Edgar Filing: CARACO PHARMACEUTICAL LABORATORIES LTD

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

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FORM 10-KSB

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

COMMISSION FILE NO. 0-24676

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CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)

MICHIGAN 38-2505723
(State of Incorporation) (I.R.S. Employer Identification No.)

1150 ELIJAH MCCOY DRIVE, DETROIT, MI 48202
(Address of principal executive office)

(313) 871-8400
(Registrant's telephone number)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

Title of Each Class Name of Each Employee
to be so Registered On which Each Class
is to be Registered
-------------------------------------------------------------

Common Stock, No Par Value American Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: None.

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 X No ___

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENTS TO
THIS FORM 10-KSB. [ ]

STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $45,498,400

THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NON-AFFILIATES,
BASED ON THE LAST SALE PRICE OF THE COMMON STOCK ON MARCH 25, 2004, AS REPORTED
ON THE AMERICAN STOCK EXCHANGE, WAS $89,056,067.

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

As of March 25, 2004, there were 24,577,828 Shares of Common Stock Outstanding

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of registrant's definitive 2004 Proxy Statement in connection
with the Annual Meeting of Stockholders to be held in June 2004 ("2004 Proxy
Statement") are incorporated by reference into Part III.

CARACO PHARMACEUTICAL LABORATORIES, LTD.
FORM 10-KSB

PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" which is also
referred to as the "Company," the "Corporation," "we," "us" or "our") is a
corporation organized under Michigan law in 1984, to engage in the business of
developing, manufacturing and marketing generic drugs for the ethical or
prescription and over-the-counter or non-prescription or "OTC" markets.

A generic drug is a pharmaceutical product, which is the chemical and
therapeutic equivalent of a brand-name drug as to which the patent and/or market
exclusivity has expired. Generics are well accepted for substitution of brand
products as they sell at lower prices than the prices of the branded products
and at their equivalence in quality and bioavailability.

The Company's principal executive offices are located at 1150 Elijah
McCoy Drive, Detroit, Michigan 48202, and its telephone number is (313)
871-8400. The Company files annual reports, quarterly reports, current reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any of the Company's SEC filings at the SEC's
Public Reference Room at 450 5th Street, N.W., Washington, D.C., 20549. You may
call the SEC at 1-800-SEC-0330 for further information about the Public
Reference Room. Our SEC filings are also available to the public on the SEC's
website at http://www.sec.gov. Our principal Internet address is www.caraco.com.
Our website provides a link to the SEC's website, through which our annual,
quarterly and current reports, and amendments to those reports are available. We
believe that these reports are made available as soon as reasonably practicable
after we electronically file with or furnish them to the SEC.

OVERVIEW

Our manufacturing facility and executive offices were constructed in
1991, pursuant to a $9.1 million loan from the Economic Development Corporation
of the City of Detroit (the "EDC"). From that date, until the second half of
2002, operations were funded from private placement offerings and loans. Since
August 1997, such capital infusions and loans have primarily come from Sun
Pharmaceutical Industries Limited, a specialty pharmaceutical corporation
organized under the laws of India ("Sun Pharma"). In addition, among other
things, Sun Pharma has acted as a guarantor on loans to Caraco, has supplied us
with raw materials for certain of our products, helped us obtain machinery and
equipment to enhance our production capacities at competitive prices and
transferred certain generic products to us. Sun Pharma's investment in and
support of Caraco has resulted in, since the second quarter of 2002, Caraco
achieving the sales necessary to support its operations. As of March 25, 2004,
Sun Pharma beneficially owns approximately 63% of the outstanding shares of
Caraco. See "Current Status" and "Sun Pharmaceutical Industries Limited."

CURRENT STATUS

We posted record net sales and four consecutive profitable quarters,
and accomplished our first-ever profitable year. Net sales for 2003 were $45.5
million as compared to $22.4 million for 2002. We earned operating income of
$12.4 million for 2003 as compared to $0.73 million for 2002. After interest
costs, we earned net income of $11.2 million for 2003 as compared to a net loss
of $2.2 million for 2002. Net cash generated from operating activities was $15.5
million for 2003 as compared to net cash used in operating activities of $0.8
million for 2002. At December 31, 2003, we had a stockholders' deficit of $5.0
million as compared to a deficit of $19.6 million at December 31, 2002. See
"Part II - Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations."

We received 2 Abbreviated New Drug Application ("ANDA") approvals in
2003. During the first quarter of 2004, we received approval for an additional
strength for one product in our portfolio. See "Caraco's Products and Product
Strategy" below.

In April 2003, we successfully modified our mortgage loan with the EDC,
which had been in default since February 1999, with interest rates starting at
2.75% per annum and increasing to 5.16% per annum. Under the modification, the
EDC retains a first mortgage on our property and a first lien on our furniture,
fixtures and equipment and intellectual property, however, the EDC no longer
retains a lien on our accounts receivable and inventory.

Pursuant to our products agreement with Sun Pharma Global, Inc. ("Sun
Global"), a wholly-owned subsidiary of Sun Pharma, we have selected, through the
first quarter of 2004, seven products out of the 25 products to be transferred
to us by Sun Global. Of these, one product passed its bio-equivalency studies in
the fourth quarter of 2003 and one product passed its bio-equivalency studies in
February 2004. Under the products agreement, Sun Global has earned 544,000
preferred shares for each such product. See "Sun Pharmaceutical Industries
Limited" and "Part II - Item 6. - Future Outlook."

During the first quarter of 2004, we filed two ANDAs with respect to
the two above mentioned products transferred to us by Sun Global, with the FDA.
This brings our total number of ANDAs pending approval by the FDA to four.

The FDA informed us and sixty-six other manufacturers and distributors
of Guaifenesin to cease manufacturing Guaifenesin by May 23, 2003 and to cease
all sales past November 2003. We have complied with the FDA's directive. During
the year ended December 31, 2003, net sales for Guaifenesin was approximately
$1.0 million.

We underwent inspections by the Food and Drug Administration ("FDA") in
November 2002 and we were found to be in substantial compliance with current
Good Manufacturing Practices ("cGMPs"). Although we did receive an FDA 483, a
written list of observations, we do not believe the observations are material
and we have taken appropriate remedial actions.

In August 2003, our common stock became listed on the American Stock
Exchange.

During the first quarter of 2004, we appointed three new independent
directors to comply with the requirements of the Sarbanes-Oxley Act of 2002 and
the regulations of the American Stock Exchange. The new independent directors
replace the three independent directors who resigned in late 2003. The new
independent directors are William C. Brooks, Timothy Manney and Georges Ugeux.

During the first quarter of 2004, Sun Pharma acquired 3,452,291
additional shares of common stock and 1,329,066 stock options from two former
directors and a significant shareholder; thereby increasing its beneficial
ownership from approximately 48% to 63%.

OVERVIEW OF THE GENERIC DRUG INDUSTRY

We believe that sales of generic drugs have increased in recent years
because of a number of factors including (i) modification of state and federal
laws to permit or require substitution of generic drugs by pharmacists; (ii)
enactment of ANDA procedures for obtaining FDA approval to manufacture generic
prescription drugs; (iii) changes in governmental and third-party payor health
care reimbursement policies to encourage cost containment; (iv) increased
acceptance of generic drugs by physicians, pharmacists and consumers; and (v)
the number of formerly patented drugs which have become available to generic
competition. Moreover, every year branded drugs with significant sales volumes
come off patent.

CARACO'S PRODUCTS AND PRODUCT STRATEGY

Our present product portfolio includes 17 prescription products in 31
strengths in 70 package sizes. The products and their use for the indications
are set forth in the table below:

GENERIC NAME PURPOSE

Metroprolol Tartrate Hyper-Tension
Miraphen PSE Decongestant
Paromomycin Sulfate Antibacterial
Salsalate Decongestant
CMT Arthritis/NSAID
Guai/DM Decongestant
Clonazepam Seizure, Panic Disorders
Flurbiprofen Arthritis/NSAID
Carbamazepine Epilepsy
Oxaprozin Rheumatoid Disease
Metformin Hydrochloride Diabetes
Tramadol Hydrochloride Analgesic
Miraphen PE Decongestant
Digoxin Heart Failure
Meperidine Hydrochloride* Analgesic
Ticlopidine Reduction of incidence of
Strokes
Tizanidine Management of Muscle Tone
associated with spasticity

* Expected to be marketed sometime in 2004.

We have submitted 17 ANDAs to the FDA for approval since August 1997,
including 2 filed during the first quarter of 2004. Of these 17 ANDAs, the FDA
approved 2 prior to 2000, 3 during 2001, 6 during 2002 and 2 during 2003.
Accordingly, we have 4 pending ANDAs. Of the 17 ANDAs, Sun Pharma and Sun Global
have transferred the technology for 14 of them to us. See "Sun Pharmaceutical
Industries Limited."

Our strategy has been to analyze the marketplace and try to determine
opportunities depending on a particular product's potential market and the
number of competitors vying for that market.

HEXAL-PHARMA GMBH & CO., KG

Pursuant to an agreement between Caraco and Hexal-Pharma GmbH & Co.,
KG, a German pharmaceutical company and its United States affiliate (together,
"Hexal") dated as of October 1, 1993, Hexal agreed to convey to us the
formulations, technology, manufacturing processes and know-how, and other
relevant information, and to pay for the bio-equivalency studies required for
the preparation of ANDAs for two products. Pursuant to the agreement, we were
required to pay Hexal (i) a Sign-Up Option to purchase 100,000 shares of Common
Stock at $3.50 per share; and (ii) a Product Option to purchase shares at an
exercise price of $3.50 per share. These options may be exercised and payment
for shares may be made only out of royalties and any interest earned on the
royalties while held by us. No options have yet been exercised.

Pursuant to the agreement, we received a formulation for one product,
Metoprolol Tartrate, from Hexal in March 1995. However, we have determined that
the formula provided to us by Hexal with respect to Metoprolol Tartrate is
different than the formula submitted in an ANDA to the FDA in 1995, approved by
the FDA in 1996 and manufactured and introduced by us since 1997. Accordingly,
since April 2003, we have discontinued to accrue royalties.

There is no assurance, however, that Hexal will not challenge our
determination and make a claim that royalties are owed.

SUN PHARMACEUTICAL INDUSTRIES LIMITED

Pursuant to a stock purchase agreement, Sun Pharma made an initial
investment of $7.5 million for the purchase of 5.3 million common shares of
Caraco.

Sun Pharma and its affiliates had loaned us approximately $10 million
since August 1997. As of December 31, 2003, we have repaid all of such loans.

Sun Pharma has assisted us, by acting as guarantor, in obtaining line
of credit loans from ICICI Bank Limited and The Bank of Nova Scotia in the
amounts of $5.0 million and $12.5 million, respectively. Such lines are fully
utilized as of December 31, 2003.

In August 1997, we entered into an agreement, whereby Sun Pharma was
required to transfer to us the technology formula for 25 generic pharmaceutical
products over a period of five years through August 2002. We exchanged 544,000
shares of our common stock for each technology transfer of an ANDA product (when
a bio-equivalency studies was successfully completed) and 181,333 shares for
each technology transfer of a DESI product. The products provided to us from Sun
Pharma were selected by mutual agreement. Under such agreement, we conducted, at
our expense, all tests including bio-equivalency studies. Pursuant to such
agreement, Sun Pharma delivered to us the technology for 13 products. This
agreement has expired and as noted below, we have entered into a new agreement,
with Sun Global, an affiliate of Sun Pharma.

