reference prior to the Retransfer Date, nor subsequent to the expiration of the Term.

2.3 Nature of Exclusivity. In the event that Licensee becomes entitled to exercise the Retained License Rights pursuant to Section 2.2, such rights shall be exclusive, including with respect to Licensor. Prior to a Payment Default, Licensor may continue to exercise such rights as if the license in Section 2.1 had not been granted, provided, however, that Licensor shall not, at any time during the Term (as defined below) of this License Agreement, grant any rights in the Retained License Rights to any third parties that could take priority over Licensee’s exclusive rights to the Retained License Rights hereunder.

SECTION 3.

TERMINATION

3.1 Term. This License Agreement shall become effective as of the Effective Date and shall remain in full force and effect with respect to the Retained License Rights until one hundred twenty (120) days after the Final Payment Date pursuant to the Purchase Agreement, after which time this License Agreement will terminate and be of no further force and effect (the applicable time period during which this License Agreement will be in effect as set forth herein being referred to herein as the “Term”).

SECTION 4.

REPRESENTATIONS; WARRANTIES; COVENANTS; LIMITATION OF LIABILITY

4.1 Representations and Warranties. Licensor and Licensee each represents and warrants that it has the power to enter into this License Agreement and perform in accordance with the provisions hereof and that the execution and performance of this License Agreement has been duly and validly authorized in accordance with all applicable laws and governing instruments.

2

4.2 Notification. Licensee and Licensor shall be vigilant in detecting any possible infringements, claims or actions in derogation of the Licensed IP by any third parties (a “Third Party Infringement”) and each shall inform the other party promptly of any such material Third Party Infringement of which it becomes aware.

4.3 Covenant of Licensor. So long as the Rights of Reference are held by Licensee, Licensor shall take all actions and make all payments and submissions necessary to maintain each of the Gestiva IND, Gestiva NDA and Gestiva Orphan Drug Designation in compliance with all applicable laws, regulations and then-current guidance of the FDA. Licensor shall provide to Licensee copies of all Gestiva IND submissions and correspondence, all Gestiva NDA submissions and correspondence and all Gestiva Orphan Drug Designation correspondence (collectively, the “Post-Approval Regulatory Documentation”) occurring after the Effective Date and until the termination of the Rights of Reference as provided in Section 4.3. The Post-Approval Regulatory Documentation shall be provided by Licensor to Licensee on a reasonably current basis.

SECTION 5.

GENERAL

5.1 Notices. All notices, requests and other communications hereunder shall be made in accordance Section 13.1 (Notices) of the Purchase Agreement.

5.2 Assignments, Successors and Assigns. This License Agreement may not be assigned by either party except in accordance with the provisions of Section 13.6 (Assignment; Binding Effect) of the Agreement.

5.3 Equitable Relief. The parties acknowledge that there will be no adequate remedy at law for either party’s failure to comply with certain terms of this License Agreement. Accordingly, if either party fails to comply with the terms of this License Agreement, the other party shall have the right to have any breach of this Agreement remedied by equitable relief by way of a temporary restraining order, preliminary injunction, permanent injunction, and such other alternative relief as may be appropriate.

5.4 Entire Agreement, Amendment and Modification. This License Agreement (and all Exhibits attached hereto) and the Purchase Agreement supersede all prior discussions and agreements, both oral and written, among the parties with respect to the subject matter hereof and contain the sole and entire agreement among the parties hereto with respect to the subject matter hereof. This License Agreement may be amended, supplemented or modified only by a written instrument mutually agreed upon and duly executed by each party hereto.

5.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO CONFLICTS OF LAWS PRINCIPLES. ALL DISPUTES UNDER, OR PERTAINING TO, THIS AGREEMENT SHALL BE RESOLVED EXCLUSIVELY IN THE STATE OR FEDERAL COURTS OF THE COMMONWEALTH OF MASSACHUSETTS.

3

5.6 Counterparts. This License Agreement may be executed in any number of counterparts and by facsimile, each of which will be deemed an original, but all of which together will constitute one and the same instrument. A facsimile copy shall be a sufficient proof of signature, without it being necessary to produce the original copy.

5.7 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS LICENSE AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 5.7.

5.8 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any current or future law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (i) such provision will be fully severable, (ii) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (iv) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar to the terms of such illegal, invalid or unenforceable provision as may be possible and reasonably acceptable to the parties herein.

5.9 Remedies Not Exclusive. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, except as expressly provided in this Agreement or any Exhibit thereto, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise. The election of any one or more remedies shall not constitute a waiver of the right to pursue other available remedies.

4

5.10 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party hereto of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not in the alternative.

5.11 Survival. This Section 5 shall survive the termination or expiration of this License Agreement.

5.12 Acknowledgment. The parties hereto acknowledge that the Purchase Agreement provides that Licensor is obligated to return to the Licensee all of Licensor’s right, title and interest in and to the Purchased Assets (including, without limitation, the Retained License Rights) in the event that Licensor breaches its obligation to pay any portion of the Additional Purchase Price Amount (other than the First Additional Purchase Price Payment) then due or any undisputed Reimbursable Expenses and fails to cure such breach within the applicable cure period. The parties hereto further acknowledge that this License Agreement is being entered into to provide additional protection to Licensee by insuring that Licensee has exclusive rights in the Licensed IP in the event of Licensor’s breach of the aforesaid obligation and subsequent failure or inability to transfer all of Licensor’s right, title and interest in and to the Purchased Assets back to Licensee as required by the Purchase Agreement.