On November 21, 2002, we entered into a products agreement with Sun
Global. Under the agreement, which was approved by our independent directors,
Sun Global has agreed to provide us with 25 new generic drugs over a five-year
period. Our rights to the products are limited to the United States and its
territories or possessions, including Puerto Rico. Sun Global retains rights to
the products in all other territories. Under such agreement, we conduct, at our
expense, all tests including bio-equivalency studies. We are also obligated to
market the products consistent with our customary practices and to provide
marketing personnel. In return for the technology transfer, Sun Global will
receive 544,000 shares of a newly created preferred stock for each generic drug
transferred when such drug has passed its bio-equivalency studies. The preferred
shares are non-voting, do not receive dividends and are convertible into common
shares after three years (or immediately upon a change in control) on a
one-to-one basis. The preferred shares have a liquidation preference equal to
the value attributed to them on the dates on which they were earned. While such
preferred shares are outstanding, we cannot, without the consent of the holders
of a majority of the outstanding shares of the preferred stock amend or repeal
our articles of incorporation or bylaws if such action would adversely affect
the rights of the preferred stock. In addition, without such consent, we cannot
authorize the issuance of any capital stock having any preference or priority
superior to the preferred stock.

The products agreement was amended by the Independent Committee in the
first quarter of 2004 to eliminate the provision requiring that the Independent
Committee concur in the selection of each product, and provide instead, that
each product satisfy certain objective criteria developed by management and
approved by the Independent Committee. Pursuant to such objective criteria, we
selected seven products during the first quarter of 2004 that we had been
working on during 2003, but had not formally selected under the products
agreement prior to its amendment. One of the seven products passed its
bio-equivalency studies in December 2003 and one product passed its
bio-equivalency studies in February 2004. Sun Global has thereby earned 544,000
preferred shares for each product. See Part II - Item 6. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Future Outlook."

Sun Pharma has established Research and Development Centers in Mumbai
and Vadodara in India, where the development work for products is performed.

Sun Pharma supplies us with certain raw materials and formulations. In
addition, Sun Pharma assists us in acquiring machinery and equipment to enhance
our production capacities. During 2003, we purchased approximately

$10,270,000 in raw materials and formulations from Sun Pharma. We paid $510,000
to Sun Pharma, its cost, for machinery and equipment bought on our behalf.

Sun Pharma has also been providing us with qualified technical
professionals.

During the first quarter of 2004, Sun Pharma acquired 3,452,291
additional shares of common stock and 1,329,066 stock options from two former
directors and a significant shareholder, thereby increasing its beneficial
ownership from approximately 48% to 63%.

MARKETING

Our marketing objective has been to create a distribution system to
obtain access to a wide range of purchasers of generic pharmaceutical products.
Internally, this requires a sales force. See "Sales and Customers" below.
Externally, it requires forging relationships with wholesaler buyer groups,
distributors and mail order companies, among others.

Drug wholesalers, with an estimated 75% of the drug market, comprise a
strategic link in the pharmacy distribution chain. They are used by drug
manufacturers because they are a cost effective means of reaching thousands of
drug purchasers and are used by most drug purchasers because they constitute a
reasonably local, stocking source for hundreds or thousands of products from
multiple manufacturers.

Our product line is now represented by the following major top drug
wholesalers: McKesson Corporation, Amerisource - Bergen and Cardinal Health. Our
products are now stocked by many other drug wholesalers, partly as a result of
our arrangements, discussed below, with buying groups.

A large number of buying groups of retail pharmacists, hospitals,
nursing homes and other regional or functionally similar categories of drug
purchasers use their members' combined purchasing power to induce drug
manufacturers or other vendors to submit bid prices at which their members may
individually purchase products through designated wholesalers. As part of our
ongoing marketing efforts, we are pursuing arrangements with additional
wholesalers and expanding our sales network of buying groups.

Further, as part of our ongoing marketing efforts, we are pursuing
arrangements to expand our business with our current distributors and a
mail-order company.

Federal and state agencies purchase a large amount of generic
pharmaceutical products. All of our products are now listed for purchase at
prices bid by us in the Federal Supply Schedule, the Federal Bureau of Prisons
Prime Vendor Program, the Veterans Administration Prime Vendor Program, the
Department of Defense and by various state agencies.

SALES AND CUSTOMERS

Presently, we have a sales organization comprised of 8 persons. In time
as new products are added to the existing product line, we plan to expand our
customer sales effort through adding additional sales personnel and/or
contracting with an independent sales and marketing firm.

Shipments to one wholesale customer accounted for approximately 61% and
65% of sales in 2003 and 2002, respectively. Balances due from this customer
represented approximately 57% and 80% of gross accounts receivable at December
31, 2003 and 2002, respectively. No other single customer represented more than
10% of our net sales during the past two years.

As disclosed above under "Marketing," certain of our customers purchase
our products through designated wholesale customers, such as Amerisource Bergen
who act as an intermediary distribution channel for our products. For example,
the Veterans Administration, which has entered into the sales contract discussed
below, has selected Amerisource Bergen as its designated wholesaler.

We have entered into a sales contract with the Veterans Administration,
an agency of the U.S. government. Our agreement with this customer is for the
period of June 21, 2002 through June 20, 2003, with four 1-year option periods
and is for the purchase of one product, Metformin Hydrochloride. The first
option period was exercised. The agreement may be terminated by the purchaser
without cause and in such case, we would only be entitled to a percentage of the
contract price reflecting the percentage of the work performed prior to the
notice of termination, plus reasonable charges that have resulted from the
termination. The agreement provides that certain penalties would be incurred if
we are unable to meet our sales commitment.

RESEARCH AND DEVELOPMENT

The development of new prescription ANDA products, including
formulation, stability testing and the FDA approval process, averages from two
to five years. A drug is "bioequivalent" to a brand-name drug if the rate and
extent of absorption of the drug are not significantly different from those of
the brand-name drug. Although we perform our own stability testing,
bioequivalence is done through independent testing laboratories.

An outline of research and development expenses incurred directly by
Caraco for 2003 and 2002 follows ($ 000's):

2003 2002
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Salaries 719 678

Raw Materials/Supplies 439 165

Bio-equivalency Studies 179 594

Laboratory 559 505

Technology Transfer, non-cash 3,103 3,887

Other 1,217 1,407
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TOTAL 6,216 7,236

The 2003 research and development expenses shown above include the non-cash
cost, with respect to the one product transferred by Sun Global to Caraco, of
$3,103,370 for 544,000 shares of our preferred stock, as compared to the 2002
non-cash cost with respect to the three products transferred by Sun Pharma to
Caraco, of $3,887,423 for 1,632,000 shares of our common stock.

REGULATION

The research and development, manufacture and marketing of our products
are subject to extensive regulation by the FDA and by other federal, state and
local entities, which regulate, among other things, research and development
activities and the testing, manufacture, labeling, storage, record keeping,
advertising and promotion of pharmaceutical products.

The Federal Food, Drug and Cosmetic Act, the Public Health Services
Act, the Controlled Substances Act and other federal statutes and regulations
govern or influence our business. Noncompliance with applicable requirements can
result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecutions. In addition,
administrative remedies can involve voluntary recall of products, and the total
or partial suspension of products as well as the refusal of the government to
approve pending applications or supplements to

approved applications. The FDA also has the authority to withdraw approval of
drugs in accordance with statutory due process procedures.

FDA approval is required before any dosage form of any new unapproved
drug, including a generic equivalent of a previously approved drug, can be
marketed. All applications for FDA approval must contain information relating to
product formulation, stability, manufacturing processes, packaging, labeling and
quality control. To obtain FDA approval for an unapproved new drug, a
prospective manufacturer must also demonstrate compliance with the FDA's current
good manufacturing practices ("cGMP") regulations as well as provide substantial
evidence of safety and efficacy of the drug product. Compliance with cGMPs is
required at all times during the manufacture and processing of drugs. Such
compliance requires considerable Corporation time and resources in the areas of
production and quality control.

There are generally two types of applications that would be used to
obtain FDA approval for pharmaceutical products:

New Drug Application ("NDA"). Generally, the NDA procedure is required
for drugs with active ingredients and/or with a dosage form, dosage
strength or delivery system of an active ingredient not previously
approved by the FDA. We do not expect to submit an NDA in the
foreseeable future.

Abbreviated New Drug Application ("ANDA"). The Waxman-Hatch Act
established a statutory procedure for submission of ANDAs to the FDA
covering generic equivalents of previously approved brand-name drugs.
Under the ANDA procedure, an applicant is not required to submit
complete reports of preclinical and clinical studies of safety and
efficacy, but instead is required to provide bioavailability data
illustrating that the generic drug formulation is bioequivalent to a
previously approved drug. Bioavailability measures the rate and extent
of absorption of a drug's active ingredient and its availability at the
site of drug action, typically measured through blood levels. A generic
drug is bioequivalent to the previously approved drug if the rate and
extent of absorption of the generic drug are not significantly
different from that of the previously approved brand-name drug.

The FDA may deny an ANDA if applicable regulatory criteria are not
satisfied. The FDA may withdraw product approvals if compliance with regulatory
standards is not maintained or if new evidence demonstrating that the drug is
unsafe or lacks efficacy for its intended uses becomes known after the product
reaches the market.

As previously disclosed, we currently manufacture several products that
are regulated as Drug Efficacy Studies Implementation, or DESI, products. These
products do not require the submission of an ANDA or an NDA to the FDA. These
products are, however, subject to cGMP compliance. Also, while products within
this DESI classification require no prior approval from the FDA before
marketing, they must comply with applicable FDA monographs which specify, among
other things, required ingredients, dosage levels, label contents and permitted
uses. These monographs may be changed from time to time, in which case we might
be required to change the formulation, packaging or labeling of any affected
product. Changes to monographs normally have a delayed effective date, so while
we may have to incur costs to comply with any such changes, disruption of
distribution is not likely.

FDA policy and its stringent requirements have increased the time and
expense involved in obtaining ANDA approvals and in complying with FDA's cGMP
standards. The ANDA filing and approval process takes approximately 12 to 18
months. The timing of final FDA approval of ANDA applications depends on a
variety of factors, including whether or not the maker of the applicable branded
drug is entitled to the protection of one or more statutory exclusivity periods,
during which the FDA is prohibited from approving generic products. FDA approval
is required before each dosage form of any new drug can be marketed.
Applications for FDA approval must contain information relating to
bio-equivalency, product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control. FDA procedures
require full-scale manufacturing equipment to be used to produce test batches
for FDA approval. Validation of manufacturing processes by the FDA also is
required before a company can market new products. The FDA conducts pre-approval
and post-approval reviews and plant inspections to enforce these rules.
Supplemental filings are required for approval to transfer products from one
manufacturing site to another and may be under review for

a year or more. In addition, certain products may only be approved for transfer
once new bio-equivalency studies are conducted.

The Generic Drug Enforcement Act of 1992 establishes penalties for
wrongdoing in connection with the development or submission of an ANDA by
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA, and to temporarily
deny approval and suspend applications to market off-patent drugs. The FDA has
authority to withdraw approval of an ANDA under certain circumstances and to
seek civil penalties. The FDA can also significantly delay the approval of a
pending ANDA under certain circumstances and to seek civil penalties. The FDA
can also significantly delay the approval of a pending ANDA under its "Fraud,
Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy."
Manufacturers of drugs must also comply with the FDA's cGMP standards or risk
sanctions such as the suspension of manufacturing or the seizure of drug
products and the FDA's refusal to approve additional ANDAs.The Drug Enforcement
Agency ("DEA") conducts inspections bi-annually.

We underwent FDA inspections during March and April 2001 and November
2002 and on each occasion we were found to be in substantial compliance with
cGMPs. We did receive FDA 483s but we do not believe the observations are
material and we have taken appropriate remedial actions. We now have 4 ANDAs
pending approval.

Each domestic drug product manufacturing establishment must be
registered with the FDA. Establishments, like ours, handling controlled
substances, must be licensed by the DEA. We are licensed by both the FDA and
DEA.

We are also subject to regulation under other federal, state and local
regulations regarding work place safety, environmental protection and hazardous
substance controls, among others. Specifically, we are licensed by the Michigan
Board of Pharmacy as a manufacturer and wholesaler of prescription drugs and as
a distributor of controlled substances. We are also licensed by the Michigan
Liquor Control Commission to use alcohol in the manufacture of drugs.

We believe that we are in compliance with environmental laws.

SUPPLIERS AND MATERIALS

The principal components used in our business are active and inactive
pharmaceutical ingredients and packaging materials. Some of these components are
purchased from single sources, however, the majority of the components have an
alternate source of supply. Development and approval of our pharmaceuticals are
dependent upon our ability to procure components from FDA approved sources.
Because the FDA approval process requires manufacturers to specify their
proposed suppliers of components in their applications, FDA approval of a new
supplier would be required if components were no longer available from the
specified suppliers. We have been, and continue to be, actively identifying and
validating alternate suppliers for our components. Our purchases of components
are made from manufacturers in the U.S. and from abroad, including Sun Pharma.
See "Sun Pharmaceutical Industries Limited." All purchases of components are
made in U.S. Dollars.

Although to date no significant difficulty has been encountered in
obtaining components required for products and sources of supply are considered
adequate, there can be no assurance that we will continue to be able to obtain
components as required.

COMPETITION

The market for generic drugs is highly competitive. There is intense
competition in the generic drug industry in the United States, which is eroding
price and profit margins. We compete with numerous pharmaceutical manufacturers,
including both generic and brand-name manufacturers, many of which have been in
business for a longer period of time than us, have a greater number of products
in the market and have considerably greater financial, technical, research,
manufacturing, marketing and other resources.

The principal competitive factor in the generic pharmaceutical market
is the ability to be the first company, or among the first companies, to
introduce a generic product after the related patent expires. Other competitive
factors include price, quality, methods of distribution, reputation, customer
service, including maintenance of inventories for timely delivery, and breadth
of product line. Approvals for new products may have a synergistic effect on a
company's entire product line since orders for new products are frequently
accompanied by, or bring about, orders for other products available from the
same source. We believe that price is a significant competitive factor,
particularly as the number of generic entrants with respect to a particular
product increases. As competition from other manufacturers intensifies, selling
prices typically decline. We hope to compete by selecting appropriate products,
based on therapeutic segments, market sizes and number of competitors
manufacturing the products, and by keeping our prices competitive and by
providing reliability in the timely delivery, and in the quality, of our
products.

EMPLOYEES

As of December 31, 2003 and 2002, we had a total of 200 and 190
employees, respectively, engaged in research and development, quality assurance,
quality control, administration, sales and marketing, materials management,
facility management and manufacturing and packaging. Most of our scientific and
engineering employees have had prior experience with pharmaceutical or medical
products companies, including Sun Pharma. See "Sun Pharmaceutical Industries
Limited." A union represents some of the employees of materials management,
facility management and manufacturing and packaging departments.

PRODUCT LIABILITY AND INSURANCE

We currently have in force general and product liability insurance,
with coverage limits of $10 million per incident and in the aggregate. Our
insurance policies provide coverage on a claims made basis and are subject to
annual renewal. Such insurance may not be available in the future on acceptable
terms or at all. There can be no assurance that the coverage limits of such
policies will be adequate to cover our liabilities, should they occur. See "Item
3. Legal Proceedings."

ITEM 2. DESCRIPTION OF PROPERTY.

EDC FINANCING

Pursuant to Section 108 of the Housing and Community Development Act of
1974, the EDC loaned us approximately $9.1 million in 1990 in accordance with a
Development and Loan Agreement dated August 10, 1990. These funds were used to
pay the direct costs of acquiring land and constructing thereon our
pharmaceutical manufacturing facility and executive offices. See "Current
Status," "Part II, Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Note 5 of Notes to Financial
Statements."

On March 1, 1994, the EDC Agreement was amended to extend the maturity
date to July 1, 2002. On August 5, 1997, we restructured the loan from the EDC.
We became in default of the restructured loan; however, from February 1999 to
April 2003 we made $100,000 monthly payments to the EDC while we were
negotiating another restructuring of the loan.

On April 23, 2003, the loan was again restructured, effective as of
January 1, 2003. The loan has been extended for six years, with interest rates
starting at 2.75% and increasing to 5.16%. Under the extension, the EDC retains
a first mortgage on our property, and a first lien on our furniture, fixtures,
equipment, ANDAs and intellectual property. The EDC has removed its first lien
on our accounts receivable and inventory. In addition to other covenants, we
agreed that we will not redeem any of our outstanding shares, pay any dividends
with respect to our outstanding common stock or preferred shares or merge or
consolidate with any other corporation or other entity without the prior written
consent of the EDC. However, the EDC has eliminated the prior restriction on
capital investment in excess of $2 million by permitting us, so long as we are
not in default of any of our obligations, to purchase new capital and sell the
existing capital equipment so long as a result of such transactions, the book
value of our assets is not reduced below the balance as of December 31, 2002 and
the proceeds of any such sales are retained by us.

THE FACILITIES

Our approximately 70,000 square foot facility, which was designed and
constructed to our specifications and completed in 1994, contains our
production, packaging, research and corporate office. It is on a four-acre site.
The manufacturing facility has a special building and systems design, with each
processing area equipped with independent zone and air handling units to provide
temperature and humidity control to each room. These air handling units are
designed to prevent product cross contamination through the use of pre-filter
and final HEPA filter banks. All processing air quarters are maintained in a
negative pressure mode using laminar airflow design. This system of airflow
provides a measurable control of air borne particulate entrapment in each room.
Environmental segregation of individual rooms within a particular zone is
accomplished by the use of duct HEPA filter booster fan units that facilitate
the isolation and confinement of room activities. These special dynamics provide
an added dimension and flexibility in product selection and processing
techniques.

We also have leased an approximately 55,000 square foot facility for
storage of inventory and office space. The lease expires in 2007 and includes an
option to renew until 2008.

We have invested approximately $2.4 million in 2003 and $1.6 million in
2002 to upgrade our facilities.

We believe the existing facilities are suitable and adequate for our
current level of operations. We also believe that our facility is adequately
covered by insurance.

ITEM 3. LEGAL PROCEEDINGS.

Except for the following, we are not a party to any litigation, which,
individually or in the aggregate, is believed to be material to our business:

As previously disclosed, on February 12, 2003, C. Arnold Curry
filed a complaint in the Wayne County Circuit Court alleging
breach of a written employment agreement. Mr. Curry is seeking
175,000 shares of our common stock (35,000 shares for each of
the first five ANDAs approved by the FDA). We, and plaintiff,
have each filed a motion for summary judgment. No trial date
has been scheduled. We intend to vigorously defend ourselves
against these claims, which we believe have no merit.

As previously disclosed, we were named as one of two
defendants and as one of several defendants in two separate
product liability suits, involving Miraphen, which contains
phenylopropanolame (PPA), one in federal court in Pennsylvania
and another in state court in New Jersey, respectively. These
lawsuits seek damages generally for personal injury as well as
punitive damages under a variety of liability theories
including strict products liability, breach of warranty and
negligence. The plaintiff in the federal lawsuit stipulated to
a dismissal of the lawsuit and the case was formally dismissed
by the federal court in December 2003. Since we believe that
the other lawsuit has not been appropriately served on the
Company, we are treating the matter as if we are not an active
party. If we are deemed to be an active party, we believe we
have substantial defenses to the claims and we will vigorously
defend the lawsuit.

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

We did not submit any matters to a vote of security holders in the
fourth quarter of the fiscal year through the solicitation of proxies or
otherwise.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Since August 2003, our common stock has been listed on the American
Stock Exchange, under the symbol "CPD." Prior to August 2003, our common stock
was quoted on the OTC Bulletin Board under the symbol "CARA." The following
table sets forth, in U.S. dollars and cents, for 2003, the high and low sales
prices for each of the calendar quarters, and for 2002, the high and low bid
prices. The quotations for the high and low bid prices reflect inter-dealer
prices, without retail mark up, mark down or commissions and may not represent
actual transactions.

2002 HIGH LOW

First Quarter $4.96 $1.10
Second Quarter $3.73 $2.25
Third Quarter $3.07 $1.73
Fourth Quarter $2.77 $1.72

2003 HIGH LOW

First Quarter $3.98 $2.65
Second Quarter $6.63 $2.40
Third Quarter $12.20 $6.47
Fourth Quarter $11.90 $6.77

As of March 16, 2004 there were 119 registered holders of our Common
Stock.

During 2002, we issued 635,000 shares of common stock for cash of
$1,692,000 pursuant to a private placement to accredited investors. All of the
shares were issued pursuant to exemptions from registration under Section 4(2),
4(16) and Regulation D under the Securities Act of 1933.

During 2003, Sun Global earned 544,000 preferred shares in exchange for
the transfer of one product pursuant to our current products agreement with Sun
Global. During 2002, we issued 1,632,000 shares of common stock to Sun Global in
exchange for the transfer of 3 products pursuant to the then existing products
agreement between Sun Pharma and us. See "Part I. Sun Pharmaceutical Industries
Limited." All issued shares of common stock to Sun Pharma are issued pursuant to
exemptions from registration under Section 4(2), Section 4(6) and Regulation D
under the Securities Act of 1933.

During 2003 and 2002, certain of our non-employee directors were issued
31,000 and 36,000 shares of common stock, respectively, for attending board and
committee meetings. The shares of common stock were issued pursuant to
exemptions from registration under Section 4(2), Section 4(6) and Regulation D
under the Securities Act of 1933.

DIVIDEND POLICY

We never have declared or paid cash dividends on our common stock. We
currently intend to retain all future earnings for the operation and expansion
of our business. We do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future. Any payment of cash dividends on the
common stock will be at the discretion of the Board of Directors and will depend
upon our results of operations, earnings, capital requirements, contractual
restrictions and other factors deemed relevant by our Board of Directors. No
dividend may be declared without the consent of the EDC.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis provides information that the
management believes is relevant to an understanding of our results of operations
and financial condition. The discussion should be read in conjunction with the
financial statements and notes thereto.

OVERVIEW

2003 was a milestone year. We earned record revenues of $45.5 million
and net income of $11.2 million, our first full year of profitability. Net cash
generated from operating activities was a record $15.5 million.

FDA COMPLIANCE AND PRODUCT APPROVALS

During 2001 and 2002, the FDA conducted inspections of our facility.
During these inspections, we were found to be substantially in compliance with
the cGMP regulations. While the FDA did issue us an FDA 483 list of observations
after each inspection, we do not believe they are material and we have taken
appropriate remedial actions. We have submitted 17 ANDAs to the FDA for approval
since August 1997, including 2 filed during the first quarter of 2004. Of these,
13 have been approved and four are pending approval.

YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002

NET SALES. Net sales for 2003 and 2002 were $45.5 million and $22.4
million, respectively, reflecting an increase of almost 103%. The increase is
due to the higher production and marketing of our products. Currently, we
manufacture and market all except one of the approved products. See "Part I,
Item 1. Business - Current Status" above. Sales of two products accounted for
approximately 87% and 78% of sales in 2003 and 2002, respectively.

Net sales have also improved for the following reasons:

- We have been successful in obtaining larger sales contracts in 2002
with an agency of the U.S. government (in June 2002) and with one large
mail order company (during 2002) so that we have benefited from sales
pursuant to such contracts for all of 2003 as compared to part of 2002.