[Signatures Follow]

5

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written

K-V PHARMACEUTICAL COMPANY	HOLOGIC, INC.
By:	By:
Name Printed:	Name Printed:
Title:	Title:

6

EXHIBIT A

Gestiva Patent Rights

NONE

7

EXHIBIT B

Gestiva Trademarks

Trademarks

Country	Title	Serial/Publish No	Registration No.	Date Filed         (Issued)
US	GESTIVA	838,134/78		03/15/06
CA	GESTIVA	1316399		09/14/06
HK	GESTIVA		300721944	09/15/06
MX	GESTIVA		964080	09/15/06
AU	GESTIVA		1135855	09/14/06
EP	GESTIVA		5314497	08/23/07
JP	GESTIVA		5027654	02/23/07
NZ	GESTIVA		755195	03/15/06
KR	GESTIVA		40-0724806	09/28/07
US	GESTURA	847,994/78		03/28/06

Reserved URLS:

www.gestiva.net

www.gestiva.org

8

Schedule 1.1(e) to the Disclosure Schedule is amended and restated as follows:

Schedule 1.1(a)(i)

Knowledge

Robert Cascella, Chief Executive Officer, Hologic, Inc.

Robb Hesley, Vice President Business Development, Cytyc Corporation

Catherine Williams, Director of Regulatory Affairs, Cytyc Corporation

Mary Eckstein, Clinical Research Manager, Cytyc Corporation

Lynn Jones, Director of Quality Assurance, Cytyc Corporation

Tom Umbel, Senior Vice President Business Development, Hologic, Inc.

Howard Doran, President of Diagnostics Products

Mark Casey, Senior Vice President General Counsel, Hologic, Inc.

EX-21

Exhibit 21

Subsidiaries of the Registrant

Name	Jurisdiction of Organization
DrugTech Corporation	Delaware
DrugTech SARL (Switzerland)	Switzerland
ETHEX Corporation	Missouri
FP1096, Inc.	Pennsylvania
KV Pharmaceutical Company Limited (UK)	United Kingdom
MECW, LLC	Delaware
Nesher Solutions Ltd. (Israel)	Israel
Nesher Solutions USA, Inc.	Delaware
Particle Dynamics, Inc.	New York
Ther-Rx Corporation	Missouri
Zeratech Technologies USA, Inc.	Delaware

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. 33-44927, 333-00199, 333-48252 and 333-85516) on Form S-8 and the registration statements (Nos. 333-87402 and 333-106294) on Form S-3 of K-V Pharmaceutical Company (the Company) of our reports dated March 25, 2010, with respect to the consolidated balance sheets of K-V Pharmaceutical Company as of March 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2009, and the related financial statement schedule for the years then ended, and the effectiveness of internal control over financial reporting as of March 31, 2009, which reports appear in the March 31, 2009 annual report on Form 10-K of K-V Pharmaceutical Company.

Our report dated March 25, 2010 on the effectiveness of internal control over financial reporting as of March 31, 2009 expresses our opinion that K-V Pharmaceutical Company did not maintain effective internal control over financial reporting as of March 31, 2009 because of the effect of material weaknesses in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).

Our report dated March 25, 2010 on the consolidated financial statements contains an explanatory paragraph that states the Company has suspended the shipment of all products manufactured by the Company and must comply with a consent decree with the FDA before approved products can be reintroduced to the market. Significant negative impacts on operating results and cash flows from these actions including the potential inability of the Company to raise capital; suspension of manufacturing; significant uncertainties related to litigation and governmental inquiries; and debt covenant violations raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements and schedule do not include any adjustments that might result from the outcome of that uncertainty.

(signed) KPMG LLP

St. Louis, Missouri

March 25, 2010

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David A. Van Vliet, 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, 2010

/s/ David A. Van Vliet

David A. Van Vliet

Interim President and Interim Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Thomas S. McHugh, 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, 2010

/s/ Thomas S. McHugh

Thomas S. McHugh

Interim Chief Financial Officer, Interim Treasurer, Chief Accounting Officer, Vice President of Finance and Corporate Controller

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, 2009, as filed with the Securities and Exchange Commission (the “Report”), I, David A. Van Vliet, Interim President and Interim 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 to my knowledge:

(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, 2010	/s/ David A. Van Vliet
	David A. Van Vliet Interim President and Interim Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as our exhibit to the Form 10-K and shall not be deemed to be considered filed as part of the Form 10-K.

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, 2009, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas S. McHugh, Interim Chief Financial Officer, Interim Treasurer, Chief Accounting Officer, Vice President of Finance and Corporate Controller 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 to my knowledge:

(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, 2010	/s/ Thomas S. McHugh
	Thomas S. McHugh Interim Chief Financial Officer, Interim Treasurer, Chief Accounting Officer, Vice President of Finance and Corporate Controller

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as our exhibit to the Form 10-K and shall not be deemed to be considered filed as part of the Form 10-K.