- With our larger base of products, we have been able to attract both new
customers, and larger orders.

GROSS PROFIT. We earned a gross profit of $26.0 million for 2003 as
compared to a gross profit of $10.3 million for 2002, reflecting an increase of
151% over 2002. The improvement was primarily due to higher sales volumes with
improved margins due to product mix in the current period as compared to the
corresponding period of 2002 and ability to absorb operational overheads due to
higher sales.

As a result of increased sales, the gross profit margin has also
improved when comparing the gross profit margins for 2003 and 2002. Gross profit
margin for 2003 was 57% as compared to 46% for 2002. The increases were the
result of:

- Changes in sales mix to higher profit margin products.

- Reduction in manufacturing costs due to increased batch sizes.

- Further improved efficiency in the overall manufacturing process
associated with higher utilization of plant capacity.

- Utilization of newly installed larger and faster equipment to achieve
economics of scale.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 2003 and 2002 were $7.4 million and $3.8 million,
respectively, representing an increase of 92%. Selling, general and
administrative expenses have decreased to 16.1% of net sales for 2003 as
compared to 17.0% of net sales for 2002.

The increase in SG&A of approximately $3.6 million in 2003 was
primarily due to recording of variable compensation expense on the extension of
the term of two former directors' stock options and severance compensation to a
former CEO ($2.2 million).

RESEARCH AND DEVELOPMENT EXPENSES. Total R&D expense for 2003 was $6.2
million as compared to $7.4 million during 2002, lower by almost 14%. Cash
research and development expenses of $3.1 million for 2003 were lower by 8% when
compared with $3.3 million incurred for 2002. We incurred non-cash research and
development expenses (technology transfer cost) of $3.1 million for the 544,000
shares of preferred stock earned by Sun Global for 1 product transfer during
2003 as compared to $3.9 million for the 1,632,000 shares of common stock issued
to Sun Global for 3 product transfers made to us during 2002. The major reason
for the reduced cash research and development expenses was the lower new product
development during 2003

INTEREST EXPENSE. Interest expense on loans from the EDC, Sun Pharma
and its affiliates, ICICI Bank and the Bank of Nova Scotia, was $1.2 million and
$1.5 million for 2003 and 2002, respectively. The decrease in the amount of
interest is primarily due to paying off the Sun Pharma loans during the second
and third quarters of 2003.

RESULTS OF OPERATIONS. We earned net income of $11.2 million for 2003
as compared to incurring a net loss of $2.3 million for 2002. The significantly
higher income for 2003 as compared to 2002 is primarily due to higher sales
volumes, better-cost absorption, an improved product mix and obtaining more
competitive prices for raw materials. In comparison, the net sales in 2002 were
inadequate to absorb all expenses including interest cost and non-cash
technology transfer cost. Also, the higher utilization of new equipment
installed helped to improve production volumes and productivity.

LIQUIDITY AND CAPITAL RESOURCES

During 2003, we generated cash of $15.5 million from operations as
compared to using cash in operations of $0.8 million during 2002. The higher
cash generation during 2003 has been primarily due to higher sales and improved
cost absorptions in the operations.

In addition to paying down debt, the cash generated from operations was
used to finance our capital expenditures of $2.4 million during 2003. The
capital expenditure in 2002 of $1.6 million was financed out of the private
placement of our stock and higher borrowings from Sun Pharma and Bank of Nova
Scotia.

Although we borrowed $1.6 million from the Bank of Nova Scotia during
the first quarter of 2003, the higher cash inflow from operations during the
remaining three quarters of 2003 allowed us to repay all of the Sun Pharma loans
of $10 million in addition to the scheduled payments to the EDC of $1.2 million
and the first installment of $0.6 million to the ICICI Bank. In comparison,
during 2002 we borrowed $2.3 million to fund our operations, capital
expenditures and debt redemption to the EDC.

During 2003, we generated $0.9 million from exercise of stock options
by our employees and directors. There were no similar exercises during 2002.
During 2002, we offered our stock in a private placement, which generated $1.7
million. No private placement offering was made during 2003.

At December 31, 2003, we had negative working capital of $1.1 million
compared to a negative working capital of $1.6 million at December 31, 2002.

FUTURE OUTLOOK

We have experienced difficult times in the past. However, because we
have been substantially compliant with cGMPs since 2001, have received approvals
of eleven ANDAs during the last three years, have expanded and upgraded our
facilities and have expanded our customer base, management feels that our future
outlook is brighter.

Although management expects an increase in sales and improvement in
cash flow during 2004, we expect pricing pressures, which resulted in lower
gross margins in the fourth quarter of 2003, to continue in 2004 due to
increased competition. However, we still expect to meet our previously stated
guidance of 20-25% revenue growth in 2004.

As disclosed, under the products agreement dated November 21, 2002,
between Sun Global and the Company, Sun Global has agreed to transfer the
technology for 25 products to the Company over a five year period in exchange
for 544,000 preferred shares (which are convertible on a one-to-one basis into
common shares) per product. Since the date of the products agreement, seven
products have been selected for development by the Company and two of these
products have passed their respective bio-equivalency studies (one in December
2003 and one in February 2004). If some or all of the remaining five products
pass their bio-equivalency studies in 2004, the fair value of the preferred
shares earned by Sun Global in exchange for such products could cause our
non-cash research and development expenses to increase to an amount which would
significantly decrease profit or create a loss.

While the development of new products will increase our non-cash R&D
expense and will impact EPS, the cash will be available, among other things, to
repay loans and reduce interest burden, meet increased working capital
requirements and finance capital investments. This in turn will strengthen our
balance sheet and build value for our shareholders. During the first quarter of
2004, we have repaid the entire balance of the ICICI Bank loan of $4.4 million
out of the cash generated. With a view to augment working capital requirements
in the short-term and to reduce interest expense by paying off higher
interest-bearing loans, the Corporation began negotiations to secure a $10
million line of credit with a financial institution. Management expects the line
of credit to be approved sometime in 2004.

The Company will continue to aggressively move forward on the
development of the products ("Products") presented and to be presented for
consideration by Sun Global pursuant to the products agreement. We believe that
receiving products from Sun Global, which products, it is believed, will be
originated by Sun Pharma, provides us with a partner with a proven track record;
one that already has provided us with quality products. Moreover, Sun Pharma's
increased beneficial ownership in us, to approximately 63% of our outstanding
shares, should, we believe, provide it with the incentive to continue to help us
succeed. Sun Pharma has already provided us with millions of dollars in capital,
loans, and guarantees of loans, and with personnel, raw materials and equipment,
which have significantly helped us to date.

Management's plans for the remainder of 2004 include:

(a) Continued focus on FDA compliance.

(b) Continued research and development activities.

(d) Increased market share for certain existing products
and recently introduced new products and enhanced
customer reach and satisfaction.

(e) Prompt introduction of new approved products to the
market.

(f) Achieving further operational efficiencies by
attaining economies of scale and cost reduction per
unit.

(g) Increase the number of products, as well as
anticipated volume increases for existing products,
which, in turn, will improve manufacturing capacity
utilization.

(h) Considering alternative ways of increasing cash flow
including developing, manufacturing and marketing
ANDAs owned by Sun Pharma.

(i) Locating and utilizing facilities of
contract-manufacturers to enhance production and
therefore sales.

(j) Raising of additional lines of credit to support
increasing working capital requirements.

(k) Further reducing debt, if adequately supported by
positive cash flows.

FORWARD LOOKING STATEMENTS

This report, other than the historical financial and business
information, may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act. Without limitation, the words "believes," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. Those
statements include statements regarding our intent, belief, and current
expectation. These statements are not guarantees of future performance and are
subject to risks and uncertainties that cannot be predicted or quantified.
Consequently, actual results could differ materially from those expressed or
implied by such forward-looking statements.

Such risks and uncertainties include: (i) that the information is of a
preliminary nature and may be subject to further adjustment; (ii) not obtaining
FDA approval for new products or delays in receiving FDA approvals; (iii)
governmental restrictions on the sale of certain products; (iv) dependence on
key personnel; (v) development by competitors of new or superior products or
cheaper products or new technology for the production of products or the entry
into the market of new competitors; (vi) market and customer acceptance and
demand for new pharmaceutical products; (vii) availability of raw materials in a
timely manner, at competitive prices, and in required quantities; (viii) timing
and success of product development and launch; (ix) integrity and reliability of
the Company's data; (x) lack of success in attaining full compliance with regard
to regulatory and cGMP compliance; (xi) experiencing difficulty in managing our
recent rapid growth and anticipated future growth; (xii) dependence on limited
customer base; (xiii) occasional credits to certain customers reflecting price
reductions on products previously sold to them and still available as
shelf-stock; (xiv) possibility of an incorrect estimate of charge-backs and the
impact of such an incorrect estimate on net sales, gross profit and net income;
(xv) dependence on few products generating majority of sales; (xvi) product
liability claims for which the Company may be inadequately insured; and (xvii)
other risks identified in this report and identified from time to time in our
reports and registration statements filed with the Securities and Exchange
Commission. These forward-looking statements represent our judgment as of the
date of this report. We disclaim, however, any intent or obligation to update
our forward-looking statements.

ITEM 7. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

Page
----

1. Independent Auditors' Report ............................................... F-1

2. Financial Statements as of December 31, 2003 and 2002 and for
Each of the Years Then Ended

Balance Sheets.............................................................. F-2

Statements of Operations.................................................... F-4

Statements of Stockholders' Deficit......................................... F-5

Statements of Cash Flows.................................................... F-6

Notes to Financial Statements .............................................. F-7

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 8A. CONTROLS AND PROCEDURES.

a. The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange
Act"). These rules refer to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in
the reports that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our Chief Executive
Officer, who is also our Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report (the "Evaluation Date"), and has concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in providing him with material information relating to the Company known to
others within the Company which is required to be included in our periodic
reports filed under the Exchange Act.

b. There has been no change in the Company's internal control over
financial reporting that occurred during the quarter ended December 31, 2003
that materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS OF THE REGISTRANT.

The information with respect to directors and executive officers of the
Corporation, the Corporation's Code of Ethics, and compliance with Section 16(a)
of the Exchange Act is included in the Corporation's definitive Proxy Statement
under the sections "Nominees For Directors' Terms Expiring in 2006," "Incumbent
Directors' Terms Expiring in 2005," "Incumbent Directors' Terms Expiring in
2004," "Committees and Meetings of Directors," "Executive Officers," "Code of
Ethics," and "Section 16(a) Beneficial Ownership Reporting Compliance," which
are incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

The information regarding executive compensation is included in the
Corporation's definitive 2004 Proxy Statement under the section "Compensation of
Executive Officers" and "Compensation of Directors," which is incorporated
herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information with respect to the security ownership of certain
beneficial owners and management and with respect to equity compensation plans
is included in the Corporation's definitive 2004 Proxy Statement under the
sections "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management and Directors," and "Equity Compensation Plan
Information" which are incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information with respect to certain relationships and related
transactions are included in the Corporation's definitive 2004 Proxy Statement
under the Section "Transactions of Directors, Executive Officers and Certain
Beneficial Owners of Caraco," which is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

3.01 Registrant's Amended and Restated Articles of Incorporation,
as amended. (2)

3.02 Certificate of Amendment to the Articles of Incorporation
filed February 13, 1997. (4)

3.03 Certificate of Amendment to the Articles of Incorporation
filed February 10, 2000. (11)

3.04 Certificate of Determination of Rights, Privileges and
Preferences Series B Preferred Stock. (12)

3.05 Registrant's Amended and Restated Bylaws. (6)

3.06 Amendment to Amended and Restated Bylaws dated May 2002. (10)

3.07 Amendment to Amended and Restated Bylaws dated November 2002.
(12)

3.08 Amendment to Amended and Restated Bylaws dated November 2003
(+)

10.01 Development and Loan Agreement, dated August 10, 1990, between
Registrant and The Economic Development Corporation of the
City of Detroit; First Amendment thereto, dated December 3,
1990; Second Amendment thereto, dated April 2, 1993; and
supplemental letter, dated October 26, 1993 and agreement. (1)

10.02 Amended and Restated Section 108 Guaranty Agreement, dated as
of August 10, 1990, of C. Arnold Curry and Cara Jean Curry in
favor of the Economic Development Corporation of the City of
Detroit. (1)

10.03 Registrant's Amended and Restated Purchase Money Promissory
Note, dated as of August 10, 1990, in the principal amount of
$157,500, to the order of the Economic Development Corporation
of the City of Detroit. (1)

10.04 Registrant's Amended and Restated Section 108 Note, dated
August 10, 1990 in the principal amount of $9,000,000, payable
to The Economic Development Corporation of the City of
Detroit. (1)

10.05 Amended and Restated Purchase Money Mortgage, dated as of
August 10, 1990, between Registrant as mortgagor and The
Economic Development Corporation of the City of Detroit. (1)

10.06 Agreement, dated as of October 1, 1993, among Registrant,
Hexal-Pharma GmbH & Co., KG, and Hexal Pharmaceuticals, Inc.
(1)

10.07 Form of 1993 Stock Option Plan. (1)

10.08 Employment Agreement, dated October 22, 1993, with Robert
Kurkiewicz. (1)

10.09 Secured Promissory Note dated December 23, 1996 with Sun
Pharma Global, Inc. (4)

10.10 Security Agreement dated December 23, 1996 with Sun Pharma
Global Inc. (4)

10.11 Stock Purchase Agreement by and between Caraco Pharmaceutical
Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd.
dated as of April 23, 1997. (5)

10.12 Products Agreement by and between Caraco Pharmaceutical
Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd.
dated as of April 23, 1997. (5)

10.13 Registration Rights Agreement dated as April 1997. (5)

10.14 Second Note and Mortgage Modification Agreement. (6)

10.15 Amendment to Employment Agreement of Robert Kurkiewicz dated
as of April 1, 1997. (6)

10.16 Employment Agreement dated September 22, 1998 with Narendra N.
Borkar. (7)

10.17 1999 Equity Participation Plan. (8)

10.18 Agreement between ICICI Bank and the Corporation for the term
loan of $5 million. (9)

10.19 Term Sheet between Bank of Nova Scotia and the Corporation for
the term loan of $12.5 million. (10)

10.20 Renewal to Employment Agreement of Robert Kurkiewicz dated as
of January 1, 1999. (11)

10.21 Third Amendment to Employment Agreement of Robert Kurkiewicz
dated August 30, 2002. (11)

10.22 Employment Agreement of Jitendra N. Doshi. (11)

10.23 Agreement between Caraco and Sun Pharma Global, Inc. dated
November 21, 2002. (13)

10.24 Sales contract with government vendor. (12)

10.25 Third Note Modification Agreement (13)

10.26 Third Mortgage Modification Agreement (13)

10.27 Agreement of Narendra N. Borkar (+)

21 Subsidiaries of the Registrant (+)

23.01 Consent of Independent Auditors (+)

24.1 Power of Attorney (on signature page).

31.1 Certificate of Chief Executive Officer and Chief Financial
Officer (+)

32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (+)

-----------------------------
+ Filed herewith

(1) Incorporated by reference from Exhibits to Registrant's
Registration Statement on Form SB-2, as amended, filed on
November 5, 1993 as Commission File No. 33-71398C.

(2) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 30, 1995 as Commission File no.
0-24676.

(3) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 30, 1996 as Commission File no.
0-24676.

(4) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 1997, as Commission File
No. 0-24676.

(5) Incorporated by reference from Exhibits to Registrant's Form
10-QSB filed on November 14, 1997 as Commission File No.
0-24676.

(6) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 1998, as Commission File
No. 0-24676.

(7) Incorporated by reference from Exhibits to Registrant's Form
10-QSB dated as of November 13, 1998 as Commission File No.
0-24676.

(8) Incorporated by reference from Exhibit A to Registrant's Proxy
Statement dated April 28, 1999 as Commission File No. 0-24676.

(9) Incorporated by reference from Exhibits to Registrant's Form
10-QSB filed on August 14, 2000 as Commission File No.
0-24676.

(10) Incorporated by reference from Exhibits to Form SB-2 filed on
July 3, 2002 as Commission File No. 333-91968.

(11) Incorporated by reference from Exhibits to Pre-Effective
Amendment No. 1 to Form SB-2 filed on September 4, 2002 as
Commission File No. 333-91968.

(12) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 2003, Commission File No.
0-24676.

(13) Incorporated by reference from Exhibit to Registrant's Form
10-QSB filed on or about May 15, 2003, Commission File No.
0-24676.

(b) Reports on Form 8-K

On November 21, 2003, the Corporation filed a Form 8-K disclosing in
Item 5 thereof the resignation of two directors.

On October 22, 2003, the Corporation filed a Form 8-K disclosing in
Item 12 thereof its expected earnings from operations for the third quarter of
2003.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information with respect to principal accountant fees and services
is included in the Corporation's definitive 2004 Proxy Statement under the
heading "Relationship With Principal Auditors," which is incorporated herein by
reference.

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 on the 30th day of
March, 2004

CARACO PHARMACEUTICAL LABORATORIES LTD.

/s/ Jitendra N. Doshi
----------------------------------------
Chief Executive Officer and Chief
Financial Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jitendra N. Doshi, this 30th day of
March, 2004, his true and lawful attorney(s)-in-fact and agent(s), with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this report
and to file the same, with all exhibits and schedules thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney(s)-in-fact and agent(s) full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney(s)-in-fact and agent(s), or
their substitutes(s), may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated above.

/s/ Dilip S. Shanghvi Chairman of the Board
------------------------------------
Dilip S. Shanghvi

/s/ Jitendra N. Doshi Director, CEO and CFO (and Principal
------------------------------------Accounting Officer)
Jitendra N. Doshi

/s/ William C. Brooks Director
------------------------------------
William C. Brooks

/s/ Sailesh T. Desai Director
------------------------------------
Sailesh T. Desai

/s/ Timothy Manney Director
------------------------------------
Timothy Manney

/s/ Georges Ugeux Director
------------------------------------
Georges Ugeux

/s/ Sudhir V. Valia Director
------------------------------------
Sudhir V. Valia

CARACO PHARMACEUTICAL LABORATORIES, LTD.

FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITORS' REPORT

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

CARACO PHARMACEUTICAL LABORATORIES, LTD.

INDEX TO FINANCIAL STATEMENTS

2003

1. Independent Auditors' Report .......................................... F-1

2. Financial Statements as of December 31, 2003 and 2002 and for
Each of the Years Then Ended

Balance Sheets......................................................... F-2

Statements of Operations............................................... F-4

Statements of Stockholders' Deficit.................................... F-5

Statements of Cash Flows............................................... F-6

Notes to Financial Statements ......................................... F-7

INDEPENDENT AUDITORS' REPORT

Stockholders and Board of Directors
Caraco Pharmaceutical Laboratories, Ltd.
Detroit, Michigan

We have audited the accompanying balance sheets of Caraco Pharmaceutical
Laboratories, Ltd. (a Michigan corporation) as of December 31, 2003 and 2002,
and the related statements of operations, stockholders' deficit and cash flows
for the years then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Caraco Pharmaceutical
Laboratories, Ltd. as of December 31, 2003 and 2002 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

REHMANN ROBSON

Troy, Michigan
February 23, 2004

F-1

CARACO PHARMACEUTICAL LABORATORIES, LTD.

BALANCE SHEETS

ASSETS DECEMBER 31
-------------------------
2 0 0 3 2 0 0 2
----------- -----------

CURRENT ASSETS
Cash and cash equivalents $ 4,206,282 $ 534,228
Accounts receivable, net 4,538,472 5,484,135
Inventories 9,610,810 5,615,962
Prepaid expenses and deposits 562,030 471,314
----------- -----------

TOTAL CURRENT ASSETS 18,917,594 12,105,639
----------- -----------

PROPERTY, PLANT AND EQUIPMENT

Land 197,305 197,305
Buildings and improvements 7,917,986 7,346,797
Equipment 6,991,024 5,458,314
Furniture and fixtures 364,140 232,112
----------- -----------

Total 15,470,455 13,234,528
Less accumulated depreciation 5,963,780 5,487,018
----------- -----------

NET PROPERTY, PLANT AND EQUIPMENT 9,506,675 7,747,510
----------- -----------

TOTAL ASSETS $28,424,269 $19,853,149
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-2

LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31
-----------------------------
2 0 0 3 2 0 0 2
------------ ------------

CURRENT LIABILITIES
Accounts payable $ 1,386,160 $ 1,958,809
Accounts payable, Sun Pharma 3,839,815 2,024,028
Accrued expenses 4,917,216 1,391,623
Current portion of subordinated notes payable to stockholder - 5,850,000
Current portion of loans payable to financial institutions 8,750,000 625,000
Current portion of EDC loan payable 1,115,213 1,004,000
Preferred stock dividends payable - 350,380
Accrued interest - 549,052
------------ ------------

TOTAL CURRENT LIABILITIES 20,008,404 13,752,892

Loans payable to financial institutions, net of current portion 8,125,000 15,275,000
EDC loan payable, net of current portion 5,270,277 6,598,547
Subordinated notes payable to stockholder,
net of current portion - 3,850,000
------------ ------------

TOTAL LIABILITIES 33,403,681 39,476,439
------------ ------------

COMMITMENTS AND CONTINGENCIES (NOTES 5, 9 AND 12)

STOCKHOLDERS' DEFICIT

Series A preferred stock, no par value;
no shares issued or outstanding - -
Series B convertible preferred stock, no par value;
544,000 shares to be issued as of December 31, 2003 - -
Common stock, no par value; authorized 30,000,000
shares, issued and outstanding 24,577,828
shares (23,767,532 shares in 2002) 41,442,311 40,457,028
Additional paid-in capital 2,718,735 282,858
Preferred stock dividends payable - (350,380)
Accumulated deficit (49,140,458) (60,012,796)
------------ ------------

TOTAL STOCKHOLDERS' DEFICIT (4,979,412) (19,623,290)
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 28,424,269 $ 19,853,149
============ ============

F-3

CARACO PHARMACEUTICAL LABORATORIES, LTD.

STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31
-----------------------------
2 0 0 3 2 0 0 2
------------ ------------

Net sales $ 45,498,400 $ 22,380,964

Cost of goods sold 19,507,406 12,047,410
------------ ------------

GROSS PROFIT 25,990,994 10,333,554

Selling, general and administrative expenses 7,363,341 3,827,707
Research and development costs - affiliate (Note 7) 3,103,370 3,887,423
Research and development costs - other 3,112,294 3,348,789
------------ ------------

OPERATING INCOME (LOSS) 12,411,989 (730,365)
------------ ------------

OTHER INCOME (EXPENSE)
Interest expense (1,233,531) (1,539,075)
Interest income 9,102 13,436
Gain on sale of property, plant and equipment 25,531 -
Other income 9,627 -
------------ ------------

OTHER EXPENSE - NET (1,189,271) (1,525,639)
------------ ------------

NET INCOME (LOSS) $ 11,222,718 $ (2,256,004)
============ ============

NET INCOME (LOSS) PER SHARE:
Basic $ 0.46 $ (0.10)
============ ============
Diluted $ 0.44 $ (0.10)
============ ============

The accompanying notes are an integral part of these financial statements.

F-4

CARACO PHARMACEUTICAL LABORATORIES, LTD.

STATEMENTS OF STOCKHOLDERS' DEFICIT

PREFERRED STOCK COMMON STOCK ADDITIONAL PREFERRED
---------------------- ----------------------- PAID-IN STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DIVIDENDS DEFICIT TOTAL
-------- ----------- ---------- ----------- ---------- --------- ------------ -----------

Balances at
January 1, 2002 285,714 $ 1,000,000 21,173,818 $34,111,543 $ - $(300,000) $(57,756,792) $(22,945,249)
Preferred stock dividends - - - - - (50,380) - (50,380)
Issuance of common stock to
directors in lieu of
cash compensation - - 36,000 41,400 - - - 41,400
Issuance of common stock
under private placement - - 635,000 1,692,000 - - - 1,692,000
Issuance of common stock to
affiliate in exchange for
product technology
transfers - - 1,632,000 3,887,423 - - - 3,887,423
Common stock subscribed - - - 7,520 - - - 7,520
Preferred stock converted to
common stock (285,714) (1,000,000) 285,714 717,142 282,858 - - -
Net loss - - - - - - (2,256,004) (2,256,004)
-------- ----------- ---------- ----------- ---------- --------- ------------ ------------

BALANCES AT
DECEMBER 31, 2002 - - 23,762,532 40,457,028 282,858 (350,380) (60,012,796) (19,623,290)
Payment of preferred stock
dividends - - - - - 350,380 (350,380) -
Issuance of common stock to
directors in lieu of
cash compensation - - 31,000 112,310 - - - 112,310
Common stock options
exercised - - 784,296 872,973 2,435,877 - - 3,308,850
Net income - - - - - - 11,222,718 11,222,718
-------- ----------- ---------- ----------- ---------- --------- ------------ ------------
BALANCES AT
DECEMBER 31, 2003 - $ - 24,577,828 $41,442,311 $2,718,735 - $(49,140,458) $ (4,979,412)
======== =========== ========== =========== ========== ========= ============ ============

The accompanying notes are an integral part of these financial statements.

F-5

CARACO PHARMACEUTICAL LABORATORIES, LTD.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31
--------------------------
2 0 0 3 2 0 0 2
------------ -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 11,222,718 $(2,256,004)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation 683,339 539,374
Capital stock issued or to be issued to affiliate in
exchange for product formula 3,103,370 3,887,423
Common shares issued in lieu of compensation 112,310 41,400
Gain on sale of property, plant and equipment (25,531) -
Variable compensation expense for stock options
extended to director and officer 2,435,877 262,265
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable 945,662 (3,997,627)
Inventories (3,994,848) (2,706,907)
Prepaid expenses and deposits (90,716) (292,112)
Accounts payable 1,243,139 3,019,936
Accrued expenses and interest (126,829) 663,652
------------ -----------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,508,491 (838,600)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,493,173) (1,592,802)
Proceeds from sale of property, plant and equipment 76,200 -
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (2,416,973) (1,592,802)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable to financial institutions 1,600,000 900,000
Repayments of loans payable to financial institutions (625,000) -
Payment of preferred stock dividends (350,380) -
Repayments of short-term borrowings - (75,000)
Net (repayments of) borrowings on subordinated
stockholder notes (9,700,000) 1,400,000
Repayments of EDC loan (1,217,057) (1,200,000)
Proceeds from issuance of common stock 872,973 1,699,520
------------ -----------

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,419,464) 2,724,520
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,672,054 293,118
Cash and cash equivalents, beginning of year 534,228 241,110
------------ -----------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,206,282 $ 534,228
============ ===========

The accompanying notes are an integral part of these financial statements.

F-6

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS

Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the
"Corporation"), based in Detroit, Michigan, develops, manufactures and markets
generic, prescription and over-the-counter pharmaceuticals in the United States.
The process of developing a line of proprietary drugs requires approvals by the
Food and Drug Administration (FDA) of Abbreviated New Drug Applications (ANDA).
The Corporation's present product portfolio consists of a limited number of
products in certain strengths and package sizes. The Corporation's drugs relate
to a variety of therapeutic segments including the central nervous system,
cardiology, pain management and diabetes.

Over the years, significant sources of funding for the Corporation have
been received from private placement offerings, stockholder and financial
institution loans and debt financing from the Economic Development Corporation
of the City of Detroit (the "EDC"), which loaned approximately $9.1 million to
the Corporation in accordance with a Development and Loan Agreement dated August
10, 1990 (see Note 5). During 2002 and 2001, the Corporation also obtained total
credit facilities of $17.5 million from two foreign banks in the form of term
loans.

The Corporation and a Mumbai, India based specialty pharmaceutical
manufacturing company, Sun Pharmaceutical Industries, Ltd. ("Sun Pharma")
completed an agreement, in 1997, whereby Sun Pharma invested $7.5 million into
the common stock of the Corporation, and was required to transfer to the
Corporation the technology formula for 25 generic pharmaceutical products over a
period of five years through August 2002 in exchange for 544,000 shares of
Caraco common stock to be issued for each ANDA product and 181,333 shares for
each DESI (Drug Efficacy Study Implementation) product. As of December 31, 2003,
Sun Pharma had delivered to Caraco the formula for 13 products under this
agreement and beneficially owns approximately 48% of the outstanding common
stock of the Corporation (see Note 12 for subsequent stock acquisition). With
the expiration of the 1997 agreement, a new agreement was reached in November
2002 with Sun Pharma Global (Sun Global) a wholly-owned subsidiary of Sun
Pharma. Sun Global agreed to transfer to the Corporation the technology
formulations for 25 generic pharmaceutical products over a period of five years
through November 2007 in exchange for 544,000 shares of a new convertible
preferred stock for each generic drug transferred when such drug passes its
bio-equivalency study (Note 7).

In addition to Sun Pharma's equity holdings, the product and technology
transfers (which include various research and development activities conducted
on an ongoing basis by Sun Pharma), loans made directly to the Corporation and
loans guaranteed on behalf of Caraco (see Note 5), Sun Pharma has also supplied
Caraco with certain raw materials and equipment (see Note 4) and transferred to
the Corporation a number of qualified technical and management professionals
having pharmaceutical experience. Furthermore, four of the seven Caraco
directors are or were affiliated with Sun Pharma. Caraco is substantially
dependent on the active involvement and continued support of Sun Pharma.

In addition to its substantial dependence on Sun Pharma, the
Corporation is subject to certain risks associated with companies in the generic
pharmaceutical industry. Profitable operations are dependent on the
Corporation's ability to market its products at reasonable profit margins. In
addition to achieving profitable operations, the future success of the
Corporation will depend, in part, on its continuing ability to attract and
retain key employees, obtain timely approvals of its ANDAs, and develop new
products.

F-7

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

OPERATIONS

During the last three quarters of 2002 and throughout 2003, the
Corporation, for the first time since inception, achieved sales necessary to
support operations. Operating results for 2003 improved such that the
Corporation generated its first annual net profit of approximately $11. 2
million, an improvement of approximately $13.4 million over the 2002 net loss of
$2.2 million. During 2003 and 2002, results of operations include approximately
$3.1 million and $3.9 million, respectively, of research and development costs
related to technology transfers from Sun Pharma and its subsidiaries in exchange
for capital stock of Caraco as explained above. While management views these
results as positive developments, the Corporation must still overcome its
stockholders' deficit, which is $5.0 million as of December 31, 2003. Caraco's
ability to realize a major portion of its assets is thus dependent upon its
ability to meet future financing requirements and the success of future
operations. Management believes that continued improvement in profitability and
cash flows, along with sustained financial and operating support from Sun
Pharma, are key factors in the Corporation's ability to continue to operate in
the normal course of business. While management has a basis to reasonably
believe that Sun Pharma's substantial investment in Caraco provides Sun Pharma
with sufficient economic incentive to continue to assist Caraco in developing
its business, and Sun Pharma has expressed its intent to continue to support
Caraco's operations in the near term, as it has done in the past, there can be
no assurance that such support will, in fact, continue for a period of time
sufficient to ensure Caraco's ultimate business success. For example, Sun
Pharma, which is subject to the prevailing regulatory process in India, may be
constrained from fully pursuing its business interests outside of India.

Management's plans for the remainder of 2004 include:

- Continued focus on FDA compliance.

- Continued research and development activities.

- Continued expenditures for capital investment, including
equipment and expansion of capacity.

- Increased market share for certain existing products and
recently introduced new products and enhanced customer reach
and satisfaction.

- Prompt introduction of newly approved products to the market.

- Achieving further operational efficiencies by attaining
economies of scale and cost reduction per unit.

- Increase the number of products, as well as anticipated volume
increases for existing products that, in turn, will improve
manufacturing capacity utilization.

- Considering alternative ways of increasing cash flow including
developing, manufacturing and marketing ANDAs owned by Sun
Pharma.

- Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.

- Raising of additional lines of credit to support increasing
working capital requirements.

- Further reducing debt, if adequately supported by positive
cash flows.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses

F-8

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, valuation allowances for
accounts receivable and the recoverability of the Corporation's property, plant
and equipment.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits in banks, cash on
hand and all highly liquid investments purchased with an original maturity of
three months or less. The Company invests its excess cash primarily in deposits
with major banks within the State of Michigan and in other high quality
short-term liquid money market investments. During the normal course of
business, the Company may maintain cash on deposit in excess of federally
insured limits with financial institutions. The Company maintains a policy of
making investments only with institutions with at least an investment grade
credit rating.

REVENUE RECOGNITION

The Corporation recognizes revenue at the time its products are shipped
to its customers as, at that time, the risk of loss or physical damage to the
product passes to the customer, and the obligations of customers to pay for the
products are not dependent on the resale of the product or the Corporation's
assistance in such resale. Customers are permitted to return unused product, in
certain instances, after approval from the Corporation upon the expiration date
of the product's lot.

Provisions for estimated customer returns, discounts, rebates and other
price adjustments, including customer "chargebacks", can be reasonably
determined in the normal course of business based on historical results and
contractual arrangements. "Chargebacks" are price adjustments given to wholesale
customers for product such customers resell to parties with whom the Corporation
has established contractual pricing. The chargeback represents the difference
between the sales price to the wholesaler and the contracted price.
Approximately 92% of the current allowance for trade receivables has been
established to provide for estimated charge backs.

Amounts billed by the Corporation, if any, in advance of performance
for contracts to render certain manufacturing or research and development
services are deferred and then recognized upon performance of those services.

ACCOUNTS RECEIVABLE

The Corporation sells its products using customary trade terms; the
resulting accounts receivable are unsecured. Accounts receivable are stated at
the amount management expects to collect from outstanding balances. The
Corporation provides for probable uncollectible amounts through a charge to
earnings and a credit to a valuation allowance based on management's assessment
of the current status of individual accounts. Balances that are still
outstanding after the Corporation has attempted reasonable collection efforts
are written off through a charge to the valuation allowance and a credit to
trade accounts receivable.

INVENTORIES

Inventories, which consist principally of raw materials, as well as
work-in-process and finished goods, are stated at the lower of cost, determined
by the first-in, first-out method, or market.

F-9

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

INCOME (LOSS) PER SHARE

Income (loss) per share is computed using the weighted average number
of common shares outstanding during each year and considers a dual presentation
and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects
the potential dilution of all common stock equivalents.

At December 31, 2002, options to purchase 310,000 shares, were excluded
from the computation of loss per share because the options' exercise prices were
greater than the average market price of the common shares.

The following table sets forth the computation of basic and diluted
income (loss) per common share for the years ended December 31:

2 0 0 3 2 0 0 2
------- -------

Numerator:

Income (loss) from continuing operations $ 11,222,718 $ (2,256,004)

Preferred stock dividends - 50,380
------------ --------------
Income (loss) available for common stockholders $ 11,222,718 $ (2,306,384)
------------ --------------

Denominator:

Weighted average shares outstanding, basic 24,137,108 22,031,425

Incremental shares from assumed
conversion of common stock options 1,344,851 -
------------ --------------
Weighted average shares outstanding,
diluted 25,481,959 22,031,425
============ ==============
Income (loss) per common share
Basic $ .46 $ (.10)
============ ==============
Diluted $ .44 $ (.10)
============ ==============

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

Depreciation is computed using the straight line method over the
estimated useful lives of the related assets, which range from 3 to 40 years.
Management annually reviews these assets for impairment and reasonably believes
the carrying value of these assets will be recovered through cash flow from
operations, assuming the Corporation is successful in continuing to operate in
the normal course of business.

FEDERAL INCOME TAXES

Deferred income tax assets and liabilities are determined based on the
difference between the financial statement and federal income tax basis of
assets and liabilities as measured by the enacted tax rates that will be in
effect when these differences reverse. The principal difference between assets
and liabilities for financial statement and federal income tax return purposes
is attributable to accounts receivable allowances and the anticipated
utilization of net operating losses.

F-10

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

RESEARCH AND DEVELOPMENT COSTS

Research and development costs settled in cash are charged to expense
as incurred.

Series B convertible preferred stock (Note 7) may be issued from time
to time to Sun Pharma Global and its affiliates in exchange for the formulations
of technology products delivered by Sun Pharma Global to the Corporation. The
amount of research and development costs associated with the issued stock and
charged to operations is determined based on the fair value of the preferred
shares on the date the respective product formula has passed the bio-equivalency
studies.

COMMON STOCK ISSUED TO DIRECTORS

Common stock is issued from time to time in lieu of cash for director's
fees, and is recorded as compensation expense at the fair values of such shares
on the dates they were earned.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying values of cash equivalents, accounts receivable, and
accounts payable approximate their values due to the short-term maturities of
these financial instruments. The carrying amounts of short-term borrowings,
notes payable to stockholders, and loans payable approximate their fair values
because the interest rates are representative of, or change with, market rates.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. (FIN) 46 "Consolidation of Variable Interest
Entities". This standard clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" and addresses consolidation
by business enterprises of variable interest entitles, more commonly known as
"Special Purpose Entities" or "SPE's". FIN 46 requires existing unconsolidated
variable interest entities' interests to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among the parties
involved. FIN 46 also enhances the disclosure requirements related to variable
interest entities. The interpretation is effective with respect to interests in
variable interest entities created after January 31, 2003. For interests in
variable interest entities created before February 1, 2003, the interpretation
applies to the first interim or annual reporting period beginning after June 15,
2003. The subject matter of FIN 46 is not currently applicable to the
Corporation; accordingly, it is not expected that the provisions of FIN 46 will
have a material impact on financial position, results of operations or cash
flows of the Corporation.

In April 2003 the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
imbedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6 (b) of SFAS
No. 133, clarifies when a derivative contains a financing component, amends a
definition to conform to language used in FASB interpretation No. 45, and amends
certain other existing pronouncements. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The subject matter of SFAS No. 149
is not currently applicable to the Corporation; accordingly, it is not expected
that the provisions of SFAS No. 149 will have a material impact on the financial
position, results of operations or cash flows of the Corporation.

F-11

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

In May 2003 the FASB issued SAFS No. 150, which establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was effective for the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. It is not expected
that the provisions of Statement No. 150 will have a material impact on the
financial position, results of operations or cash flows of the Corporation.

2. SUPPLEMENTAL CASH FLOWS INFORMATION

OTHER CASH FLOWS INFORMATION

Cash paid for interest during 2003 and 2002 was approximately
$1,783,000 and $1,820,000, respectively.

3. ALLOWANCES FOR SALES ADJUSTMENTS AND DOUBTFUL ACCOUNTS RECEIVABLE

Accounts receivable and related allowances are summarized as follows as
of December 31:

2 0 0 3 2 0 0 2
------------ --------------

Accounts receivable $ 20,328,472 $ 14,774,382
------------ --------------
Allowances:
Chargebacks (Note 1) 14,783,000 8,972,247
Sales returns and allowances 650,000 223,000
Doubtful accounts 610,000 95,000
------------ --------------
Total allowances 15,790,000 9,290,247
------------ --------------
Accounts receivable, net of allowances $ 4,538,472 $ 5,484,135
============ ==============

4. INVENTORIES

Inventories consist of the following amounts at December 31:

2 0 0 3 2 0 0 2
----------- -----------

Raw materials $ 4,226,363 $ 3,117,293
Goods in transit 1,874,625 801,043
Work in process 1,633,963 1,153,913
Finished goods 1,875,859 543,713
----------- -----------
Total $ 9,610,810 $ 5,615,962
=========== ===========

The principal components used in the Corporation's business are active
and inactive pharmaceutical ingredients and packaging materials. Some of these
components are purchased from single sources, however, the majority of the
components have an alternate source of supply. Because the FDA approval process
requires manufacturers to specify their proposed supplier of components in their
applications, FDA approval of a new supplier would be required if components
were no longer available from the specified suppliers.

F-12

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

During 2003 and 2002, the Corporation purchased inventory components of
approximately $1.3 million and $2.4 million, respectively, from Sun Pharma.

5. LONG-TERM DEBT (INCLUDING RELATED PARTY DEBT)

EDC LOAN

The EDC loan was restructured on April 23, 2003, with the revised terms
effective as of January 1, 2003. The agreement provided for a six year extension
of the loan of approximately $7.8 million, with interest rates starting at 2.75%
per annum and increasing to 5.16% per annum over the term of the extension. The
EDC retains a first mortgage on the property, and a first lien on furniture,
fixtures, equipment, ANDA's and intellectual property. The EDC removed its first
lien on accounts receivable and inventory. In addition to other covenants, the
Corporation may not redeem any of its outstanding shares, pay any dividends with
respect to its outstanding common or preferred shares or merge or consolidate
with any other corporation or entity without the prior written approval of the
EDC. In addition, the EDC eliminated the prior restriction on capital investment
in excess of $2 million by permitting the Corporation, so long as it is not in
default of any of its obligations, to purchase new capital assets and sell its
existing capital assets so long as a result of such transactions the book value
of its assets is not reduced below the balance as of December 31, 2002 and the
Corporation retains the proceeds of any such sales.

LOANS PAYABLE TO FINANCIAL INSTITUTIONS

Loans payable to financial institutions consist of the following
obligations as of December 31:

2 0 0 3 2 0 0 2
------------ -----------

Term loan payable to ICICI Bank of India, with quarterly
principal payments of $625,000 commencing on December 31, 2003
and ending on September 30, 2005. Interest is adjusted
semi-annually and is charged at the LIBOR rate plus 140 basis
points (effective rate of 2.6% per annum at December 31, 2003),
and is due in quarterly installments. (see below) $ 4,375,000 $ 5,000,000

$12.5 million term loan payable to Bank of Nova Scotia,
with semi-annual principal payments of $3,125,000
commencing in February 2004 and ending in August 2005.
Interest is charged at the LIBOR rate plus basis points
that range from 155 to 180 depending on the outstanding
balance (effective rate of 2.9% per annum at December
31, 2003), and is due in quarterly installments. An
additional annual fee of $15,000 is charged. 12,500,000 10,900,000
------------ -----------

Total loans payable to financial institutions 16,875,000 15,900,000

Less current portion 8,750,000 625,000
------------ -----------

Loans payable to financial institutions, net of current
portion $ 8,125,000 $15,275,000
============ ===========

F-13

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

The term loan to ICICI Bank of India was paid in full on February 23,
2004. The repayment of the Bank of Nova Scotia term loans is guaranteed by Sun
Pharma.

The Corporation had at December 31, 2002 $9.8 million of subordinated
notes payable to Sun Pharma which were repaid in full during 2003. Interest
incurred on these notes amounted to $0.5 million and $0.8 million in 2003 and
2002, respectively. Accrued expenses on the accompanying balance sheets at
December 31, 2002 include approximately $0.4 million of accrued interest payable
on these Sun Pharma notes.

Scheduled future minimum principal payments on long-term debt for each
of the five years succeeding December 31, 2003 are summarized as follows:

Year ending
December 31 Amount
----------- ------

2004 $ 9,870,000
2005 7,750,000
2006 1,260,000
2007 1,310,000
2008 1,370,000

NEW LINE OF CREDIT

The Corporation began negotiations to secure a $10 million line of
credit with a financial institution. Management expects the line of credit to be
approved sometime in 2004.

6 INCOME TAXES

The Corporation's deferred income taxes result principally from its net
operating loss (NOL) carryforwards and allowances recorded against accounts
receivable. At December 31, 2003 a deferred income tax asset of approximately
$14.0 million (computed using a 34% tax rate) relating to these temporary
differences exists. Based on the Corporation's prior operating results and
operating characteristics, utilization of these deferred tax assets to offset
future taxable income is not reasonably assured. Accordingly, Caraco has
recorded a valuation allowance to fully offset the deferred tax asset, resulting
in no net deferred tax asset or liability in the accompanying balance sheets.
The valuation allowance decreased by approximately $4.1 million in 2003 and
increased by approximately $0.8 million in 2002, respectively.

At December 31, 2003, net operating loss carryforwards of approximately
$23.0 million, which expire between 2012 and 2017, are available to offset
future federal taxable income, if any. As discussed in Note 12, Sun Pharma
acquired a majority of the Corporation's common stock subsequent to year end.
Under rules established by the Internal Revenue Code, such change in ownership
may effect the Corporation's ability to utilize these net operating loss carry
forwards in future years.

7 STOCKHOLDERS' DEFICIT

COMMON STOCK

During 2003, the Corporation's shareholders approved the authorization
of an additional 20,000,000 shares of common stock. The Corporation has not yet
filed an amendment to its articles of incorporation to effect this change.

PREFERRED STOCK

During 2003, the Corporation's shareholders approved the authorization
of an additional 10,000,000 shares of preferred stock bringing to 15,000,000 the
number of total preferred shares authorized. The Corporation has not yet filed

F-14

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

an amendment to its articles of incorporation to effect this change. The shares
are issuable in series with the terms and amounts set at the Board of Director's
discretion.

The Corporation has designated two series of preferred stock: Series A
and Series B. Each share of Series A Preferred Stock is nonvoting and is
convertible, at the option of the holder, into one share of common stock. The
Series A preferred shares require annual dividends of $0.21 per share on a
cumulative basis. Accrued dividends of $0.4 million on Series A preferred shares
were paid during 2003, and the holder, then a company director, converted all
such outstanding shares into an equivalent number of common shares.

In November 2002, in connection with the new technology transfer
agreement established with Sun Pharma Global (Note 1), the Corporation
designated a new series of preferred stock, the Series B Convertible Preferred
Stock. The Series B preferred shares are non-redeemable and have no par value.
In addition, the Series B Preferred Stock has no voting or dividend rights or
liquidation preference other than priority liquidation based on their values on
the dates they were earned, and can be converted after 3 years from the issuance
date into one share of common stock, subject to a conversion adjustment (Note
1).

OTHER COMMON STOCK ISSUANCES (ALSO SEE NOTE 2)

During 2002, the Corporation issued 1,632,000 shares of common stock to
an affiliate of Sun Pharma in exchange for the formula for three ANDA products
delivered to Caraco. Research and development expense charged to operations
related to the issued shares, which was based on the fair value of the
respective shares on the dates bio-equivalency passed, totaled $3.9 million in
2002. These shares are also included in the calculation of the weighted average
number of common shares outstanding in the year the respective formula was
delivered.

During 2002, 285,714 shares of Series A preferred stock was converted
into 285,714 shares of common stock. The Corporation recorded additional paid-in
capital of $0.3 million for the difference between the fair value of the common
stock on the conversion date and the stated value of the Series A preferred
stock.

During 2002, the Corporation issued 635,000 shares of common stock in
connection with a private placement offering resulting in net proceeds of
$1,692,000 or approximately $2.66 per share.

During 2003 and 2002, the Corporation issued 31,000 and 36,000 shares,
respectively, of common stock to non-employee directors in exchange for services
rendered. The Corporation recorded compensation expense of $112,310 and $41,400,
respectively, based on the fair values of such shares on the dates they were
earned.

8 COMMON STOCK OPTIONS

COMMON STOCK OPTION PLANS

As of December 31, 2003, the Corporation maintains one stock option plan, the
1999 Plan (all options under the 1993 were exercised during 2003), under which
the Corporation may grant options to employees and non-employee-directors for
the purchase of up to 3,000,000 shares of common stock. The exercise price of
options granted may not be less than the fair value of the common stock on the
date of grant. Options granted under this plan generally vest in annual
installments, from the date of grant, over a five year period, and expire
within six years from the date of the grant. Activity with respect to these
options is summarized as follows:

F-15

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

2003 2002
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price

Outstanding, beginning of year 687,138 $ 1.04 701,138 $ 1.03
Exercised 410,138 0.97 - -
Terminated - - (14,000) 1.74

Outstanding, end of year 227,000 $ 1.00 687,138 $ 1.01

Options exercisable, end of year 102,500 $ 1.07 288,075 $ 1.04

Options at December 31, 2003

Options Outstanding
--------------------------------- Options Exercisable
Remaining -------------------
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
------------------------ ------- ----------- -------- ------- --------

$0.68 to $1.00 152,000 2.4 years 0.79 76,000 0.79
$1.01 to $2.00 125,000 3 years 1.25 62,500 1.25
------- --------- ---- ------- ----
Total 277,000 2.7 years 1.00 178,500 1.07
======= ========= ==== ======= ====

* Weighted average

F-16

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

OTHER COMMON STOCK OPTION AGREEMENTS

The Corporation has issued other stock options outside of the 1999 and
1993 Plans. These stock options have been issued with various vesting schedules
and expire at various dates through October 2006. Activity with respect to these
options is summarized as follows:

2003 2002
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- ---------

Outstanding, beginning of year 2,250,824 $ 2.00 2,250,824 $ 2.00
Exercised 374,158 1.16 - -
--------- -------- --------- ---------
Outstanding, end of year 1,876,666 $ 2.01 2,250,824 $ 2.00
========= ======== ========= =========
Options exercisable, end of year 1,876,666 $ 2.01 2,250,824 $ 2.00
========= ======== ========= =========

Options at December 31, 2003:

Options Outstanding and Exercised
----------------------------------
Remaining
Contractual Exercise
Range of Exercise Prices Shares Life * Price *
------------------------ --------- ----------- --------

$0.66 to $1.00 100,000 1.0 year $ 0.88
$1.01 to $2.00 800,000 1.8 years 1.06
$2.01 to $3.00 666,666 2.3 years 2.63
$3.01 to $4.00 310,000 0.4 years 3.50
--------- --------- ------
Total 1,876,666 1.7 years $ 2.01
========= ========= ======

* Weighted average

As mentioned in Note 12, Sun Pharma acquired a majority of these
options subsequent to year-end.

The Corporation follows only the disclosure aspects of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The Corporation continues to apply Accounting Principles Board
(APB) Opinion No. 25 in accounting for its plans and, accordingly, no
compensation cost has generally been recognized in the financial statements for
its outstanding stock options. No options were granted during 2003 or 2002.

In December 2001, the Board of Directors extended the exercise date to
December 31, 2005 with respect to options for 224,158 shares of Caraco common
stock previously granted to a then independent director. Variable compensation
expense of $2.1 million and $0.3 million triggered by the extension was recorded
during 2003 and 2002 in recognition of this modification.

On October 2, 2003, the Corporation entered into a severance agreement
with its former Chief Executive Officer. The agreement allowed vesting of
options for the purchase of 40,000 common shares held by the former officer to
be accelerated. The modification resulted in the options being treated as
variable rather than fixed in accordance with Financial Accounting Standards
Board Interpretation 44 (FIN 44). As a result variable compensation expense of
$0.3

F-17

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

million was charged to operations during 2003 for the difference between the
fair value of the underlying common stock and the exercise price of the
respective options.

The options modified for the independent director and for the former
officer were exercised during 2003 resulting in an increase to additional paid
in capital of $2.4 million during 2003.

STRATEGIC ALLIANCE STOCK OPTION ARRANGEMENT

Pursuant to an agreement between the Corporation and Hexal-Pharma GmbH
& Co., KD, a German pharmaceutical company and its United States affiliate
(together, "Hexal") dated as of October 1, 1993, Hexal agreed to convey to the
Corporation the formulations, technology, manufacturing processes and know-how,
and other relevant information, and to pay for the bio-equivalency studies
required for the preparation of ANDAs for two products. Pursuant to the
agreement, the Corporation was required to pay Hexal (i) a Sign-Up Option to
purchase 100,000 shares of Common Stock at $3.50 per share; and (ii) a Product
Option to purchase shares to an exercise price of $3.50 per share. These options
may be exercised and payment for shares may be made only out of royalties and
any interest earned on the royalties while held by the Corporation. No options
have yet been exercised.

Pursuant to the agreement, Caraco received a formulation for one
product, Metoprolol Tartrate, from Hexal in March 1995. However, Caraco has
determined that the formula provided to it by Hexal with respect to Metoprolol
Tartrate is different than the formula submitted in an ANDA to the FDA in 1995,
approved by the FDA in 1996 and manufactured and introduced by Caraco since
1997. Accordingly, since April 2003, Caraco has discontinued to accrue
royalties.

9. LEASES (INCLUDING RELATED PARTY)

The Corporation entered into two noncancelable operating leases during
2000 with Sun Pharma to lease production machinery. The leases each require
quarterly rental payments of $4,245 and expire during 2005.

The Corporation entered into a noncancelable operating lease with an
unrelated party during 2002 to lease additional warehouse space. This lease was
subsequently canceled during 2003 in lieu of a new noncancelable operating lease
for additional space at this warehouse. The new lease requires monthly payments
that increase from $15,458 to $16,892 over the term of the lease that expires in
2007.

Net rental expense on these operating leases was $176,065 and $51,460
in 2003 and 2002, respectively.

The following is a schedule of annual future minimum lease payments
required under the operating leases (including the leases with Sun Pharma) with
remaining noncancelable lease terms in excess of one year as of December 31,
2003:

Year Amount
---- ----------

2004 $ 237,828
2005 205,223
2006 198,276
2007 50,676
----------
Total minimum payments due $ 692,003
==========

F-18

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

The Corporation also paid approximately $0.5 million and $0.3 million
to Sun Pharma during 2003 and 2002, respectively, for the purchase of various
parts and machinery needed for operations.

10. RETIREMENT PLAN

The Corporation maintains a deferred compensation plan qualified under
Section 401(k) of the Internal Revenue Code. Under this plan, eligible employees
are permitted to contribute up to the maximum allowable amount determined by the
Internal Revenue Code. The Corporation may make discretionary matching and
profit sharing contributions under the provisions of the Plan. The Corporation
made no discretionary contributions during either 2003 or 2002.

11. CONCENTRATIONS AND COMMITMENT

MAJOR CUSTOMER

The loss of this customer could have a materially adverse effect on
short-term operating results.

MAJOR PRODUCTS

Sales of two products accounted for approximately 87% of sales in 2003
and 78% of sales in 2002.

MAJOR SUPPLIER

Approximately 73% and 20% of Caraco's raw material purchases in 2003
and 2002, respectively, were made from Sun Pharma.

LABOR CONTRACT

The majority of the Corporations hourly work force is covered by a
collective bargaining agreement that expires in May 2004.

PRODUCT SALES COMMITMENT

Certain of the Corporation's customers purchase its products through
designated wholesale customers, who act as an intermediary distribution channel
for the Corporation's products. One such customer, the Veterans Administration,
an agency of the United States Government, entered into a sales contract with
the Corporation effective August 5, 2002 to ship approximately $13,000,000 of
product per year over a one year base contract period that ended June 30, 2003.
The contract has four one-year option periods, the first of which was exercised.
The agreement may be terminated by the purchaser without cause and in such case,
Caraco would only be entitled to a percentage of the contract price, plus
reasonable charges that have resulted from the termination. The agreement
further provides for certain penalty provisions if the Corporation is unable to
meet its sales commitment.

F-19

CARACO PHARMACEUTICAL LABORATORIES, LTD.

NOTES TO FINANCIAL STATEMENTS

12. OTHER MATTERS

EMPLOYMENT CONTRACTS

The Corporation has employment agreements with two of its executive
officers that provide for fixed annual salaries and a six-month continuance
including insurance benefits and immediate vesting of stock options upon
termination without cause.

LITIGATION

On February 12, 2003, C. Arnold Curry filed a complaint in the Wayne
County Circuit Court alleging breach of a written employment agreement. Mr.
Curry is seeking 175,000 shares of the Corporations' common stock (35,000 shares
for each of the first five ANDAs approved by the FDA). The Corporation and the
plaintiff, have each filed a motion for summary judgment. The Corporation
intends to vigorously defend itself against these claims, which it believes will
have no merit.

The Corporation had been named as one of two defendants and as one of
several defendants in two separate product liability suits, involving Miraphen,
which contains phenylpropanalomine (PPA), one in federal court in Pennsylvania
and another in state court in New Jersey, respectively. These lawsuits seek
damages generally for personal injury as well as punitive damages under a
variety of liability theories including strict products liability, breach of
warranty and negligence. The Federal lawsuit does not set forth a specific
dollar amount of damages requested; the state lawsuit seeks damages of $20
million. The plaintiff in the federal lawsuit stipulated to a dismissal of the
lawsuit and the federal court formally dismissed the case in December 2003. The
Corporation believes that the state lawsuit has not been appropriately served on
the Corporation and the Corporation is treating the matter as if it is not an
active party..

PRODUCT LIABILITY AND INSURANCE

The Corporation currently has in force general and product liability
insurance, with coverage limits of $10 million per incident and in the
aggregate. The Corporation's insurance policies provide coverage on a claim made
basis and are subject to annual renewal. Such insurance may not be available in
the future on acceptable terms or at all. There can be no assurance that the
coverage limits of such policies will be adequate to cover the Corporation's
liabilities, should they occur.

SUBSEQUENT TRANSACTIONS WITH AND RELATING TO SUN PHARMA

During the first quarter of 2004, Sun Pharma acquired 3,452,291
additional shares of common stock and 1,329,066 stock options directly from two
former directors and a significant shareholder, thereby increasing its
beneficial ownership of the Corporation from approximately 48% to 63%.

In February of 2004, Sun Global earned 544,000 shares of Series B
preferred stock pursuant to the products transfer agreement (Note 1).

* * * * *

F-20

EXHIBIT INDEX

3.08 Amendment to Amended and Restated Bylaws dated November 2003

10.27 Agreement of Narendra N. Borkar.

21 Subsidiaries of the registrant.

23.01 Consent of Independent Auditors.

31.1 Certification of Chief Executive Officer and Chief Financial Officer.

32.1 Certification Pursuant to 18 USC Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.